The International Monetary Fund is likely to upgrade its growth forecast for Japan but fiscal and structural reforms must start in 2014, said top IMF official David Lipton in an interview with the Financial Times to mark the first year of “Abenomics”.
Mr Lipton, the powerful number two to IMF managing director Christine Lagarde, said monetary stimulus in the first year of Shinzo Abe’s premiership has already changed Japan’s economic trajectory and suggested that the fund could tolerate even more should it be needed.
“The first year was a year of opportunity for monetary policy and I think they hit the target and showed they were changing the trajectory for the economy,” said Mr Lipton. “The second year they have the opportunity to show that the second and third arrows are potent. It doesn’t mean they have to finish but they really have to start.”
Mr Abe came to power in December 2012 promising to turn Japan’s economy around after almost two decades of low growth by firing “three arrows” of monetary easing, fiscal stimulus and structural reform. Mr Lipton’s remarks suggest international policy makers will not object to the weakening of the yen as long as Japan makes progress on structural changes.
“The international community is supportive of Abenomics and has been very understanding of the fact that the first arrow of Abenomics has weakened the exchange rate substantially,” said Mr Lipton. So far, he said, the net effect of Mr Abe’s policies on the rest of the world is positive because of the boost to Japan’s growth. “We’ve not seen huge spillovers and what spillovers we have seen have been positive ones.”
Mr Lipton said that the Bank of Japan’s huge bond-buying programme, aimed at reaching 2 per cent inflation within about two years, was changing public expectations. “I think they have broken the negativism that people felt, the desperation people felt, the way that deflation or at best very low inflation had become widely expected,” he said.
“We would certainly be open to a strengthening of the policy if the circumstances warranted it, but right now we think they have the right policy from the monetary standpoint.”
They have broken the negativism that people felt, the desperation people felt, the way that deflation or at best very low inflation had become widely expected
He added that Japan should go ahead with an increase in consumption tax to 8 per cent next April and manage the impact via extra spending – which Tokyo is planning. “It is right that when you are carrying out reforms, including substantial tax policy changes, that you go ahead with the steps but you calibrate the impact to make sure you don’t undermine the incipient recovery.”
Falling salaries have raised concerns about the impact of the tax rise on a revival in consumer spending. Data on Friday showed that regular wages halted a 17-month decline in November, one positive sign for Mr Abe that companies may finally be heeding his calls to increase pay, key to creating a “virtuous circle” that spurs consumption and investment. But analysts said the outlook remained uncertain while the impact of the sales tax increase was unknown.
Jonathan Soble, Tokyo bureau chief, investigates the progress of Shinzo Abe’s plan to pull Japan’s economy out of its more than 15-year deflation
But he said it was crucial that Japan now start reforms to boost its potential to grow. “They have a lot more to do and there are risks. If they don’t complete Abenomics we don’t think it will succeed – it really does depend on all three arrows being shot.”
In particular, Mr Lipton called for measures to make it easier for women to participate in the jobs market – thus boosting potential growth and increasing the pool of taxpayers to help lower debt – and for Japan to sign up to the Trans-Pacific Partnership trade deal and the internal reforms that membership will require.
He said it would take years for Japan to tackle its high public debt but there was a path to do so. “What is within their grasp is to have a more dynamic economy with more rapid growth, and to show that by tackling the second and third arrows, sustained higher growth is possible,” said Mr Lipton. “Once that is established the worries about debt will diminish.”