WASHINGTON – The International Monetary Fund warned Wednesday of the risk of global financial instability if Japan fails to implement fiscal and structural reforms while the United States scales back its quantitative easing.
“Japan is scaling up monetary stimulus under the ‘Abenomics’ framework,” the IMF said in its Global Financial Stability Report, referring to the set of measures Prime Minister Shinzo Abe has taken to prop up the economy since assuming power in December.
But substantial risk to financial stability could accompany the Japanese economic program if planned fiscal and structural reforms are not fully implemented, the IMF said.
“Failure to enact these reforms could lead to a return of deflation and increased bank holdings of government debt,” it said.
The United States may soon move to less accommodative monetary policies and higher long-term interest rates as its recovery gains ground, the IMF said.
Tapering of the U.S. Federal Reserve’s asset purchasing program could lead to an unusual rise in yields on long-term bonds and outflows of capital from emerging economies, the IMF said.
If the U.S. economic recovery gathers steam, the Federal Reserve will near a decision on starting to reduce the amount of assets it purchases as part of accommodative measures aimed at creating more jobs, the report said.
The reduction of the asset buying program, however, could result in a rise and increased volatility of yields in the short term. How to deal with the “side effects” will pose a challenge for international financial markets, it said.
The IMF repeated its call for the United States to sufficiently disclose information regarding when the Fed is going to change monetary policy.
“A clear and well-timed communication strategy by central bank officials is critical,” it said.
The Fed introduced the asset purchasing program in September last year to boost economic recovery.