The International Monetary Fund gave a thumbs-up Wednesday to plans by new Prime Minister Yoshihide Suga to maintain the thrust of his predecessor's Abenomics stimulus programs, while pushing through reforms to revitalize the economy.
Odd Per Brekk, deputy director of the IMF's Asia and Pacific department, also urged the Bank of Japan to consider reviewing its 2% inflation target to make it more flexible — repeating a recommendation made earlier this year.
"Such a review would provide the BOJ with an opportunity both to reconfirm its commitment to the target and to increase policy flexibility as needed," he said in a written interview.
In succeeding Shinzo Abe as prime minister last month, Suga pledged to maintain the first two "arrows" of Abenomics — huge fiscal and monetary stimulus measures to prop up growth.
He also vowed to pursue a remodeled version of structural reforms, such as steps to boost smaller firms' productivity, promote digitalization and consolidate regional banks.
"Giving renewed momentum to the 'third arrow' of structural reform would help in the recovery and in putting the economy on a longer-term growth path," Brekk said.
"In this regard, reforms to promote the digital economy, revive regional economies, and deal with regional bank issues should be given high priority," he said.
Labor market reforms, such as opening up more career opportunities for women and encouraging more telework, must also remain a priority, Brekk said.
The economy suffered its biggest postwar slump in the second quarter as the coronavirus pandemic slammed domestic and global demand, and analysts expect any rebound to be modest as uncertainty over the outlook weighs on consumption and capital spending.
The economy was already in recession before the health crisis due to the blow from last year's sales tax hike. Regional banks are reeling from sluggish credit demand, a rapidly aging population and narrowing margins from years of ultralow interest rates.
With high uncertainty over the economic outlook, the BOJ should avoid a premature withdrawal of stimulus and wait until a recovery takes hold, Brekk said.
It could take additional steps if needed, such as an expansion of its special lending programs, a cut in longer-term yield targets and an increase in purchases of exchange-traded funds, he said.
In the longer run, the BOJ should consider a review of its price target and policy framework to allow itself more room to address financial system risks, Brekk said.
Under yield curve control (YCC), the BOJ guides short-term rates at -0.1% and 10-year bond yields around zero as part of efforts to achieve its elusive 2% inflation target.
Years of heavy money printing and the adoption of YCC, however, have failed to fire up inflation, drawing criticism that the policies were doing more harm than good by hurting commercial banks and discouraging them from boosting lending.
Brekk's comments followed those in a staff report in February, in which the global lender urged the BOJ to re-define its inflation target as a long-term goal with room for some allowances.
It said this would give the central bank more flexibility in whittling down stimulus to ease the pain on financial institutions.
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