IMF and Japan Economy:

 Article Source: https://mainichi.jp/english/articles/20220128/p2g/00m/0bu/022000c

Article:

WASHINGTON (Kyodo) -- The International Monetary Fund said Thursday the coronavirus pandemic is unlikely to have "significant scarring effects" on Japan due to substantial fiscal and monetary support, but the world's third-largest economy needs to come up with post-pandemic policies to ensure sustainable growth as its population shrinks.

The IMF also said in an assessment of Japan's economic developments and policies that there is still "room" to raise revenues such as through consumption tax rate hikes, with the country's tax revenues as a percentage of gross domestic product relatively low among the Group of Seven industrialized nations.

The Washington-based institution holds regular consultations with member countries, usually annually. The pandemic, however, has disrupted the schedule, making the latest report on Japan the first since February 2020.

Ideas:

Most likely the Japanese economy is going to come out of the virus situation without a lot of scarring effects in most industries. But that can't be said for the services sector and especially the businesses that relied heavily on domestic or internatinal toursim, or even JAL an ANA which relied a lot on its overseas flights.

Japan has done a lot of fiscal and monetary support but there are always some who would say its not enough due to fact it might have never reached certain businsses or familes who might have been in the shadows or in the blind spots related to aid and subisidies.

Maybe the IMF doesn't remember or know just what happened in 2014 and 2019 when the Japanese government increased the sales tax rate. When the tax rate went from 5 to 8 percent in 2014 there was sigificant increase in consumer spending in the months before the April 2014 tax increase and then the months after the tax increase consumer spending decreased significantly as consumers either already bought what they wanted or didn't want to buy. 

The same thing happened in 2019, but it seemed on a larger scale.Being in Yokohama in September of 2019 it seemed like it was feeding frenzy meaning there were sales everywhere trying to get people to buy before the Oct. 1 sales tax increase from 8 to 10 percent and then after Oct. 1 and many months after consumer spending again dropped significantly. 

What this shows is that the Japanese consumer is very sensitive to price changes and the sales tax is essentially a price increase for consumers.

While the Japanese government might be justified to increase the sales tax again in the future, they need to be aware of the overal effect on the Japanese consumer. Yes they had different levels of the sales tax on different kinds of products but it was a very confusing situation for the Japanese public at that time.

Article:

In its preliminary findings following the consultations, the IMF estimated that Japan's growth will accelerate to 3.3 percent in 2022 following a 1.6 percent rise in 2021, on the back of continued strong fiscal support, a high COVID-19 vaccination rate and the easing of pandemic-related global supply constraints. The economy suffered a 4.5 percent contraction in 2020.

While the current surge of the highly transmissible Omicron variant of the coronavirus in Japan could slow growth momentum in the first quarter of 2022, a "strong rebound" is expected in the second quarter as the wave dissipates, the IMF said.

But it also warned of the "unusual uncertainty around the pandemic," touching on a possible delay to the recovery of services consumption if strict containment measures become necessary as a result of Omicron cases overwhelming the health system.

Ideas:

Any kind of economic growth has to be tempered with the idea the growth is being measured against the negative growth from the previous year so in real economic terms it might not be that much, but better of course than the year before.

Even as the Japanese economy does get to back to some solid growth not all sectors in the Japanese economy are going to growth at the same rate, just like before the pandemic and in a market economy there are always going to some sectors that grow more than other sectors.

Exports and manufacturing might be signficant bright spots for the Japanese economy but the services sectors especially related to tourism might take a long time to get back to any kind of pre-pandemic level, especially the international tourism sector, with the thousands of missing Chinese tourists who have yet to come and as the Japanese government has not yet allowed tourists to enter the country.

The first quarter of 2022 in Japan and most countries might not be a robust as expected or needed but by the end of the second quarter the Japanese economy might begin to takeoff and see some signs of reaching the pre-pandemic level in most sectors except the tourism sector.

But then again, as has been suggested there could be some new strains that come along and again disrupt or slow down the growth of the Japanese economy.

Article:

Overall, the "scarring effects" from the health crisis -- meaning the extent to which growth will return to its pre-pandemic level -- will be limited in Japan due to the significant support provided to companies and households, Ranil Salgado, assistant director of the IMF's Asia and Pacific Department who led the IMF's mission to Japan, said in an online press conference.

"As we exit the pandemic, households will have substantial savings that have been built up during the pandemic, which is often different from what you see in other crises...Firms have been able to retain workers," he added.

A fiscal stimulus package announced by the Japanese government in November could have been "better targeted," such as by lowering the income threshold for cash transfers to child-rearing households, but it will provide "needed support," the IMF said.

Ideas:

The scarring effects might not seem apparent or visible in the overall economy but for sure there have been many layoffs and businesses that have closed and or reduced their operations due the pandemic.

Yes, some households might have substantial savings built up but that doesn't mean all households in Japan have the same amount of savings. But Japanese households or consumers are not as spend crazy as for example the US consumer, so there might not be a wave of significant spending in Japan after the omicron virus passes. 

