TOKYO -- Japan needs a complete set of policies to boost growth and mend its finances that would avoid excessive dependence on a weak yen, the International Monetary Fund said.
The nation's central bank should stand ready to increase monetary stimulus and improve communication with the market, while the government needs a sound plan to secure its fiscal credibility, the IMF said in a report released in Washington on Friday. Slower-than-expected growth in China and the United States could trip Japan's export-led recovery, the IMF said.
"Without bolder structural reforms and credible fiscal consolidation, domestic demand could remain sluggish, and any further monetary easing could lead to over-reliance on depreciation of the yen," the IMF said.
The Bank of Japan refrained from boosting unprecedented easing on Friday, even as a tumble in oil has pushed its main inflation measure down to a 10th of its 2 percent goal. More than two years into Abenomics, growth-boosting reforms have been slow in coming and investors are waiting for a fiscal plan due next month to see how Prime Minister Shinzo Abe contains the world's heaviest debt burden.
The IMF said the central bank should put greater emphasis on achieving its goal of stable 2 percent inflation. Any extra easing should take the form of increased assets purchases and lengthening their duration, the IMF said in its statement, after meeting government officials and policymakers in Japan for an annual review.
Unprecedented monetary easing that Bank of Japan Gov. Haruhiko Kuroda introduced two years ago has driven the yen down about 23 percent against the dollar. While the yen's real effective exchange rate in 2014 was broadly consistent with fundamentals, depreciation in the second half of the year moved it to a weaker level, the IMF said.
Strengthening the effectiveness of any additional easing via more explicit guidance from the Bank of Japan would enhance inflation dynamics, while clarifying the conditions that would trigger more action would be helpful, IMF said.
While the central bank stands ready to adjust policy if needed, further easing isn't required now because the trend in inflation remains on track, Kuroda said on Friday.
The IMF forecasts that economic growth will accelerate to about 1 percent this year and 1.25 percent in 2016, from no growth in 2014, on a recovery in exports and stronger consumption.
The Abe administration has sought to stoke the recovery in the economy and inflation by encouraging companies to increase wages for workers, who have seen the cost of living outpace pay. Talks between business and labor leaders this year produced some progress.
"The authorities should make a concerted effort to raise all administratively controlled wages and prices and call for a supplementary wage round," the IMF said.
Inflation is expected to pick up toward the end of 2015 and rise gradually to about 1.5 percent over the medium term due to rising oil prices, the yen's decline and a narrowing gap between demand and supply in the economy, according to the IMF.
The IMF said the biggest risks lie in weak domestic demand and incomplete policies, particularly fiscal stimulus measures and structural reforms.
"Low and stable JGB [Japanese Government Bond] yields should not be taken for granted as shifts in investor sentiment could happen abruptly," the IMF said.
The target of a primary balance budget surplus by the fiscal year starting in April 2020 provides an anchor to guide fiscal policy in Japan, the IMF said.
Abe has ordered a medium-term fiscal consolidation plan to be formulated by the end of June. He has said the administration's basic stance is that there will be no fiscal consolidation without economic revival.
According to the government's estimates, fiscal policy on its current course will miss the 2020 target. The primary balance deficit is estimated at 3.3 percent of nominal GDP for the year through March 2016 and 1.6 percent in fiscal 2020, according the Cabinet Office.
Business on 05/23/2015