2019 Looks Like a Crunch Year for Japan's Economy

(Bloomberg) -- Japan is in the middle of its longest growth stretch in decades, and while that’s set to continue this year, 2019 looks like a crunch year for the world’s third-largest economy.

The nation’s growth will slow then, according to an International Monetary Fund forecast, just as the government raises the sales tax. That is also when the central bank has forecast that it will be approaching its inflation target, which means it might start winding down stimulus.

The last time the tax was raised, it caused a recession and knocked 9 trillion yen ($86 billion) off of output. That result, and a possible reduction in monetary stimulus, will be on the minds of policy makers, especially if the economy is already slowing. Prime Minister Shinzo Abe has postponed the sales-tax increase twice before.

The Fund’s forecast is based on the assumption that the Bank of Japan keeps interest rates close to zero through that period. If the BOJ does raise rates and start cutting stimulus as Governor Haruhiko Kuroda has suggested it might, that slowdown could come sooner, or be steeper.

Japan’s prospects over the medium term "remain weak, owing largely to a shrinking labor force," the Fund wrote in its semi-annual World Economic Outlook. Japan’s major trading partners, the U.S. and China, are forecast to slow down from around 2020, adding further risks to the outlook.

To contact the reporter on this story: James Mayger in Tokyo at jmayger@bloomberg.net.

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Henry Hoenig

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