Abenomics Beginning to Work, Says IMF
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The International Monetary Fund on Friday gave its full backing to Japan’s use of ‘Abenomics’, adding that it is “beginning to work”, but warned of significant downside risks to the world’s third largest economy if it does not rein in its huge government debt.
The International Monetary Fund on Friday gave its full backing to Japan’s use of ‘Abenomics’, adding that it is “beginning to work”, but warned of significant downside risks to the world’s third largest economy if it does not rein in its huge government debt.
In its annual country report, the Washington-based fund said it expects Japan to grow 1.6 percent this year and threw its support behind Tokyo’s unconventional use of fiscal and monetary policy – dubbed Abenomics – aimed at jolting the world’s third largest economy into growth after nearly two decades of stagnation.
“The new policy framework … provides a unique opportunity to end decades-long deflation and sluggish growth, and reverse the rise of public debt. The rewards are potentially large,” said the IMF.
Speaking at a press conference, the IMF’s first deputy managing director David Lipton also said the yen’s current depreciation is not problematic, considering the government of Prime Minister Shinzo Abe is also taking steps other than monetary easing to defeat deflation.
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“So long as monetary easing pursues domestic goals, and is accompanied by comprehensive fiscal and structural reforms, we don’t see the yen’s current depreciation as problematic,” the IMF said in the concluding statement of its consultation mission with Japan.
Tackling the national debt – now two and a half times annual economic output – and a planned doubling of the country’s sale tax to 10 percent by October 2015 were crucial to Japan’s fiscal revival, added the IMF.
The fund also gave its blessings to the ultra-loose monetary policy being pursued by the Bank of Japan, saying the exchange rates will eventually adjust “in an appropriate fashion” and the benefits of a revived Japanese economy will outweigh any loss of trade competitiveness that Japan’s trade partners suffered as a result of the weaker yen.
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The yen has fallen 20 percent since late last year, a plunge that has led to heavy criticism, particularly in Europe, that Tokyo was using its economic policies to gain an unfair trade advantage, setting the stage for a global currency war.
Lipton, however, came to Japan’s defence yesterday, saying the yen’s plunge “must be understood in the context of the critical and welcome effort of the Bank of Japan to decisively exit from deflation.”
It added that initial signs suggest the Bank of Japan’s new policy framework, which includes monetary easing and a two percent inflation target, is beginning to work and that various indicators suggest a gradual pickup in inflation expectations.
“The work of Abenomics has just begun,” said Lipton. “The government’s growth strategies, fiscal reforms … are essential for the strategy to be successful.”
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