Bleak assessments of the global economy continued to emerge at the annual meetings of the International Monetary Fund and the World Bank in Tokyo Wednesday, with the IMF's Global Financial Stability report warning that market players' confidence remains fragile.
"Risks have increased since the last report in April," Jose Vinals, director of the IMF's Monetary and Capital Markets department, said, adding that more effective policies are needed to achieve lasting stability across the globe. Market conditions may have improved but this should not "lead to a false sense of security," he said.
On Japan, Vinals said that "delaying policy adjustments until market strains become evident leads to financial turmoil and to harsher economic outcomes."
The IMF on Tuesday projected Japan's economic outlook would fall from 2.2 percent this year to 1.2 percent in 2013. Carlo Cottarelli, head of the organization's Fiscal Affairs department, said Japan must proceed with a debt reduction plan and may require more tax hikes in the future.
While their safe haven status is benefiting Japanese government bonds, Vinals warned that for them to remain secure, the government must take appropriate fiscal consolidation strategies to minimize deficits and curtail the accumulation of more debt.
Meanwhile, the IMF expert called Europe's sovereign debt issues "the principle risk to global financial stability," and said that although actions taken by European authorities have eased some fears, their efforts still fall short.
The Global Financial Stability report said Europe's biggest banks may have to sell off $2.8 trillion of their assets and possibly as much as $4.5 trillion in a worst-case scenario if policies to restore confidence in the eurozone aren't implemented quickly.