IMF Cuts Japan’s GDP Forecast for Third Time in 2019
The IMF recommendations come as Prime Minister Abe’s administration mulls the scale of planned stimulus to support growth.
(Bloomberg) --
The International Monetary Fund called on Japan’s government and the Bank of Japan to cooperate more in support of the economy as it cut its 2019 growth forecast for the third time this year amid heightened global risks.
Speaking at the conclusion of the fund’s annual mission to review Japan’s economy, IMF Managing Director Kristalina Georgieva essentially gave a green light for Prime Minister Shinzo Abe’s planned stimulus package as she called for continued spending to prop up growth and prices.
Japan’s Abe Calls for Extra Spending for Disaster Relief, Growth
The fund also made several recommendations to make Bank of Japan policy more sustainable, including the targeting of shorter-term bonds, while reiterating its call for more ambitious structural reforms to boost growth.
The IMF recommendations come as Abe’s administration mulls the scale of planned stimulus to support growth in the face of a sales tax hike, damage from recent typhoons and a decelerating world economy. Economists and policy makers see a greater need for the government to step in to keep the economy ticking over as the BOJ runs short of additional ammunition.
“The IMF’s comments add support to Abe’s fiscal stance. He wants to do a speedy and substantial stimulus in case there’s an economic slowdown after the sales tax hike just as existing public spending peaks out,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley.
Georgieva said the resilience of Japan’s domestic demand would be tested by a synchronized global slowdown in the near future and by the country’s own demographics in the longer term.
“Fiscal policy should be supportive to protect near-term growth and promote inflation momentum,” Georgieva said while reminding policy makers in Japan that eventually they would still need to rein in the country’s towering public debt. “Beyond the short-run, a clear commitment to long-term fiscal sustainability is essential.”
The IMF trimmed its growth forecast for the world’s third-largest economy this year to 0.8% from 0.9%, and forecast a slowing to 0.5% next year, matching the country’s potential growth rate.
The fund said Japan should not tighten its spending stance for now, suggesting that measures aimed at supporting growth through the sales tax hike should be extended. Those measures, including rebates for cashless payments and tax breaks on housing and car purchases, had already helped smooth out demand, the fund said.
Public money could also be used to raise pay for workers in the health care sector, offer incentives for firms to raise wages, and widen the availability of childcare facilities, the fund added.
Among pressing structural reforms to improve labor market flexibility and corporate governance, the fund flagged the importance of addressing the duality of Japan’s job market. Breaking the wall that separates secure lifetime employees from contracted workers by giving them equal working conditions would improve productivity, it said.
Easing Sustainability
The IMF called on the BOJ to maintain its support for the economy while honing its policy measures to make them more sustainable.
The central bank could reduce the side effects of its prolonged easing on financial institutions by shifting its 0% yield target on 10-year Japanese government bonds to a shorter maturity and by cutting back its buying of longer-term JGBs. Such actions should steepen the JGB yield curve, which would help financial institutions’ profitability.
The BOJ could also consider adopting an inflation target range to give it more flexibility on policy, while making its decisions more closely linked to forecasting by its staff, rather than the views of board members.
What Bloomberg’s Economist Says
“The IMF’s Article IV consultation for Japan points to fiscal policy taking the driver’s sheet for now, while suggesting a more simplified monetary policy framework focusing on the yield curve rather than the quantity of asset buying. While that approach may offer more clarity and consistency, it’s a combination that could also push up the yen, an outcome the Bank of Japan surely wants to avoid.”
--Yuki Masujima, economist
--With assistance from Emi Urabe.
To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jason Clenfield
©2019 Bloomberg L.P.
