Reloading Abenomics: Priorities f th N d d R i Shiftfor the Needed Regime Shift

K A L P A N A K O C H H A R

D E P U T Y D I R E C T O R , A S I A A N D P A C I F I C D E P A R T M E N T

I N T E R N A T I O N A L M O N E T A R Y F U N DI N T E R N A T I O N A L M O N E T A R Y F U N D

S E P T E M B E R 4 , 2 0 1 5

Still bumpy recovery on weak domestic demandSt bu py eco e y o ea do est c de a d

1082014 f 5 t 8 t 1997 f 3 t 5 t

Private consumption before and after the tax increase(Monthly index; October = 100)

3

Contributions to QoQ Growth (SA)(In percent)

104

1062014: from 5 to 8 percent 1997: from 3 to 5 percent

Consumption tax rate increase1

2

100

102-1

0

Private inventories

96

98

4

-3

-2 Private consumptionNet exportsGovernment spendingPrivate gross fixed investment

94

t-6

t-5

t-4

t-3

t-2

t-1 t

t+1

t+2

t+3

t+4

t+5

t+6

t+7

t+8

t+9

t+10

t+11

t+12

t+13

t+14

S C bi t Offi d H A l ti

Before After-5

-4

2013Q2 2013Q4 2014Q2 2014Q4 2015Q2

Private gross fixed investmentReal growth (q/q)

Source: Cabinet Office; and Haver Analytics. Source: Haver Analytics

Inflation remains well below 2-percent targetat o e a s e be o pe ce t ta get

2

Inflation(Year-on-year percent change)

2

Long Term Inflation Expectations(In annual percentage points)

1

1.5

1

1.5

0.5

1

0.5

1

-0.5

0

Headline Inflation adjusted for consumption tax increase

Sub-basket less sensitive to exchange rate (excl. C tax effect) -0.5

0Inflation-Swaps 10Y

Inflation-Swaps (8-10Y)

-1Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015

Sources: CEIC; Bloomberg; and IMF staff estimates

-1Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15

Break-even rate 10Y JGBs

Sources: CEIC; Bloomberg; and IMF staff estimates. Sources: Bloomberg; and Quick Survey.

Portfolio rebalancing is progressing; credit growth showing modest pick upgrowth showing modest pick up

44Corporate

Currency, Deposits & Government Bonds Holdings (2015Q1)(In percent of total portfolio)

3.5Corporations Households Total

Japan: YoY Growth in Bank Lending (In percent)

0

2

0

2

hare

Corporate Pensions

Banks

Other Financial Intermediaries

Insurance

2.5

3.0Corporations Households Total

-4

-2

-4

-2

Ch

an

ge in

Sh

1.5

2.0

-8

-6

-8

-6

2012-15

C

Public Pensions

HouseholdsRebalancing

0.5

1.0

-10-100 10 20 30 40 50 60

Historical fluctuation (2 Std Dev)

Share of Currency, Deposits, and Government Securities

Public Pensions

0.0Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

S H A l iSources: Bank of Japan Flow of Funds, Haver, and IMF Staff Estimates Source: Haver Analytics.

Labor markets are tight but will wages rise to support consumption? support consumption?

3 5

4.0

Total Compensation and Inflation(In percent, yoy)

N i l ( )

1.34 4

Labor Market

2.5

3.0

3.5 Nominal wage (yoy)

Employment (yoy)

Total compensation (yoy)

I fl ti

1.2

4.0

4.2

4.4

1.0

1.5

2.0 Inflation

1.0

1.1

3.6

3.8

4.0

-0.5

0.0

0.5

0.93.2

3.4 Unemployment Rate (%)

Job opening to application ratio (RHS)-1.0

2013Q2 2013Q4 2014Q2 2014Q4 2015Q2Sources: Ministry of Intenal Affairs and Communications, Ministry of Health, Labour & Welfare; and IMF staff calculations

0.83.0Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15

Job opening to application ratio (RHS)

So rce: Ha er Anal tics Welfare; and IMF staff calculations.Source: Haver Analytics.

Structural impediments stronger than expected including from population agingincluding from population aging

Excessive duality in the labor market is suppressing wage growthsuppressing wage growth

3Changes in part-time wages

Nonregular Workers and Wage Growth (year-on-year percent change) (% of staff)

1.6

Real wage and productivity growth (In percent, 1992-2014)

35

37

1

2

Changes in part time wages

Composition effect

Change in full-time wages

Share of nonregular workers (right side) 1/ 1.0

1.2

1.4

wth

31

33

1

0

g ( g )

0 4

0.6

0.8

wag

e

gro

w

29-2

-1

0.0

0.2

0.4

Real w

27-32001Q2 2003Q2 2005Q2 2007Q2 2009Q2 2011Q2 2013Q2 2015Q2

Sources: Haver Analytics; and IMF staff estimates.1/ Y l A

-0.20.0 0.5 1.0 1.5 2.0

Labor productivity growth

Sources: OECD and IMF staff calculations1/ Yearly Average. Sources: OECD, and IMF staff calculations.

