Japan: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan

2024ARTICLE IV CONSULTATION—PRESS RELEASE;STAFF REPORT; AND STATEMENT BY THE EXECUTIVEDIRECTOR FORJAPAN Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussionswith members, usually every year. In the context of the2024Article IV consultation withJapan, the following documents have been released and are included in this package: •APress Releasesummarizing the views of the Executive Board as expressed during itsMay 6, 2024consideration of the staff report that concluded the Article IVconsultation withJapan. •TheStaff Reportprepared by a staff team of the IMF for the Executive Board’sconsideration onMay 6, 2024, following discussions that ended onApril 4, 2024, withthe officials ofJapanon economic developments and policies. Based on informationavailable at the time of these discussions, the staff report was completed onApril 15,2024. •AnInformational Annexprepared by the IMFstaff. •AStatement by the Executive DirectorforJapan. The documents listed below will be separately released. Selected IssuesFinancial SystemStabilityAssessment TheIMF’s transparency policy allows for the deletion of market-sensitive information andpremature disclosure of the authorities’ policy intentions in published staff reports andother documents. Copies of this report are available to the public from International Monetary Fund•Publication ServicesPO Box 92780•Washington, D.C. 20090Telephone: (202) 623-7430•Fax: (202) 623-7201E-mail:publications@imf.org Web:http://www.imf.org International Monetary FundWashington, D.C. IMF Executive Board Concludes 2024 Article IV Consultationwith Japan FOR IMMEDIATE RELEASE Washington, DC–May 13, 2024:On May 6, 2024, the Executive Board of the InternationalMonetary Fund (IMF) concluded the Article IV consultation1with Japan. This also included adiscussion of the findings of the Financial Sector Assessment Program (FSAP) exercise forJapan.2 The Japanese economy continues to grow after the pandemic, with broad-based priceincreases following three decades of low inflation. In 2023Q2, real GDP surpassed the peaklevel in 2019Q3, and the output gap is estimated to have closed. However, the recoveryremains uneven. While goods and services exports have risen above the pre-pandemic peak,private consumption and investment remain below. Headline inflation has been above twopercent (y/y) since April 2022. Measures of underlying inflation show that the current above-target inflation is broad-based across products and services for the first time in three decades.The passthrough from inflation to wages has started to pick up. The current account surplusincreased to 3.4 percent of GDP in 2023, with the external position in 2023 assessed asbroadly in line with the level implied by medium-term fundamentals and desirable policies. Growth is expected to continue, with a pick-up in consumption later this year. Growth isprojected to decelerate to 0.9 percent in 2024, owing to fading of one-off factors supportinggrowth in 2023, including a surge in tourism. Consumption is expected to pick-up in the latterhalf of 2024 and 2025 due to the combination of rising nominal wages, following the strongShunto settlement in 2024, and lower headline inflation lifting real wages. Core inflation isexpected to decline gradually as the effect of higher import prices wanes but is projected tostay above the two-percent target until the second half of 2025. The primary fiscal deficit isexpected to remain elevated at 6.4 percent in 2024, reflecting the impact of the latest fiscalstimulus package. The current account surplus is expected to increase slightly to 3.5 percentof GDP supported by exports. An aging and declining population will continue to be a majormacroeconomic challenge in the medium to long term. Risks to growth and inflation are broadly balanced. For growth, downside risks include aslowdown in the global economy, deepening geoeconomic fragmentation, and more volatilefood and energy prices. On the domestic side, the main downside risks are weak consumptionrelated to negative real wage growth, more acute labor shortages that could constrain activity,and a return to a zero-inflation environment. On the upside, additional recovery of inboundtourism and a stronger global economy could support growth. For inflation, upside risks stem from backward-looking inflation expectations and significantly strong-than-expected wagesfollowing the spring wage negotiations. Downside risks could come from a faster decline inglobal goods and import prices. The Japanese financial system has withstood a series of shocks but confronts severalchallenges. Key risks to macrofinancial stability at the current juncture stem from three mainsources of vulnerability: the sizable security holdings of financial institutions under mark-to-market accounting, some banks’ notable foreign currency exposures, and signs of overheatingin parts of the real estate markets. The systemic risk analysis conducted as part of t