• Kyodo

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The International Monetary Fund on Friday cut its economic growth projection for Japan in 2001 to a contraction of 0.2 percent from an April estimate of 0.6 percent growth and urged the Bank of Japan to expand its quantitative monetary-easing steps.

The IMF also called on Japan to promote Prime Minister Junichiro Koizumi’s economic reforms, particularly emphasizing the need to get rid of bad loans at banks. It even proposed that in order to prevent a credit crunch, public funds be injected into relatively sound banks after radical writeoffs of bad loans.

But the IMF cautioned against tightening fiscal policy too rapidly as that could damage the fragile economy.

IMF directors “were concerned that Japan could re-enter a cycle of slowing activity, rising bankruptcies and a deteriorating banking system, which would, in turn, exacerbate the global downturn,” the Washington-based institution said in a report on economic conditions.

The IMF said the Japanese economy grew 1.5 percent in 2000. The modest economic recovery, however, has given way to renewed weakness, reflecting a slowdown in the global electronics industry, slow progress with bank and corporate restructuring and questions about the long-term fiscal situation.

It called on the BOJ to take further monetary-easing steps, saying the current policy would not be able to stave off deflationary pressure resulting from economic reform.

“Most directors . . . suggested that the BOJ should not delay in raising its quantitative target for current account balances, while being prepared, if necessary, to increase purchases of longer-term government securities to meet the higher target,” the report said.

In March, the BOJ adopted a strategy of targeting cash balances held by financial institutions at the central bank, instead of targeting key short-term interest rates.

Under the quantitative easing strategy, the BOJ is keeping the balance of commercial banks’ current accounts at the central bank at around 5 trillion yen, about 1 trillion yen above the average balance before the new strategy was adopted.

On Japan’s fiscal policy, the IMF said Japan should not be in a hurry to trim government spending at a time when the economy remains weak. Koizumi is known to be a strong advocate of fiscal rebuilding.

“In the near term, most directors emphasized the fiscal policy should remain responsive to changing economic circumstances and cautioned the authorities against getting locked into commitments that could result in too rapid a pace of fiscal consolidation,” the report said.

In the area of the crippled banking sector, the IMF said fixing the problem is the “key to restoring healthy growth in Japan.” Targeted capital injections may be needed to help banks clean up their bad loans, it added.

“While unviable financial institutions should be encouraged to exit, undercapitalized banks with healthier prospects are likely to need public funds to prevent a credit crunch and maintain systemic confidence,” the report said.

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