Japanese Economy on the Mend Says IMF

IMF officials wrote:

The IMF report found that Abenomics’ three-pronged strategy of aggressive monetary easing, flexible fiscal policy, and structural reforms constituted a clear break from previous incremental efforts. But, despite initial positive results, the pace of real GDP growth has remained at about 1 percent — similar to the post-bubble period — and deflation risks remain.

“This is partly due to external shocks, including slower global growth, and the collapse in commodity prices” said Kalpana Kochhar, Deputy Director in the IMF’s Asia and Pacific Department, and head of the mission that conducted the assessment.

In addition, the negative impact of the consumption tax rate hike in 2014 lasted longer than expected, but structural impediments have also played a role, including sluggish wage growth, production increasingly moving to other countries through foreign direct investment, and headwinds from an aging and declining population

The growth of the Japanese economy will still lag the other largest economies in the world. U.S. GDP is expected to rise by 2% this year, before another bump in 2016. China’s economy has slowed, but it is expected to expand 7% in 2015. Germany’s GDP is surging at a better rate than that of the United States.

Production and wage improvement was the key to Japan’s recovery, according to IMF officials:

The economy is projected to grow by 0.8 and 1.2 percent in 2015 and 2016, provided higher real wages support consumption, and business investment rises on the back of lower production costs from declining oil prices, record-high corporate profits, ongoing corporate governance reforms, and the abundant availability of credit.

“However, risks are elevated and clearly to the downside, including from a disappointing outcome of the Shunto wage negotiations, and weaker spending of the oil windfall,” said Kalpana Kochhar, Deputy Director in the IMF’s Asia and Pacific Department

Japan also faces short-term risks from lower-than-expected growth in China and the United States, and possible yen appreciation in the event of global financial turbulence given its status as a safe-haven currency.

The recovery, therefore, could move off track and Japan’s economy return to the stagnation that reaches back into the 20th century.

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