Japan’s recovery from its 2012 recession is being driven by strong export growth, consumer spending amid rising confidence and employment, and a rebound in business investment. The expansion, which is being supported by strong monetary stimulus and a fiscal package, is expected to continue. However, fiscal consolidation, including the consumption tax hikes in 2014 and 2015, is projected to slow output growth to around 1½ per cent in 2014 and 1% in 2015. The sustained recovery will help push inflation toward the 2% target.
With gross public debt surpassing 230% of GDP, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by FY 2020 is a top priority to sustain confidence in Japan’s public finances. The hike in the consumption tax rate to 8% in 2014 is an important first step to achieve fiscal sustainability and it should be followed by the second hike, to 10%, in 2015. Additional fiscal stimulus packages beyond that planned for 2014 might jeopardise the needed fiscal consolidation. Increasing sustainable growth through bold structural reforms is also essential to address the fiscal situation, as is expansionary monetary policy. The Bank of Japan's “quantitative and qualitative monetary easing” should continue until the inflation target has been sustainably achieved in order to ensure a definitive exit from deflation.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.