WASHINGTON – Japan should undertake structural economic reforms that will lead to a recovery driven by private demand, the U.S. Treasury Department said in its semiannual Report to Congress on International Economic and Exchange Rate Policies.
It is imperative for both the Japanese and global economies that “Japan’s economic policies work primarily through an increase in domestic demand,” the department said in its analysis of Japanese economic and monetary policy.
The report pointed out the weak points of “Abenomics,” notably the Bank of Japan’s “qualitative and quantitative” monetary easing policy.
“Monetary policy cannot offset excessive fiscal consolidation nor can it substitute for necessary structural reforms that raise trend growth and domestic demand,” it said.
The Treasury also urged Japan, which is saddled with the biggest public debt in the developed world, not to roll out fiscal consolidation “too rapidly,” but to ensure durable growth and escape from deflation.
The department expected Japanese fiscal policy to remain austere this year and next, the semiannual report said, noting that “Additional support may be necessary should private demand continue to falter.”
The recent surge in the dollar’s strength against the yen was driven by the growing recovery in the U.S. economy and the slowdown in Japan’s, the report said, referring to the big contraction in the April-June quarter caused by the April consumption tax hike to 8 percent from 5 percent.
“U.S. economic growth is proceeding at a faster pace than in most major trading partners, and this dynamic is expected to persist over the near term,” it said.
The Treasury said the Chinese yuan remains “significantly undervalued” and urged Beijing to accelerate reforms in its foreign exchange system, including information disclosure. But it again stopped short of labeling China a currency manipulator.
The department also regarded South Korea’s won as undervalued and said the currency “should be allowed to appreciate further.”