(Bloomberg) -- A revamping of Abenomics is needed to sustain Japan’s economic revitalization, including continued monetary stimulus and deep labor market reforms, the International Monetary Fund said after its annual consultation with the Japanese government.
In the near term, risks to Japan’s recovery include weaker global demand from trade or geopolitical tensions, which could trigger a strengthening of the yen, as well as a disorderly tightening of global financial conditions, the IMF said. A bigger-than-expected hit to consumers from a sales-tax hike next year could also undermine momentum, it said.
The economy is expected to grow 1.1 percent this year and 0.9 percent in 2019, it said.
Over the longer run, though, Japan’s demographic challenges are the main issue and reinvigorated policies will be needed to finish the job of reflating the economy, IMF Managing Director Christine Lagarde said in Tokyo after the report was released.
"We took as a central theme of our work the issue of Japan’s demographic transition -- in particular, all the issues related to the aging and the shrinking of the working population of the country," Lagarde said.
‘Fresh Look’
Under Prime Minister Shinzo Abe, a combination of extraordinary monetary policy, fiscal stimulus and modest structural reforms have been implemented in an effort to escape deflation and raise potential growth.
Lagarde said Abenomics needed to be "broadened, sustained and accelerated," with the three major elements mutually reinforcing each other. Labor market reforms would offer the greatest benefit and need to be deep and credible, she said.
"There has to be a fresh look at Abenomics," she said.
The IMF also stressed the importance of tackling Japan’s enormous government debt. The most recent fiscal plan, announced in June, made limited progress in strengthening the fiscal framework, and Japan lacks a long-term plan to address increases in social spending and ensure debt sustainability, it said.
The economy is strong enough to withstand a sales-tax increase scheduled for next year, but it could hit consumers hard if not accompanied by mitigating policies, the IMF said.
BOJ Policy
Lagarde said she fully supports the Bank of Japan’s accommodative policy stance and its recent steps to improve the sustainability of its stimulus program. But she said Japan’s monetary policy was stretched and inflation would stay below the central bank’s 2 percent target for the next few years.
To strengthen policy credibility, the BOJ should consider moving closer to a full-fledged inflation targeting framework, including publishing staff baseline forecasts with underlying policy assumptions, the IMF said. This would help strengthen market communication and counter speculation about early policy normalization, said.
Japan’s financial institutions, particularly regional ones, could be encouraged to engage in excessive risk-taking if the low interest-rate environment continues while other major central banks raise rates, the IMF said. The viability of some regional banks and life insurance firms could be at risk if they don’t adapt their business models to low rates and demographic changes, it said.
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