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Growth is estimated to have picked up to 1.5% in 2017, aided by stronger international trade and fiscal stimulus. Although fiscal consolidation is set to resume in 2018, growth is projected to remain close to 1% in 2018 and 2019, as export growth remains robust. Employment is projected to peak in 2018 as the decline in the working-age population accelerates. Sustained above-potential growth will boost inflation to 1% in 2018 and around 1½ per cent in 2019 (excluding the impact of the increase in the consumption tax rate).
The Bank of Japan should maintain its expansionary monetary policy until the 2% inflation target is achieved. Structural reforms, including measures to improve corporate governance, facilitate the exit of non-viable firms and raise productivity in small firms, are key. Increasing female employment by expanding childcare and improving work-life balance is also essential to boost growth and help put the government debt ratio on a downward trend.
In contrast to household and corporate debt, government debt, which has surpassed 220% of GDP, the highest ever recorded in the OECD area, poses a serious risk. The debt burden is limited at present by negative interest rates on government bonds of less than ten years maturity, as a result of purchases by the Bank of Japan, which now owns 41% of the outstanding stock of government bonds. Achieving fiscal sustainability requires measures to durably strengthen economic growth and a more detailed consolidation path, including gradual hikes in the consumption tax rate and measures to control social spending in the face of rapid population ageing.
Economic Survey of Japan (survey page)