Consumer spending has always been a major challenge for the Bank of Japan and it will probably continue to be a challenge. And now if you add in the prices increases in the supermarkets, the gas stations, and increases in home energy prices, those areas could be constraints on some to get out and spend in the coming months.

Firms might have been able to retain workers but the lastest reports suggest there is movement in the Japanese labor market as some workers are quitting their jobs or have moved on to other jobs as they were just waiting for the pandemic to subside before they changed jobs.

Yes the November stimulus for child rearing families could have been structured better to provide better support for more low income families and even single mother families who usually have lower income than the traditional family.

Article:

The exceptional fiscal support and the sharp output drop during the pandemic, however, have raised Japan's debt-to-GDP ratio from 236 percent in 2019 to 259 percent in 2021.

While debt rollover and issuance risks are "contained" in the near term, helped by a large domestic savings base and other factors, debt sustainability risks will increase as demographic trends weigh in the medium and long terms, with health care and long-term care spending expected to continue rising, the IMF said.

Over the longer term, a possible shrinking of the labor force and low productivity growth are two of the main challenges faced by the Japanese economy, Salgado said in a written interview with Kyodo News.

Ideas:

Yes there was exceptional fiscal support, but again there might have been some blind spots where some businesses and some households were unable to get any kind of support.

And yes the sharp drop in output and the significant increase in government spending no doubt increased the debt to GDP ratio to most likely the highest in the world.

The high debt to GDP ratio has been a part of Japan's economic situation for decades as Japan has always tried to spend its way to economic growth, and maybe more than any other economy. 

For example roads to nowwhere, bridges that are not important and so on as construction projects have always been a favorite of the Japanease government as a way to grow the economy.

Maybe the US, a joke, should take a lesson on how Japan continues to improve its infrastrucure even if not needed.

The ageing of the Japanese society is most likely going to be a challenge in the future. But it doesn't have to be that way. Most likely there are many in the upper age groups willing and able to continue working instead of companies having some kind of set age that they must leave the company and maybe even not be active even though they want to do it.

For example one company, Dentsu has a program that allows workers to move from working directly with or for Dentsu and Dentsu helps them setup their own business and they can continue to work and contribute to society and economy without just being thrown out of the economy.

One area of low productivity that seems to be improving somewhat now is the idea of working from home and not having to stay an office from 9 to 6 or later. What some articles suggest is that workers feel they are more productive when they are not required to sit at their desks all day long and can work some days at home and some days in the office.

Article:

To raise revenues, the IMF laid out options to explore including raising the current 10 percent consumption tax rate, without specifying an exact level, and strengthening property taxation through the removal of preferential treatment of residential land.

Meanwhile, medium-term inflation is projected to remain well below the Bank of Japan's 2 percent target.

"In this regard, we strongly support the Bank of Japan's commitment to accommodative monetary policy until inflation is durably above target," Salgado said.

Ideas:

The Japanese government, at the moment, might not be too eager to raise the sales tax above the 10 percent level knowing full well how sensitive Japanese consumers are to prices increases, which is what the Japanese consumer will see and fell, an increase in prices.

The Japanease government has to be concerned with the continued increase of the aged population who are on fixed incomes and how the sales tax increase might effect them.

Not to mention the continued increase in supermarket prices and home energy costs which might be effecting their limited budgets at the same time.

The Bank of Japan has been trying to reach the elusive 2 percent target for many years without much success. Maybe the Bank of Japan should forget about its 2 percen target until the Japanese economy is fully out of the pandemic situation and its fully back to the pre-pandemic level and then being to focus on the 2 percent target. 

But for now the Bank of Japan should continue to support businesses and households until the pandemic is over with and even continue to support whomever as all in the economy are not going to come back as quickly as others. 

Some parts of the Japanese economy are going to bounce back quickly but some parts are going to take some time even when other parts reach the pre-pandemic level quicker.

Article:

While monetary tightening is expected or already under way in some advanced economies amid higher inflation, the IMF official said interest rate differentials could weaken the yen further.

A weaker yen would be a boon for export-oriented firms, as their overseas profits would gain a boost when repatriated.

At the same time, a sharp tightening of global financial conditions could lead to "heightened risk aversion" and trigger an appreciation of the yen, which is perceived as a safe-haven, the official added.

Ideas:

There are always going to be positives and negatives in a market economy. A weak yen might be a boon for exporters but its a negative for importers as now they have to pay more for what they bring into Japan.

And now even more with the global increase in energy prices its more of a challenge for Japanese importers, especially energy importers.

Exports has always been a stong economic growth driver so most likely there are those in the Bank of Japan and the Japanese government see the positives of the weak yen but at the same time coming up with measures to help energy importers who have the challenges of a weak yen and at the same time the continued increase of global energy prices.

And now as the Ukraine situation continues to get worse the gas and oil situation related to Russia might increase energy prices even higher.

The Japanese government just stated they are going to increase the subsidies that they give t energy importers as an incentive not to pass on their increase costs to the next in the supply chain and hopefully not reach the gasoline stations and the final consumer in the chain.

The Ukraine situation might bring challenges to all countries if the SWIFT situation begins to affect not only Russia but many other countries as collateral damage.

Have a nice day and be safe!