Japan economy facing more downside risks than year ago

Bloomberg

Downside risks to Japan’s economy have increased in the past year and more work will be needed to sustain the recovery, the International Monetary Fund (IMF) said after its annual consultation with the Japanese government.
Near-term risks include weaker global demand from trade or geopolitical tensions, which could undermine growth and trigger a strengthening of the yen, as well as a disorderly tightening of global financial conditions, the IMF said.
A bigger-than-expected hit to private consumption from a sales-tax increase scheduled for next year could also undermine growth momentum in the near term, it said.
Over the longer run, Japan’s demographic challenges are the main issue, IMF Managing Director Christine Lagarde said in Tokyo after the report was released.

‘Revamp Abenomics’
Reinvigorated policies will be needed to reflate the economy, raise the potential growth rate and put public debt on a sustainable path, the IMF said. Policies should include well-specified medium-term fiscal framework, “ambitious” labor market reforms and continued accommodative monetary policy with “clear forward guidance,” it said.
Under Prime Minister Shinzo Abe, the government has used extraordinary monetary policy and fiscal stimulus in an effort to escape deflation and raise potential growth, while undertaking modest structural reforms. Overall, Abenomics requires a revamping, Lagarde said.
The IMF also stressed the importance of tackling government debt. The government’s most recent fiscal plan, announced in June, made limited progress in strengthening the fiscal framework, which lacks a long-term plan to address the increases in social spending and to ensure debt sustainability, it said.
Underlying growth is expected to remain solid, but a sales tax increase scheduled for next year will likely lead to volatility in private consumption if mitigating policies aren’t introduced. “Following a consumption tax-induced spike in 2020, inflation will rise over the medium term, but likely remain below the BOJ’s target,” it said. Continued monetary accommodation at a time when other central banks are tightening policy could encourage financial institutions, particularly regional ones, to engage in excessive risk-taking, the IMF said. The viability of some regional banks and life insurance firms could be at risk if they don’t adapt their business models to low interest rates and demographic changes,
it said.