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The International Monetary Fund suggested Aug. 13 that Japan should tighten its monetary policy later this year, saying that the current low level of short-term interest rates are not appropriate over the medium term.

The view was included in a report on the economic situation in Japan prepared by an IMF staff mission completed in July. Similar assessments are usually made on an annual basis, and it was the first time the report on Japan was made public before the issue of the IMF’s annual report.

Most directors on the IMF Executive Board agreed that Japan’s current easy monetary stance should be maintained for now. The Bank of Japan has kept its official discount rate at a record-low 0.5 percent since September 1995 in an effort to keep the economic recovery from losing steam.

But the report says “it would likely be desirable” for monetary policy to be tightened later in the year.

The IMF directors said the pace and timing of future interest rate increases would depend on indications of the strength of the recovery, including the effects of fiscal reconsolidation steps, according to the report.

The report also says that the present level of Japan’s current account surplus is still not a cause for concern but adds that sustained growth in the figure could fuel protectionist pressures abroad.

The IMF directors supported the view that Japan’s economy is becoming self-sustaining, with most of them noting that the key policy challenge would be to return the fiscal balance to a more sustainable level over the medium term.

They endorsed the various structural reforms and deregulation measures currently being undertaken by the Japanese government, saying they would be “an important element in ensuring robust, longer-term economic growth in the face of an aging population,” according to the report.

The board said that the current level of the yen is broadly in line with economic fundamentals and that Japan’s current account surplus, whose downward trend reversed in the first half of 1997, is presently not at levels which should cause concern.

The board also expressed support for Japan’s efforts at fiscal reconsolidation in the medium term, but a number of directors called for consolidation at a faster pace.

The IMF staff members who visited Japan to prepare the report suggested that consolidation measures averaging 1 percent of gross domestic product per year be taken over the next four years.

Japan has set a goal to reduce its fiscal deficit to 3 percent or less of GDP by fiscal 2003, which requires a 0.43 percent annual reduction.

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