TOKYO: The International Monetary Fund on Tuesday unexpectedly upgraded its projections for Japan’s economic growth this year and 2016, pointing to a weak yen and lower oil prices, but also warning that Tokyo must tame its massive national debt.
In its latest World Economic Outlook, the Washington-based IMF said it expects Japan’s gross domestic product to expand by 1.0 percent in 2015 and by 1.2 percent in 2016, lifting projections earlier this year for 0.6 percent and 0.8 percent growth respectively.
The Fund acknowledged that an April 2014 sales tax rise had dented growth, sending the world’s number three economy into a brief recession and dealing a blow to Prime Minister Shinzo Abe’s growth blitz, dubbed Abenomics.
But it said better times were on the horizon for the long-laggard economy.
“The gradual pickup reflects support from the weaker yen, higher real wages, and higher equity prices due to the Bank of Japan’s additional quantitative and qualitative easing, as well as lower oil and commodity prices,” the IMF report said.
Major Japanese firms have generally responded to Abe’s call for higher wages, seen as key to kickstarting spending and driving prices higher — a cornerstone of Tokyo’s efforts to conquer years of deflation.
The inflation rate stalled in February, with a key measure of prices flat for the first time in nearly two years due partly to tepid consumer spending.
The numbers fell well short of the Bank of Japan’s 2.0 percent inflation goal, and heightened speculation it will be forced to unleash further monetary stimulus to counter the downturn.
The drop in world oil prices has helped shrink Japan’s massive energy import bill — after the country switched off its nuclear reactors following the 2011 Fukushima atomic accident — but has also hurt efforts to push prices higher.
The IMF offered a cautious view of Japan’s inflation battle.
“Waning downward pressure on prices from lower commodity prices as well as higher real wage growth on tight labor market conditions are expected to help push up underlying prices next year,” it said.
“But under current policies and constant real exchange rates, inflation is projected to rise only gradually to about 1.5 percent in the medium term.”
The IMF said the central bank should tinker with its asset-purchase plan — including scooping up longer-maturity government bonds — and improve the way it communicates its policy goals.
“More forecast-oriented monetary policy communication would increase the transparency of its assessment of inflation prospects and signal its commitment to the inflation target,” the IMF said.
The Fund also said Tokyo must balance efforts to cut the massive national debt through sales tax rises against the current state of the economy.
“The stronger-than-expected contraction in consumption after the consumption tax increase last April highlights that it is critical for fiscal policy consolidation to be attuned to economic conditions and prospects,” it said.
It added that Japan’s debt burden — one of the heaviest among wealthy nations — was still a “key concern”, with a medium-term reduction plan “urgently needed to maintain market confidence”.
The report repeated calls to raise the number of women in the workforce — a key plank of Abe’s growth plan — by improving childcare options, and to usher in more reforms to the highly regulated economy.
The deflation-plagued economy had been on a roll after Abe swept to power in late 2012 with his three-pronged plan to combat years of falling prices and kickstart growth.
The blueprint called for big government spending and huge monetary easing from the BoJ, moves that boosted growth and stoked a stock market rally, while pushing down the yen — a plus for exporters.
But the initial party ended as the economy contracted following the sales levy rise.
Japan limped out of recession in the last three months of 2014 with a tepid 0.4 percent expansion.