• Kyodo

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The International Monetary Fund said Saturday that the Bank of Japan “needs to stand ready” for further monetary easing to accelerate the country’s economic recovery, warning of differences between the central bank and market inflation forecasts.

Though market inflation expectations “rose markedly” since the BOJ introduced large-scale easing in 2013, the nation’s key consumer inflation rate remains at around 1 percent, lower than the central bank’s target of 2 percent, the IMF said in a concluding statement after its annual consultation mission to Japan.

“The transmission to inflation is taking longer than expected,” the Washington-based lender said, citing lower energy costs due to falling crude oil prices, a deeply rooted “deflationary mindset” among Japanese people and structural hurdles preventing wage growth from translating into price rises.

“The monetary transmission is weak so that even with further easing, reaching 2 percent inflation in a stable manner is likely to take longer than envisaged by the BOJ,” the IMF said.

The BOJ now expects to hit its inflation target in the first half of fiscal 2016.

The IMF said any additional easing by the BOJ should come in the form of expanding its existing massive asset purchase program. The fund also said the central bank must enhance communication with the market by providing “stronger guidance” on its future policy.

On fiscal policy, the IMF called on Japan to adopt “prudent and realistic economic assumptions” as the government is drawing a consolidation plan to attain its international commitment of balancing the primary budget by fiscal 2020.

“Using overly optimistic macroeconomic assumptions” in a government scenario “risks harming confidence in the authorities’ ability to restore fiscal sustainability,” the IMF said.

The warning came after a key government panel said recently it is possible to achieve the fiscal discipline goal through robust economic growth of more than 3 percent in nominal terms, which will increase tax revenues.

“Consolidation will require both expenditure and revenue measures,” the IMF said, adding that a further increase in the consumption tax rate above 10 percent will be needed in addition to curbing the rise in social security spending.

The government is scheduled to raise the tax rate to 10 percent from the current 8 percent in April 2017, amid fears of negative impact on economic activities and growth.

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