The International Monetary Fund said Japan’s currency is overvalued and the central bank should consider further monetary stimulus, including longer-dated government bonds and private securities.
“The exchange rate has appreciated over the past year partly because of safe-haven capital inflows, and our analysis suggests that the yen is moderately overvalued from a medium-term perspective,” the IMF said in a report on Japan’s economy released today. Intervention can be used to counter volatile currency movements, David Lipton, the IMF’s first deputy managing director, told reporters in Tokyo.
Investor concern about Europe’s sovereign-debt crisis has fueled a 5 percent gain in the yen against the dollar since mid-March, threatening the profits of the nation’s exporters. The Bank of Japan could increase its asset purchases to help the nation overcome more than a decade of deflation, the Washington-based fund said.
“The asset-purchase program could be expanded substantially beyond current plans to increase the likelihood of achieving the 1 percent inflation goal by end 2014,” the IMF said, referring to the BOJ’s price target. “Given the importance of expectations in the current low-interest rate environment, an upfront announcement of such easing could also raise inflation expectations.”
The yen fell to 79.54 per dollar as of 1:48 p.m. in Tokyo, reversing earlier gains after the IMF’s comments. The Nikkei 225 Stock Average slid 0.9 percent as surging Spanish bond yields stoked concern that a bailout of the nation’s banks won’t tame the European debt crisis.
An intensification of the flight to safety in financial markets could lead to exchange-rate volatility, further strengthen the yen and depress equity prices and also business and consumer confidence, the IMF said.
“We see in the world volatile capital flows, where risk aversion and risk taking can create volatility,” said Lipton. “And certainly in that setting intervention can be used to avoid disorderly markets -- but that should be in the context of an exchange-rate system that remains market determined.”
Japanese lawmakers are increasing pressure on central bank Governor Masaaki Shirakawa to ease monetary policy to support the economy even after the BOJ bolstered the size of its 40 trillion yen ($503 billion) asset-buying fund, its main policy tool, twice this year. Taking into account BOJ easing to date, the IMF said the BOJ’s price goal won’t be reached until 2017.
Japan’s government nominated two economists for the central bank policy board who previously signaled support for stimulus, underscoring forecasts for policy makers to expand asset purchases. Prime Minister Yoshihiko Noda’s administration yesterday nominated Takahide Kiuchi of Nomura Securities Co. and Takehiro Sato of Morgan Stanley MUFG Securities Co., pending confirmation by the Diet.
The nominees would join a central bank that’s boosted its asset fund by 20 trillion yen this year yet been faulted by lawmakers for failing to do enough to end deflation and stoke growth. Sato said in an interview last month the BOJ’s inflation forecast for next year was “wishful thinking,” and Kiuchi said the bank may need to cut growth and price forecasts. The BOJ board is concluding its next board meeting on June 15.
Economic growth may slow by more than half from the first quarter, when gross domestic product rose 4.7 percent from the previous three months at an annualized pace. Bloomberg News surveys of economists estimate GDP will grow 2 percent this quarter and 1.6 percent in the final three months of 2012.
Japan’s central bank forecast consumer prices will rise 0.7 percent in the year starting in April 2013 and it expects inflation will reach its goal of 1 percent before “too long,” according to its outlook report on April 27.
The IMF also said extending the maturity of government bonds the central bank buys beyond three years could help lower medium-term interest rates. Purchases of assets including corporate bonds, equities and highly-rated securitized loans of small and medium-sized enterprises could stimulate activity by boosting asset prices, the fund said.
Regarding fiscal policy, the fund said Japan could increase the consumption tax to at least 15 percent, more than Noda’s goal to double the 5 percent levy by 2015.
Elsewhere in Asia, India may say industrial production rebounded in April, while Bank Indonesia is forecast to keep interest rates unchanged for a fourth meeting, according to Bloomberg News surveys.
The U.K. may report manufacturing output fell in April from the previous month, while overall industrial output climbed 0.1 percent in the same period, Bloomberg surveys showed.
In the U.S., confidence among small businesses probably fell in May from a month earlier, a Bloomberg survey showed ahead of a report by the National Federation of Independent Business today. The Labor Department may say import prices fell in May from April, a separate survey showed.