IMF Backs More BOJ Easing If Coupled With Comprehensive Reforms

  • Fund official says recent BOJ steps help avoid financial risks
  • Japan fiscal package to slightly boost growth, official says
Photographer: Tomohiro Ohsumi/Bloomberg

The International Monetary Fund welcomes the recent easing of monetary policy by the Bank of Japan and would support further steps in the context of a broad program to spur wage gains and aid the economy, a senior IMF official said.

"We supported the BOJ’s recent easing and particularly the increase in the dollar lending operation as it will help avoid financial stability risks," Luc Everaert, the fund’s mission chief for Japan, said in an interview on Monday. "We would support further easing in the context of a comprehensive policy package."

The BOJ last week enlarged a program of buying exchange-traded funds and expanded a dollar-lending facility, while keeping its negative interest rate unchanged and avoiding an increase in raising the target for the monetary base. It is conducting an assessment of its policies before deciding what, if anything, to do next.

Everaert told reporters on Tuesday that the fiscal package that Japan unveiled on Tuesday "will slightly improve the outlook for the Japanese economy," although it was too soon to say by how much.

Wage Gains

Asked if Japan’s latest moves lived up to the fund’s call for a comprehensive economic program, Everaert said the IMF was still analyzing them. He did add though that the IMF had called for steps to spur wage gains and labor market reforms as part of a wide-ranging strategy to combat the danger of deflation.

"Those elements are very important and we’d like to see to what extent they are part of the government’s announcement," said Everaert, who is assistant director in the IMF’s Asia and Pacific Department.

Japan’s government announced 4.6 trillion yen ($45 billion) in extra spending for the current fiscal year, as Prime Minister Shinzo Abe sought to bolster the economy without abandoning targets for improving fiscal health.

The spending, approved by the cabinet on Tuesday, is part of what Abe flagged in a speech last week as a 28 trillion yen stimulus package, saying more investment was needed to expand the world’s third-largest economy.

"If there is no comprehensive package, fiscal policy should be neutral in the next couple of years," Everaert said in the interview.

Policy, though, should provide stimulus if the reforms the IMF is recommending are implemented, he said. The aim would be to keep economic growth over the next couple of years close to its potential rate, which the fund reckons is about a half percent per year.

Structural Reforms

In its annual Article IV report on Japan’s economy released on Tuesday, the IMF said the country needs to implement structural reforms, particularly in the labor market, to raise wages, address the divide between regular workers and temporary employees, and encourage greater participation of women, older workers and foreigners.

Everaert said the IMF would like Japan to pursue two objectives with its budget policy: manage the ups and downs of its economy while seeking to ensure its long-term fiscal sustainability.

In that regard, the fund is calling for small, gradual increases in the 8 percent consumption tax up to at least 15 percent.

"What we really would like to see is a path of small increases,” he said. "The sooner you start the better. You can start tomorrow."

"But you also have to manage your economy to make sure you have enough support to prevent demand from declining too much," he added. "It’s a delicate two-step."

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