Exports remained subdued despite the large yen depreciationdepreciation

Japanese firms’ offshoring seems to be the main driver behind the sluggish recovery of exportsdriver behind the sluggish recovery of exports

0.301200

Investment by manufacturing sector 1/

Overseas fixed investment (ex Lands in billion yen) 5.0

Real exports(In logs)

0.20

0.25

800

1000Overseas fixed investment (ex. Lands, in billion yen)

Share of overseas investment (RHS)

4 7

4.8

4.9

0 10

0.15

400

600

4 4

4.5

4.6

4.7

0.05

0.10

200

400

4 1

4.2

4.3

4.4

Actual

With offshoring (multiplicative)0.000

97Q1 99Q1 01Q1 03Q1 05Q1 07Q1 09Q1 11Q1 13Q1 15Q1Source: Haver Analytics.1/ Investment flow

4.0

4.1

96Q4 99Q4 02Q4 05Q4 08Q4 11Q4

With offshoring (multiplicative)

Sources: Haver analytics; IMF staff projections

14Q3

1/ Investment flow. Sources: Haver analytics; IMF staff projections.

More drivers are needed to successfully exit from low growth and deflationlow growth and deflation

Some progress in structural reform, but more needs to be doneneeds to be done

4.5%

5.0%Austria Finland GermanyJapan Norway Portugal

Job Vacancies per Labor Force Population 1/

1.468

Female Labor Force Participation Rate and Job Vacancy Ratio (In percent)

3.0%

3.5%

4.0%Japan Norway Portugal

United Kingdom United States

1.0

1.2

64

66FLFP (15 to 64 years old)

Job Vacancy Ratio (RHS)

Abenomics

1.5%

2.0%

2.5%

0.6

0.862

64

0.0%

0.5%

1.0%

0 2

0.4

0.6

58

60

0.0%20002001200220032004200520062007200820092010201120122013

Sources: OECD and IMF staff calculations. 1/ Australia data contains anomalies during the Global Financial Crisis period.

0.0

0.2

561994M7 1997M7 2000M7 2003M7 2006M7 2009M7 2012M7 2015M7

l iSource: Haver Analytics.

Labor shortages are particularly acute in certain sectors including various services sectorssectors, including various services sectors

Increasing foreign labor supply could be part of the strategy to ease shortagesthe strategy to ease shortages

Some improvement in corporate governance structure but its economic impact limited so farstructure but its economic impact limited so far

90(percent)

Appointment of Outside Directors by Tokyo Stock Exchange Listed Companies 45%

Cash and Cash Equivalents per Market Cap

61 4

84.7

70

80

90Companies appointed outside independent directors

Companies appointed more than two independent outside directors

40%

38.8

46.9

61.4

46.5

40

50

60

independent outside directors

35%

31.534.6

38.8

12 9 15.0 16.7 18.021.5

20

30

40

30%12.9

0

10

2010 2011 2012 2013 2014 201525%

Dec 10 Dec 11 Dec 12 Dec 13 Dec 14

Jun -15

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Sustained growth accelerations are rare, but not unprecedentedunprecedented…

and could also be realized in Japan…and could also be realized in Japan

Female labor participation (See OECD 2015

Potential Impact of Path-Breaking Structural Reforms (Potential growth; Illustrative)

Female labor participation (See OECD, 2015 forthcoming)

Corporate governance reform (See IMF WPs by Aoyagi and Ganelli, 2014; Galen, 2014)

1.5

Financial sector reforms that raise risk capital as well as SMEs restructuring (Peterson Institute, 2012)

TPP (Peterson Institute, 2012)

Product market reform (SEZs, Agricultural, Electricity)

Gains from ending deflation

Reducing labor duality (See Aoyagi and Ganelli, IMF WP, 2013)

Foreign labor (See IMF 2013 Art IV)0.4

Potential Impact (cummulative)

Further balanced consolidation is needed to secure fiscal sustainabilitysecure fiscal sustainability

0.1

Consumption Tax Hike: Deviation in Growth from Baseline (In percentage point)

-0.2

-0.1

0

-0.5

-0.4

-0.3

0 8

-0.7

-0.6(i) 5-stage: 0.5 percent of GDP increase each in year 1-5 (announced in year 1)

(ii) 2-stage (pre-announced): 1 percent of GDP increase in year 1 and 1.5 percent of GDP in 4 (b th d i 1)

-0.9

-0.8

year 1 2 3 4 5 6 7 8

year 4 (both announced in year 1)(iii) 2-stage (ad hoc): same as in (ii) except that the second tax increase is announced in year 4

Source: IMF staff estimatesSource: IMF staff estimates.

The BoJ needs to stand ready to ease further and enhance communication to guide marketsenhance communication to guide markets

80Oct. 2011

Share of JGB holdings by the Bank of Japan(Percent)

500

Potential Portfolio Rebalancing under QQE2, 2014-17(trillion yen)

50

60

70 Oct. 2012

Oct. 2014

Dec. 2019-QQE

Dec 2019-QQE2

61.1%

350

400

450

500

30

40

50 Dec. 2019-QQE2

45.6%QQE-2

QQE 200

250

300

350

10

2022.3%

12.1%9.0% 50

100

150

0

600 650 700 750 800 850 900 950 1000 1050

Outstanding JGBs

Source: IMF staff calculationsUses deficit projections to forecast outstanding amount of JGBs (size of the bubble)

0Bank of Japan Public pension

fundsInsurance companies

Private banks (major and regional)

Japan Post bank

Sources: IMF staff projectionsUses deficit projections to forecast outstanding amount of JGBs (size of the bubble). g )Sources: IMF staff projections.

So, can Abenomics succeed? So, ca be o cs succeed

My best answer is “I hope so”. y p

Many difficult decisions are needed and that Many difficult decisions are needed and that requires courage not to engage in “politics as

l”usual”