Just when you think they are coming around…

IMF report cites concerns over Japan’s fiscal situation

August 3 (Jiji Press) — The International Monetary Fund has expressed concern about the fiscal situation in Japan, where public debt keeps soaring.

Simulations by the IMF “suggest that global output losses could reach 2 percent of GDP” if Japan is “exposed to a reconsideration of sovereign risk by investors” and experiences a long-term interest rate jump of two percentage points, the IMF said in a report.

The international body called for a credible fiscal consolidation plan by Japan in the report on the spillovers of the domestic economic and monetary policies of major contributors to the global economy.

Prime Minister Shinzo Abe’s three-pronged economic policy, Abenomics, is believed to have “positive, albeit small” spillover effects on the global economy in the short term if all three arrows are successfully deployed, the report said.

But the IMF also said, “The pickup in growth provided by short-term fiscal and monetary stimulus is expected to wind down after a year or so.”

In the absence of a successful reform package including fiscal consolidation, structural reforms and achievement of the new inflation target, the IMF’s simulations “suggest that output in Japan will be 4 percent lower after 10 years,” the report said.

In a different report, focusing on major nations’ external positions, the IMF said it can see “moderate undervaluation” of the yen relative to medium-term fundamentals and desirable policies, in the wake of the currency’s sharp drop since autumn last year.

But in the spillover report, the global body said, “The effects of the yen’s depreciation on competitiveness in other countries is broadly offset by the positive effects of higher growth in Japan and lower interest rates in trading partners as a result of greater capital inflows and lower sovereign risk in Japan.”

At a teleconference, an IMF economist said it has become very difficult to analyze developments in Japan because of volatile market movements and a sharp deterioration in the nation’s trade balance due to soaring imports of energy sources.