September 22, 2017 / 5:43 AM / a year ago

IMF says BOJ should maintain stimulus, allow for delay in exit

TOKYO (Reuters) - The Bank of Japan should maintain its massive monetary stimulus and enhance its communication of how it expects to achieve its 2 percent inflation target, a senior IMF official said on Friday.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, September 21, 2017. REUTERS/Toru Hanai

Odd Per Brekk, the International Monetary Fund’s mission chief for Japan, said the BOJ will likely lag behind the U.S. Federal Reserve and the European Central Bank in normalising monetary policy.

“But we think this is appropriate, as monetary policy is focused on domestic conditions and domestic conditions are different among countries and regions,” he said in a seminar.

Brekk said the BOJ’s decision last year to shift to a policy targeting interest rates rather than the pace of money printing has made its stimulus programme more sustainable.

“The de-emphasising of the quantitative element... is a good move,” he said. “The BOJ’s bond purchases have tapered off to an (annual) pace of around 50-60 trillion yen ($446-536 billion). This is fine.”

Brekk also said a gradual, steady increase in Japan’s sales tax, coupled with steps to curb social security spending, is the most growth-friendly way to achieve medium-term fiscal reform.

“We are worried about the 2 percentage point increase” in the sales tax scheduled in 2019, because the previous hike in 2014 led to an economic downturn, Brekk said.

“A better strategy is to pre-commit to a smaller but gradual rise of 0.5 percent or 1 percent each year, until the (tax rate) level reaches around 15 percent,” he said, repeating a recommendation the IMF made in annual Article 4 consultations.

Prime Minister Shinzo Abe has pledged to proceed with a sales tax hike to 10 percent from 8 percent in 2019, although some of his aides have suggested the government may postpone the increase again for fear of killing off a budding economic recovery.

Abe is expected to call a snap election as early as next month. Sources say that to lure voters, he will pledge to use part of revenues from the scheduled tax hike to boost spending on education and child care, instead of using the bulk for social security costs and repaying debt.

($1 = 112.0100 yen)

Editing by Richard Borsuk

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