IMF optimistic on Japanese economy

By Reuters
August 12, 2004

WASHINGTON -- The International Monetary Fund yesterday upgraded its economic outlook for Japan and said it expects price deflation there to end next year.

''There are clear indications that Japan's long-standing economic problems have eased," the IMF said in a review of the Japanese economy.

The Washington-based lender said it expected Japan's real gross domestic product to rise 4.5 percent in 2004, above its April forecast of 3.4 percent growth.

The fund said it expected the Japanese consumer price index to fall 0.1 percent this year, with deflationary pressures ''ebbing to zero" by the end of 2005.

''Recovery has strengthened and become more broadly based, while labor market conditions have improved," the IMF said in a statement released in Washington.

''Meanwhile, deflationary pressures have eased, against the backdrop of a narrowing output gap and supportive monetary policy," the lender added.

Still, the IMF said its buoyant outlook for Japan could be threatened by a potential sharp rise in global interest rates or a slowdown in the economies of key trading partners.

It also said Japan's large public debt could restrain growth over the medium-term and noted lingering weakness in the country's financial and corporate sector.

The fund praised the Bank of Japan for its policy of maintaining zero interest rates until both actual and expected inflation rates turn positive. It said it viewed the current accommodative policy stance as appropriate.

''As the end of deflation draws nearer, enhancements to the Bank of Japan's communication strategy to provide a clear signal to markets about the future direction of monetary policy could help stabilize inflation expectation," the IMF said.

The IMF conducts economic reviews of all its member countries, known as Article IV consultations, usually every year. The staff involved in Japan's review said it was divided on the issue of foreign exchange intervention.

Japan sold a record $184 billion during 2003 to curb the yen's strength and help protect its export-led recovery, though it stopped the interventions this year.

The IMF said while past interventions had successfully suppressed the yen's value, ''with exchange rate risks now more balanced, such interventions were not seen as desirable."

However, the fund said its staff split on the question of whether future interventions might be warranted.

Some staffers believed Japan could justifiably intervene again if significant upward pressures on the yen reemerged and threatened to stall the economy, while others felt the yen's exchange rate should be fully market-determined, the IMF said.

Japan's economy grew at an annualized 6.1 percent pace in the January-March quarter, its best showing in more than a decade and outstripping US expansion in the same period.

Tokyo said last week its economy continued to recover steadily, although rising oil prices gave reason for caution.

In its statement, the IMF said while it considered short-term conditions favorable in Japan, it expected the country's output to moderate in coming years. The fund forecast a 2.5 percent expansion in 2005, with longer-term growth of about 1.7 percent per year.

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