October 23, 2013, 1:24 AM ET
IMF Warns Japan About Using Monetary Policy as Crutch
By Mitsuru Obe
But with the BOJ now purchasing Japanese government bonds at a faster pace than Japan’s government can issue debt, economists at the International Monetary Fund warn that Mr. Abe’s plans to revive the economy through monetary policy could hit a wall unless more fundamental reform measures take their place.
“Without ambitious growth and fiscal reforms in train, the BOJ could face difficulties in mainintaining stable long-term rates,” a working paper released by the global financial watchdog showed. “Monetary policy alone cannot counter a potentially rising fiscal risk premium under current policies.”
While public spending along with private consumption have been key factors in recent strong readings of gross domestic product, underlying economic data that reflect what fundamentally drives the nation’s economy paint a different picture. Neither industrial production nor machinery orders have logged significant gains in recent years, while the country has racked up 15 straight months of merchandise trade deficits.
The IMF has long called for radical, market-driven reforms as a way to kick-start Japan’s long-dormant economy. Deregulating the agricultural sector, encouraging foreign investment, increasing labor mobility and relaxing immigration rules are among the recommendations the IMF made in its annual consultation with Japan this year.
Mr. Abe has pledged to undertake bold reforms, calling them “the third arrow” of his “Abenomics” policy after “the first arrow” of monetary easing and “the second arrow” of fiscal stimulus. But the announced programs so far have been seen as a far cry from the proposals that the IMF and the business community have suggested.
The IMF paper warned that incomplete implementation of structural reforms in Japan could lead to slower growth, requiring further fiscal stimulus to close the output gap and boost inflation in the near term, leading to a further deterioration in Japan’s fiscal conditions, already the worst among developed countries.
Under the scenario of incomplete policy implementation, Japan’s government debt is projected to increase to around 310% of its GDP by 2030, from around 240% now.
By contrast, successful implementation of the reforms would spur economic growth, reduce the need for fiscal outlays, and keep the debt level at around 250% of GDP over the medium term.
“Successful implementation of Abenomics … will be essential to keep long-term interest rates low and stable at levels broadly similar to nominal GDP growth rates,” it said.
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