A top International Monetary Fund official urged Japan on Wednesday to adopt a medium-term inflation target to help the country break out of a crippling deflationary trap.
The step was among a list of recommendations for fixing Japan’s economy presented by First Deputy Managing Director Anne Krueger, the IMF’s No. 2 official. The list, presented at a news conference in Tokyo, also includes calls for financial-sector reforms, corporate restructuring and fiscal consolidation.
“Strengthened efforts to end deflation are required,” Krueger said. “A medium-term inflation target combined with clear communication of the strengthened strategy would help convince the public that deflation will end, and encourage spending.”
Adopting an inflation target means the Bank of Japan would aim for a specific level of consumer prices within a given period. Krueger specified no range, saying only that “any positive magnitude or range would clearly enable the situation to improve.”
As part of efforts to end persistent price falls, she recommended that the BOJ purchase a wider range of assets, including foreign assets. This would “allow monetary policy to act more directly through asset prices, as well as by expanding liquidity,” Krueger said.
The news conference came at the end of her two-day visit to Japan for the IMF’s annual bilateral discussions with member countries on economic development and policies.
Krueger urged “extreme caution” against using foreign exchange rates as a policy tool, saying experience shows that such acts “very seldom can achieve very much for any period of time.”
Her comments come as the weakening U.S. dollar is causing worries over the prospects for recovery in Japan and Europe.
Japan has intervened heavily in the currency markets since the beginning of the year to stem rapid rises in the yen. A strong yen would hurt Japan’s exports, the only bright spot in the nation’s economy.
Krueger suggested that Japan begin fixing its debt-ridden finances, saying delays would cause the country’s debt to mount further.
Japan’s goal to balance the budget in 10 years “is a step in the right direction, but may not be sufficiently ambitious,” she said.
Krueger was referring to Japan’s official goal to achieve a primary-balance surplus in the early 2010s. In a state of primary balance revenues and expenditures, excluding debt-servicing costs, are balanced.
Speaking of the global economy, Krueger said she sees worldwide deflation as an event that has “a really small probability” of happening.
But she added, “There are some countries that are closer to (deflation) than others, and we believe they need to be more alert to the dangers.”
Krueger said there are two lessons to be learned from Japan — to address the risk of deflation early before it gets entrenched, and that nonperforming loans in the banking sector should be promptly cleaned up.
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