IMF backs Japan’s ’Abenomics’, but warns of risks
The IMF, which expects the world’s third-largest economy to grow 1.6 per cent this year, said Prime Minister Shinzo Abe and his hand-picked team at the Bank of Japan were on the right track.
The International Monetary Fund on Friday gave a cautious thumbs up to Japan’s economy-boosting efforts, but warned there are “considerable downside risks” if Tokyo doesn’t chop its huge national debt.
The Washington-based IMF, which expects the world’s third-largest economy to grow 1.6 per cent this year, said Prime Minister Shinzo Abe and his hand-picked team at the Bank of Japan were on the right track in their bid -- dubbed “Abenomics” -- to reverse years of falling prices.
David Lipton, the first deputy managing director of the IMF, also told a news conference that the yen’s current depreciation was not problematic if accompanied by fiscal and structural reforms Abe has promised to deliver.
“The authorities have embarked on an ambitious agenda to raise growth and inflation,” the IMF report said.
“The new policy framework... provides a unique opportunity to end decades-long deflation and sluggish growth, and reverse the rise of public debt. The rewards are potentially large.”
But Abe -- whose plan to boost growth with big spending and aggressive central bank easing which has sharply weakened the yen -- must make good on pledges for more reforms, including bringing more women into the workforce, it added.
“Despite the strong start, there are considerable downside risks to the outlook,” the IMF said.
“Disappointing growth reforms that fail to raise private investment and employment could weaken the recovery, and slow the return to inflation.”
Tackling Japan’s crushing debt -- the worst among industrialised nations at more than twice the size of the economy -- and a planned doubling of the nation’s sales tax to 10 per cent by 2015 were crucial to putting Tokyo’s fiscal house in order, the IMF said.
“Lack of concrete fiscal measures to bring down public debt, or a delay in the consumption tax increase, could elevate risks of a rise in government bond yields, which would undermine fiscal and financial sector stability,” it said.
Japan pays low interest rates on its debt, which is mainly held domestically, but a spike in yields in recent weeks has sparked concerns about Tokyo’s loan-servicing costs.
The IMF comments come after the Bank of Japan unleashed a torrent of monetary easing and set a two-per cent inflation target designed to reverse the years of deflation that have crimped private spending and business investment.
On Friday, the IMF said “we fully endorse” the target while repeating its view that a sharp decline in the yen, tumbling by about 25 per cent against the dollar since late last year, would not devastate rival trading nations.
Tokyo has faced heavy criticism, particularly in Europe, that it was using its economic policies to drive down the unit to gain a trade advantage, setting the stage for a global currency war.
“We do not see the yen’s current depreciation as problematic,” the IMF said.