Japan: 2025 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan

2025ARTICLE 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 the2025Article 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 itsMarch 26, 2025consideration of the staff report that concluded the Article IVconsultation withJapan. •TheStaff Reportprepared by a staff team of the IMF for the Executive Board’sconsideration onMarch 26, 2025, following discussions that ended onFebruary 6,2025, with the officials ofJapanon economic developments and policies. Based oninformation available at the time of these discussions, the staff report was completedonMarch 11, 2025. •AnInformational Annexprepared by the IMFstaff. •AStatement by the Executive DirectorforJapan. 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 2025 Article IV Consultationwith Japan FOR IMMEDIATE RELEASE Washington, DC–April 2, 2025:The Executive Board of the International Monetary Fund(IMF) concluded the Article IV consultation1with Japan. After three decades of near-zero inflation, signs are growing that Japan’s economy can reacha new equilibrium with inflation sustained at the Bank of Japan’s 2 percent headline inflationtarget and growth at the 0.5 percent potential. Temporary supply-side disruptions have led to asignificant growth slowdown in 2024, but growth is expected to pick up to 1.2 percent in 2025,with private demand replacing public consumption as the main growth driver. Above inflationwage growth is expected to strengthen in 2025, boosting households’ disposable income andconsumption. Private investment is also expected to remain strong, supported by highcorporate profits and accommodative financial conditions. Inflation is expected to convergefrom above to the BoJ’s 2-percent target in late 2025, helped by a moderation in oil and foodprices. The current account balance increased to 4.8% of GDP in 2024, with the externalposition assessed, on a preliminary basis, as broadly in line with the level implied by medium-term fundamentals and desirable policies. Financial conditions in Japan remainaccommodative but are gradually tightening amid increasing real interest rates and risingmacroeconomic uncertainty. Risks to growth are tilted to the downside, while risks to inflation are broadly balanced. Aslowdown in the global economy, weak domestic consumption, or tighter financial conditionsin a context of high public debt pose downside risks to growth, while upside risks arise fromfaster wage increases and greater regional integration. The possibility of inflation expectationsstalling below the inflation target is a downside risk to inflation. Upside risks to inflation arerising food and energy prices, as well as stronger-than-expected wage growth. The estimated fiscal deficit and general government debt in 2024 are lower than expected atthe time of the 2024 Article IV, as expenditures to support the economic recovery werepartially phased out and revenues overperformed. Still, the fiscal deficit is estimated to haveworsened modestly from 2.3 percent of GDP in 2023 to 2.5 percent of GDP in 2024 and undercurrent policies is projected to continue rising over the medium term. Following a successfulexit from unconventional policies in March 2024, the BoJ has initiated a tapering of JGBpurchases and gradually raised the policy rate, to 0.5 percent. Executive Board Assessment2 Executive Directors commended Japan’s prudent macroeconomic policies and welcomed theexpected acceleration of growth in 2025 supported by rising real wages, and the ongoingtransition to a growth-oriented model with headline inflation moving toward the Bank ofJapan’s target. Noting that risks are tilted to the downside, including from increased tradetensions, Directors underscored the need to continue to rebuild fiscal buffers, re-anchorinflation expectations, and advance comprehensive structural reforms to support potentialgrowth in the context of an aging population. Directors welcomed the authorities’ commitment to fiscal consolidation. They emphasized theneed for a clear plan to fully offset the rising cost of interest on the public debt and expenditurepressures associated with health and long-term care. Additionally, the consolidation isnecessary to ensure debt sustainability and increase the fiscal sp