IMF says Japan needs bold reforms to spark economic revival

The International Monetary Fund on Monday said the Japanese government’s quest to revitalize its economy faces a long slog in the absence of ‘bold’ structural reforms, and urged Tokyo to move income policies and labor market reform to the forefront.

The global lender called for a more flexible monetary policy framework with the Bank of Japan abandoning a specific calendar date for achieving its 2 percent inflation target.

“Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the timeframe set by the authorities,” the IMF said in a statement after “Article 4” annual consultations on economic policy with Japan.

The IMF’s sober assessment comes as the effectiveness of Prime Minister Shinzo Abe’s reflationary policies dubbed Abenomics face renewed doubts as inflation has ground to a virtual halt and growth has remained anaemic.

While unprecedented monetary expansion and fiscal stimulus met with some initial success, Abe’s ‘third arrow’ of structural reforms have been slow to make headway.

“Abenomics has made progress in revitalizing Japanese economy,” David Lipton, the first deputy managing director of the IMF, told a press conference in Tokyo.

“This year’s consultation, however, highlighted continuing challenges that Abenomics faces in the effort to achieve its goals, the objectives of higher growth, higher inflation and fiscal sustainability.”

It added that Japan would need to raise the sales tax – currently at 8 percent – to at least 15 percent to strike the right balance between growth and fiscal sustainability.

The appreciation of the real effective exchange rate since the start of this year has moved it towards a level broadly in line with medium-term fundamentals, it added.

“Without bolder structural reforms and credible fiscal consolidation, domestic demand could remain sluggish, and any further monetary easing could lead to overreliance on depreciation of the yen,” the IMF said.

Source: Reuters