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IMF cuts Japan's 2019 GDP forecast again to 0.8%
THE International Monetary Fund (IMF) has called on Japan's government and the Bank of Japan (BOJ) to increase their cooperation to support the economy as it cut its 2019 growth forecast for the third time this year amid heightened global risks.
Speaking at the conclusion of the fund's annual mission to review the economy, IMF managing director Kristalina Georgieva called for continued spending to prop up growth and prices as the resilience of Japan's domestic demand is tested by the synchronised global slowdown.
The fund also made several recommendations to make BOJ policy more sustainable, including the targeting of shorter-term bonds, while reiterating its call for more ambitious structural reforms to boost growth.
"Fiscal policy should be supportive to protect near-term growth and promote inflation momentum," Ms Georgieva said while reminding policy makers in Japan that eventually they would still need to rein in the country's towering public debt.
"Beyond the short run, a clear commitment to long-term fiscal sustainability is essential."
The IMF reduced its growth forecast for the world's third-largest economy this year to 0.8 per cent from 0.9 per cent, with the economy set to decelerate to 0.5 per cent next year, matching the country's potential growth rate.
The fund said Japan should not tighten its spending stance for now, suggesting that measures aimed at supporting growth through a sales tax hike should be extended.
Those measures, including rebates for cashless payments and tax breaks on housing and car purchases, had already helped smooth out demand, the fund said.
Public money could also be used to raise pay for workers in the health care sector, offer incentives for firms to raise wages, and widen the availability of childcare facilities, the fund added.
The IMF also called on the BOJ to maintain its support for the economy while honing its policy measures to make them more sustainable.
The central bank could reduce the side effects of its prolonged easing on financial institutions by shifting its zero per cent yield target on 10-year Japanese government bonds to a shorter maturity and by cutting back its buying of longer-term Japanese government bonds (JGBs).
Such actions should steepen the JGB yield curve, which would help financial institutions' profitability.
The BOJ could also consider adopting an inflation target range to give it more flexibility on policy, while making its decisions more closely linked to forecasting by its staff, rather than the views of board members.
Ms Georgieva said that while the 2 per cent inflation goal hadn't been achieved, the direction of inflation had been established. "The most important thing is deflation is now a story of the past," she said.
Looking at the longer term, Japan's aging society will put more pressure on the country's already strained finances.
While a shrinking labour force in a growing economy would put upward pressure on wages, making the BOJ's inflation target achievable, the country still need to address its debt pile, she said. "From the perspective of the IMF, we believe a gradual increase of consumption tax helps." BLOOMBERG