KEY POLICY INSIGHTS
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Figure 8. Underlying consumer price inflation has been trending up but remains below the 2% target1 Y-o-y % changes 2
Y-o-y % changes 2
1
1
0
0
-1
-2
-1
Headline inflation Core inflation²
2013
2014
2015
2016
2017
2018
2019
2020
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1. Excluding the effects of the April 2014 consumption tax hike, which added 2 percentage points to inflation in FY 2014 according to a government estimate. It also excludes the scheduled October 2019 consumption tax hike, which would add 1.0 point to inflation in the fourth quarter of 2019, and the impact of free childcare for children aged three to five, which would reduce it by 0.5 percentage points, according to OECD estimates. 2. OECD measure, which excludes food and energy. Source: OECD Economic Outlook 104 database; and Bank of Japan. 1 2 http://dx.doi.org/10.1787/888933953297
Table 3. Possible shocks to the Japanese economy Shocks A loss of confidence in Japan's fiscal sustainability
An increase in trade protectionism in major trading partners Natural disasters, such as earthquakes, tsunamis and typhoons The large expansion of the Bank of Japan’s balance sheet results in excessively high inflation
Possible outcome A rise in real interest rates, which could destabilise the financial sector and the real economy, with large spillovers to the world economy A contraction in exports and business investment and a disruption of global value chains Significant loss of life, disruption of economic activity and high costs for reconstruction A fall in the value of households’ savings and real wages, increased uncertainty and a reversal of the monetary policy stance
Fiscal policy: short-term challenges and threats to long-run fiscal sustainability After three years of significant fiscal consolidation aimed at the target of a primary surplus by FY 2020, fiscal policy in 2017 contributed to strong growth. With a primary deficit of 2.7% of GDP in 2017, a surplus in FY 2020 is out of reach. The failure to reach the benchmark of a primary deficit of around 1% of GDP in FY 2018 reflects: i) shortfalls in tax revenue due to slower-than-projected economic growth; and ii) the postponement of the second consumption tax hike (from 8% to 10%), originally planned for 2015, to 2019 (Committee for Promotion of Integrated Economic and Fiscal Reform, 2018). This slippage plus the decision to use half of the revenue from the tax hike for additional spending on early childhood education and care and social programmes put the FY 2020 target out of reach.
OECD ECONOMIC SURVEYS: JAPAN 2019 © OECD 2019