The IMF has assessed Japan’s 2024 external position as broadly aligned with medium-term fundamentals and desirable policy settings but cautioned that underlying structural weaknesses and demographic pressures require urgent policy attention.

The current account (CA) surplus rose to 4.8 per cent of GDP in 2024, up from 3.8 per cent the previous year, driven mainly by a stronger primary income balance and a smaller goods trade deficit. Nearly half the increase came from improved investment income, reflecting overseas direct investment gains and the impact of a weaker yen.

On the trade front, easing import costs and rising yen-denominated export prices helped narrow the goods deficit from –1.1 to –0.6 per cent of GDP. However, Japan’s export competitiveness continues to face headwinds from global competition and the effects of production offshoring.

From a savings-investment lens, the uptick in the CA surplus was largely attributed to a rising private savings rate. The IMF estimates the cyclically adjusted CA balance at 4.9 per cent of GDP, against an assessed norm of 4.3 per cent, leaving a current account gap of +0.6 per cent. The unexplained component of this gap is likely linked to domestic structural rigidities such as persistent corporate savings, barriers to entrepreneurship, and weak investment incentives. Looking ahead, the IMF projects Japan’s CA surplus to gradually decline to around 3.0 per cent of GDP, as returns on Japan’s large stock of foreign assets soften in line with lower global interest rates and declining corporate profitability.

Japan’s real effective exchange rate (REER) depreciated by 5.4 per cent in 2024, continuing the previous year’s trend, largely due to enduring interest rate differentials with other major economies. However, the REER appreciated 4.1 per cent through March 2025 relative to the 2024 average. Based on the current account gap and elasticity estimates, the REER was assessed to be undervalued by 3.3 per cent, with a possible range between –9.6 and +3.0 per cent.

The country’s net international investment position (NIIP) rose to 89.8 per cent of GDP in 2024, up from 80 per cent the year before, fuelled by strong net foreign direct investment and portfolio outflows, along with valuation gains from yen depreciation. Japan remains the world’s largest net external creditor, with foreign assets valued at $3.6 trillion. These assets were well-diversified: portfolio investments made up 42 per cent and direct investment 21 per cent.

Of the portfolio share, 56 per cent was denominated in US dollars, and only 20 per cent in yen, exposing Japan to potential losses if the yen strengthens. Nonetheless, external vulnerability was assessed as low due to the quality of liabilities, of which 35 per cent were in equity or direct investment form. Japan’s NIIP generated an annual return of 7.4 per cent in 2024, well above the pre-pandemic average of 6.2 per cent, helped by the growing FDI share in external assets.

Japan’s financial account showed net outflows of 4.5 per cent of GDP in 2024, consistent with the current account surplus. Outward FDI rose to 4.8 per cent of GDP, targeting Asia, North America, and Europe, while portfolio investment outflows remained elevated at 2.4 per cent of GDP. These trends reflect domestic investors’ search for higher yields abroad amidst sustained real interest rate differentials. The IMF noted that home bias among Japanese investors remains strong, while inward capital flows are largely equity-based, limiting financial vulnerabilities and external spillovers.

Official foreign exchange reserves remained broadly stable at $1.3 trillion, equivalent to 32 per cent of GDP as of end-2024. While the yen is officially free-floating, foreign exchange interventions took place in April, May, and July 2024. The IMF reiterated that such interventions should remain infrequent and strictly focused on addressing disorderly market conditions.

To sustain external balance and foster economic resilience, the IMF recommended that Japan implement a credible and specific medium-term fiscal consolidation plan. Broader reforms to boost private-sector demand, address demographic challenges, and enhance productivity—particularly through labour, fiscal, digital, and green investment policies—were also emphasised. The IMF further advised that industrial policy, if used, should remain targeted and minimise global trade and investment distortions.

Japan’s 2024 external position was broadly aligned with fundamentals, with the CA surplus rising to 4.8 per cent of GDP.
Stronger investment income and a smaller trade deficit drove the gain.
The IMF urged structural reforms, fiscal consolidation, and targeted policies to sustain external stability amid demographic pressures and declining global returns.

Fibre2Fashion News Desk (HU)