IMF cuts Japan’s GDP forecast third time amid global risks

Bloomberg

The International Monetary Fund (IMF) called on Japan’s government and the Bank of Japan (BOJ) to cooperate more in support of 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 Japan’s economy, IMF managing director Kristalina Georgieva essentially gave a green light for prime minister Shinzo Abe’s planned stimulus package as she called for continued spending to prop up growth and prices.
The fund also made several recommendations to make Bank of Japan policy more sustainable, including the targeting of shorter-term bonds, while reiterating its call for more ambitious structural reforms to boost growth.
The IMF recommendations come as Abe’s administration mulls the scale of planned stimulus to support growth in the face of a sales tax hike, damage from recent typhoons and a decelerating world economy. Economists and policy makers see a greater need for the government to step in to keep the economy ticking over as the BOJ runs short of additional ammunition.
“The IMF’s comments add support to Abe’s fiscal stance. He wants to do a speedy and substantial stimulus in case there’s an economic slowdown after the sales tax hike just as existing public spending peaks out,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley.
Georgieva said the resilience of Japan’s domestic demand would be tested by a synchronised global slowdown in the near future and by the country’s own demographics in the longer term.
“Fiscal policy should be supportive to protect near-term growth and promote inflation momentum,” 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 trimmed its growth forecast for the world’s third-largest economy this year to 0.8% from 0.9%, and forecast a slowing to 0.5% 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 the 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 healthcare sector, offer incentives for firms to raise wages, and widen the availability of childcare facilities, the fund added.
Among pressing structural reforms to improve labour market flexibility and corporate governance, the fund flagged the importance of addressing the duality of Japan’s job market. Breaking the wall that separates secure lifetime employees from contracted workers by giving them equal working conditions would improve productivity, it said.
The IMF 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 0% yield target on 10-year Japanese government bonds (JGB) to a shorter maturity and by cutting back its buying of longer-term JGBs.