• Kyodo

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The International Monetary Fund announced Wednesday a substantial downward revision to its forecasts for global economic growth in calendar 2003, with the projection for Japan lowered to 0.8 percent from 1.1 percent.

In its semiannual World Economic Outlook report, the IMF cut its projection of real world gross domestic product to 3.2 percent from the 3.7 percent growth estimate released in September.

The IMF attributed the revisions mainly to the sharp rise in oil prices due to the war in Iraq.

It said its latest projections are based on the assumption that the uncertainties surrounding the war will be broadly resolved in the near term and warned against downward risks stemming from a protracted war.

“A more prolonged and destructive conflict in Iraq could have a severe impact on global activity, through elevated oil prices, falling consumer and business confidence, lower equity prices and higher risk premiums,” the report says.

It also says “further policy stimulus” might be needed if the conflict is prolonged and widespread.

The institution lowered its 2003 growth projection for the U.S. economy to 2.2 percent from 2.6 percent and its growth estimate for the euro-zone economy to 1.1 percent from 2.3 percent.

On the Japanese economy, the IMF said “aggressive action” is urgently needed to end deflation and called for Japan to spur inflation.

“It would be helpful for the Bank of Japan to state clearly to the public that it will do whatever is necessary to restore inflation within a reasonably short time frame, and that it will in the medium term target a sufficiently positive inflation rate,” the report says.

The IMF urged Japan to make further efforts to strengthen its banking system, including accelerating adequate provisions against bad loans and amending the law to facilitate the injection of public funds into weak banks.

It said the role of the planned Industrial Revitalization Corp. should be limited to buying bad loans from banks and reselling them to the private sector, rather than “picking winners” to be restructured with the help of public funds.

A key tool in the restructuring of Japan’s banking and corporate sectors, the planned public entity is designed to rebuild heavily indebted companies that the government nonetheless considers to be viable.

The IMF reiterated that rebuilding strained finances and promoting tax and other fiscal reforms are important medium-term tasks for Japan.

Turning to the U.S., the IMF said the “soft spot” of the U.S. economy will only fade gradually, particularly given the impact of the uncertain geopolitical environment on investment.

A protracted Iraq war could “create potential for a double-dip recession, even with an appropriate further easing of monetary policy,” it said.

The IMF also warned against the large U.S. current account deficit as well as the growing budget deficit due to proposed tax cuts and costs related to the Iraq war.

On the euro-zone economy, the IMF said prospects remain lackluster. It voiced particular concerns about growing deflationary pressure in Germany.

For calendar 2004, the IMF anticipates the world economy will grow 4.1 percent.

The IMF put its 2004 growth projection at 1 percent for the Japanese economy, 3.6 percent for the U.S. economy and 2.3 percent for the euro-zone economy.

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