Abenomics has successfully raised both growth and inflation for Japan, while challenges remain in sustaining the strong performance in the medium-term. This is according to the 2017 Annual Consultation Report on Japan, published by the Asean+3 Macroeconomic Research Office (AMRO).
After expanding by 1.2 percent annually during fiscal year (FY) 2012-16, Japan’s economy is expected to continue growing above its potential, by 1.8 percent in FY2017 and 1.3 percent in FY2018. Private domestic demand, boosted by spending related to the 2020 Tokyo Olympics, is expected to remain robust in the near term due to steadily rising employment and corporate earnings.
The consumer price inflation is expected to inch up gradually, but the inflation excluding fresh food is projected to be around 0.7-0.8 percent in the near-term, falling short of the 2-percent price stability target set by the Bank of Japan.
The slow wage growth and stubbornly low underlying inflation will continue to be a challenge to the anchoring of medium-term inflation expectations, which is widely viewed to be adaptive in behavior and difficult to change without a prolonged period of high inflation.
In spite of the strong external position and sound financial system, near-term downside risks and vulnerabilities have emerged from external developments such as protectionist measures invoked by major trading partners, as well as a faster-than-expected pace of monetary policy normalization by the US Fed and the European Central Bank.
Mid-to long-term challenges remain significant, particularly the sustainability of public finance ahead of rapidly rising spending related to social security as well as low profitability of the banking sector, and the ageing population.
In order to sustain the higher growth and inflation momentum over the long term, the authorities should continue its comprehensive policy package, with more efforts on implementing measures to address structural challenges.
Fiscal policy should focus on restoring the fiscal sustainability in the medium-term. The scheduled consumption tax hike in 2019 should be implemented as planned. When formulating the new fiscal consolidation plan, targets should be more credible over the medium-term in accordance with more reasonable macroeconomic projections.
In the meantime, monetary policy should remain accommodative to allow more time for the virtuous cycle from tight labor market and the positive output gap into higher wages and prices to work. However, the easy monetary policy may need to be recalibrated while developments in economic activities and prices as well as financial conditions, and their potential side effects, should be closely monitored. In this regard, recent policies of maintaining close communication with the market should be continued. Government efforts to tackle demographic challenges and structural reforms to lift potential growth and productivity are commendable and should continue to be at the top of the policy agenda.
Asean+3 Macroeconomic Research Office (AMRO) Singapore