JAKARTA (TheInsiderStories) – The International Monetary Fund (IMF) reduced its Japan’s growth forecast for the third time this year to 0.8 percent from 0.9 percent, with the economy set to decelerate to 0.5 percent next year, while urged the Bank of Japan (BOJ) to consider steps to ease the strains such as targeting a shorter maturity for its long-term bond yield target.
Speaking at the conclusion of the fund’s annual mission to review the economy on Monday (11/25), IMF Managing Director Kristalina Georgieva called for continued spending to prop up growth and prices as the resilience of Japan’s domestic demand is tested by the synchronized global slowdown.
“Japan’s resilience will be tested. We project that growth will remain in line with Japan’s estimated potential growth rate of about 0.5 percent. Headline consumer price inflation is projected to continue its slow upward trend towards—but still below— the BOJ’s 2 percent target,” she said.
The fund also made several recommendations to make the BOJ policy more sustainable, including the targeting of shorter-term bonds, while reiterating its call for more ambitious structural reforms to boost growth.
“Fiscal policy should be supportive to protect near-term growth and promote inflation momentum,” Georgieva said while reminding policymakers in Japan that eventually, they would still need to rein in the country’s towering public debt.
The fund said Japan should not tighten its spending stance for now, suggesting that measures aimed at supporting growth through a sales tax hike should be extended. Those measures, including rebates for cashless payments and tax breaks on housing and car purchases, had already helped smooth out demand, Georgieva said.
Public money could also be used to raise pay for workers in the health care sector, offer incentives for firms to raise wages, and widen the availability of childcare facilities, the fund added.
The IMF also urged the BOJ to consider steps to ease the strains caused by its ultra-loose policy on financial institutions, such as targeting a shorter maturity for its long-term bond yield target.
Fiscal policy can complement the BOJ’s efforts to protect the economy from overseas risks, it said, suggesting that Japan should not shy away from ramping up fiscal spending in the near-term despite its huge public debt.
The central bank could reduce the side effects of its prolonged easing on financial institutions by shifting its 0 percent yield target on 10-year Japanese government bonds to a shorter maturity and by cutting back it’s buying of longer-term JGBs. Such actions should steepen the JGB yield curve, which would help financial institutions’ profitability.
The BOJ could also consider adopting an inflation target range to give it more flexibility on policy while making its decisions more closely linked to forecasting by its staff, rather than the views of board members.
Georgieva said that while the 2 percent inflation goal hadn’t been achieved, the direction of inflation had been established. The most important thing is deflation is now a story of the past, she said.
Looking at the longer term, Japan’s aging society will put more pressure on the country’s already strained finances. While a shrinking labor force in a growing economy would put upward pressure on wages, making the BOJ’s inflation target achievable, the country still needs to address its debt pile, she said.
“Over the next 40 years, worsening demographics will slow Japan’s real GDP. Our analysis indicates that an ambitious and coordinated reform program can significantly mitigate this risk and, offset up to 15 percent of the real GDP slowdown, she concluded.
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