IMF working paper proposes reinforced Abenomics to battle Japan deflation

Japan should set a wage inflation goal of around 3 percent to try to end low wage growth and induce prices to rise in line with the central bank’s inflation target, International Monetary Fund (IMF) staff said in a paper released on Monday.

The working paper also called for the Bank of Japan to adopt an inflation-forecast-targeting framework, in which monetary policy responds to deviations of the inflation forecast from the 2 percent target.

The recommendations were made by several authors as part of their proposed policy package to reinforce the “Abenomics” three-pronged policies – a reflationary recipe Prime Minister Shinzo Abe adopted after sweeping to power in December 2012.

The IMF said working papers by its staff are done to encourage debate and do not necessarily represent its official views.

More than three years after Abenomics was launched, the world’s third largest economy has stalled, with core consumer prices falling and dampening base wage growth, and consumption and investment remain weak amid deteriorating sentiment.

The working paper suggested that the “new arrow” of a proposed policy package be “an incomes policy for Japan to put an end to low wage growth and induce inflation” through cost-push pressures.

Under the new incomes policy, the government would announce a wage inflation guideline, which companies would then need to comply with, or explain publicly why they cannot, it added.

It also noted that the BOJ forecast of inflation would become an ideal intermediate target for monetary policy, helping the central bank build up credibility with financial markets and better anchor long-term inflation expectations to its 2 percent target.

The BOJ plans to conduct a comprehensive review of the effects of its massive stimulus program at the next policy meeting on Sept. 20-21.

“Monetary policy would need to continue to be managed flexibly with all easing options remaining on the table to respond to demand conditions in the economy,” the working paper said.

“The objective would be to plan for a modest overshoot of the long-term 2 percent inflation target in order to get the economy permanently out of the effective lower bound.”

Source: Reuters