Norway: Financial Sector Assessment Program - Financial System Stability Assessment

Abstract

IMF Executive Board Concludes 2016 Article IV Consultation with Japan On July 29, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with Japan. Economic growth has slowed due to weak private consumption and sluggish investment, and inflation has lost its forward momentum. While financial conditions remain accommodative, falling stock prices and the appreciation of the yen have resulted in a modest tightening. The authorities responded to the weaker domestic and external economic environment through additional monetary and fiscal support, including the adoption of the negative interest rate policy, plans for additional fiscal stimulus, and the postponement of the scheduled 2017 consumption tax hike by two and a half years. Nevertheless, the outlook for growth and inflation remains subdued. Private consumption is projected to grow modestly and weakness in the global recovery and trade, higher uncertainty, especially in the wake of the Brexit referendum, and the recent appreciation of the yen will likely pose a drag on net exports and investment. Consequently, the economy is expected to expand at a moderate pace of about 0.3 percent in 2016, before slowing to 0.1 percent in 2017, excluding the possible effect of the yet to be adopted economic stimulus package. Over the medium term growth is projected to be in line with potential (which is on a declining trend), while inflation is expected to rise to about 1 percent. Additional fiscal support could boost growth in the near term, but downside risks dominate in the medium term relating to weak external and domestic demand, uncertainty about the sustainability of low interest rates in a high public debt environment, and financial stability risks in the context of unprecedented monetary easing. These risks may affect the financial system which so far has remained sound and resilient, with good capitalization and a declining NPL ratio.