This 2013 Article IV Consultation highlights that on the back of new policy framework, growth in Japan accelerated sharply in early 2013. First quarter GDP growth rose to 4.1 percent (seasonally adjusted annual rate) after two quarters of stagnation. Rising equity values stimulated consumption, and exports rebounded supported by strong regional demand and a weaker yen. Inflation expectations have started to increase, and actual inflation recorded positive growth in June. The near-term outlook has improved considerably, buoyed by stimulus. In 2014, growth is expected to moderate to 1.2 percent.
KEY ISSUES Abenomics has lifted Japan out of the doldrums and needs to be reinforced to accomplish the desired “once in a lifetime” economic regime shift. Building on initial positive results, policies now need to embark on a sustained effort to meet the unprecedented challenges Japan is facing: ending an entrenched deflationary mindset, raising growth, restoring fiscal and debt sustainability, and maintaining financial stability in the face of adverse demographics. Japan should be at the vanguard of structural reform. More vigorous efforts to raise labor supply and deregulate domestic markets, backed by further endeavors to raise wages and investment and designed to boost confidence and raise domestic demand, will be essential to lift growth, facilitate fiscal consolidation, and unburden monetary policy. A credible medium-term fiscal consolidation plan is needed to remove uncertainty about the direction of policies that may be holding back domestic demand. The overarching goal should be to put debt on a downward path, through gradual but steady consolidation that does not derail growth and inflation momentum. It should be based on prudent economic assumptions and on concrete structural revenue and expenditure measures identified upfront. More explicit monetary guidance would enhance inflation dynamics. Actual and expected inflation remain well below the Bank of Japan’s (BoJ’s) inflation target and monetary policy transmission remains weak. The BoJ needs to stand ready to undertake further easing and should provide stronger guidance to markets through enhanced communication. Absent deeper structural reforms, even with further easing, reaching two- percent inflation in a stable manner is likely to take longer than envisaged, suggesting that the BoJ should put greater emphasis on achieving the inflation target in a stable manner rather than within a specific time frame. The financial sector should be a greater catalyst for growth, and guard against risks from unconventional policies. The soundness of the financial system allows more risk taking and consolidation, while remaining resilient to the likely higher volatility of asset prices, exchange rates and interest rates, and lower liquidity in the JGB market as quantitative easing proceeds. While the 2014 external position was assessed to be broadly aligned with fundamentals, subsequent developments and incomplete policies raise the risk of negative spillovers. With the depreciation of the yen relative to its mid-2014 level, further monetary easing without bolder structural reforms and a credible medium-term fiscal consolidation plan could lead to sluggish domestic demand and overreliance on yen depreciation to pursue domestic policy objectives.
Cambodia is a fast-growing, highly open economy, and attained lower-middle income status this year. Over the last two decades, Cambodia grew rapidly (average real GDP growth of around 8 percent) and its integration with the global economy increased sharply, accompanied by an impressive decline in poverty. Going forward, Cambodia’s strategic location, China’s changing trade patterns, and ongoing regional integration provide further opportunities.1 Important steps have been taken by the government that will help Cambodia capitalize on these opportunities, including energy-related investments to help reduce the cost of doing business and measures to facilitate trade, payments and business registration. Nonetheless, further measures are needed to support sustained growth, including reforms to improve the business climate and policies to mitigate rising financial sector vulnerabilities.
Despite the global slowdown, Cambodia’s economy has been holding up, driven by resilient exports and tourism and a strong real estate recovery. Fiscal policy has remained anchored in rebuilding government deposits and maintaining long-term fiscal debt sustainability, while providing adequate financing for Cambodia’s vast development needs. Executive Directors identified greater mobilization of fiscal revenues imperative to rebuild government deposits, and maintained that focus should be on measures that would generate substantial additional revenue and create strong positive externalities.
Abenomics has improved economic conditions and engendered structural reforms but has not yet achieved a durable exit from deflation. The economy has expanded at a pace above potential the last five consecutive quarters, and unemployment has fallen to record low levels. Short-term fiscal stimulus and rising global demand have been key drivers. However, inflation, public debt sustainability, and growth objectives remain to be secured. Risks to the outlook are tilted to the downside, particularly in the medium term. The current favorable economic environment is an opportunity to accelerate reforms. A comprehensive and mutually reinforcing package of accelerated structural reform, coordinated demand and income polices, strengthened policy frameworks, and enhanced financial sector policies is needed. The reform agenda should prioritize structural measures aimed at facilitating reflation (particularly labor market reforms to boost wages), followed by policies to lift potential growth.
Cambodia continues to grow at an impressive pace. Looking ahead, the outlook is positive, although there are near-term downside risks. Financial sector vulnerabilities stemming from rapid financial deepening remain elevated despite a recent slowdown in credit growth. Revenue performance has been strong, but spending pressures are contributing to larger fiscal deficits. Medium-term prospects are favorable, though important challenges remain.
Abenomics needs a significant policy upgrade to regain traction. Abenomics initially made good progress in revitalizing the economy, but the targets for growth, inflation, and the primary balance remain out of reach under current policies. Recognizing the risk of falling short, the authorities introduced a negative interest rate policy, delayed the planned consumption tax hike, and adopted additional structural reforms, but the outlook remains weak. Abenomics can still achieve its ambitious targets through a comprehensive and coordinated policy upgrade. In the absence of such a reload, policies and targets will need to be reset for more gradual and realistic progress to avoid adding to volatility and uncertainty.
This Selected Issues paper describes Palau’s fiscal challenges and policy options to achieve long-term fiscal sustainability. Palau relies heavily on compact grants, and without continued fiscal consolidation over the medium term, the fiscal position will become unsustainable after these grants expire in FY2024. The fiscal sustainability analysis uses an intertemporal budget constraint model to show that reducing the current deficit excluding grants by about 8 percentage points of GDP during FY2014–19 would ensure Palau’s long-term fiscal sustainability. The paper also discusses the role of tourism in Palau and identifies policy priorities to further promote this sector and sustain growth.
This 2013 Article IV Consultation highlights that growth in the Fijian economy increased to 2¼ percent in 2012, supported by income tax cuts, low interest rates, and the one-time payouts under the Fiji National Provident Fund (FNPF) reform, which offset the negative impact of the severe floods and Cyclone Evan on the agriculture and tourist sectors. Inflation declined as imported commodity and food prices moderated. With a lower-than-budgeted deficit of 1 percent of GDP, Fiji’s debt-to-GDP ratio continued to decline in 2012. The latest available indicators suggest accelerating growth momentum in the first half of 2013 boosted by increases in disposable income, bank borrowing, and rising investment.