The economic expansion was derailed in 2015 by a sharp slowdown in demand from China and other Asian countries and sluggish private consumption. Output growth is projected to pick up from around ½ per cent in 2015 to 1% in 2016, as rising real wages support consumer spending. However, with the consumption tax hike in 2017, growth is likely to slow to ½ per cent. Headline consumer price inflation, which has fallen close to zero with the decline in oil prices, is projected to reach 1½ per cent by end-2017.
The government’s target of a primary surplus by FY 2020 remains a priority to put gross public debt, which has risen to 230% of GDP, on a downward trend. Above all, achieving fiscal sustainability requires faster output growth through bold and wide-ranging structural reforms. To sustain confidence in Japan’s public finances, a detailed and concrete consolidation plan to achieve the FY 2020 primary surplus target is essential. The Bank of Japan's quantitative and qualitative easing (QQE) should continue until the 2% inflation target is sustainably achieved.
Japan’s reliance on thermal energy sources increased sharply following the Great East Japan Earthquake, as all nuclear power plants were closed until mid-2015. The government envisages that nuclear power will supply around 20% of electricity in 2030, compared to around 30% before the earthquake, which would reduce energy costs and greenhouse gas emissions. The plan to enhance competition in the electricity sector will facilitate the use of renewable energy from its current low level and promote green growth. Japan's relatively low taxation of CO2-emitting fuels, especially in heating and industrial processing, could be increased.