It would be “dangerous” for the Bank of Japan to increase stimulus beyond what it already planned before Prime Minister Shinzo Abe implements structural reforms in the economy, a top International Monetary Fund official said.
“It would be very dangerous to rely on monetary policy alone” to boost growth, Naoyuki Shinohara, deputy managing director at the IMF, said in an interview in Washington today. “Because of Japan’s poor fiscal state, it would be easy for the Bank of Japan to be seen as financing the government’s deficits.”
The Japanese central bank pledged in April to double the monetary base over two years to end deflation. Abe has yet to specify the reforms that he says make up the third and final pillar of his plan to bolster the Japanese economy. Short-term fiscal stimulus and monetary easing are the two other pillars.
Inflation expectations in Japan haven’t rebounded as much as the government has hoped, Shinohara said. The more stimulus the central bank injects, the harder it gets to eventually normalize policy and the greater the risk of accumulating imbalances in financial markets, which are challenges that the U.S. Federal Reserve is already facing, he said.
Shinohara added that the Fed’s attempts to signal an eventual reduction in its $85 billion in monthly bond purchases have served as a “stress test” for emerging market economies, some of which have proved to be more resilient than others.
“The hardest-hit countries had weak fundamentals” such as high inflation and a current account deficit, he said.
Policy makers in emerging market economies should also resist the urge to pump too much stimulus into their economies, Shinohara said. Both slower growth in developed economies and some structural issues may mean they no longer have the capacity to grow at the rate that they once did, he said.
“It would be fine if they responded under the assumption that the global economy has changed,” he said. “But if they assume they can continue in the same way as before, they may fail.”
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