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IMF wants Japan to revamp "Abenomics" to stimulate growth

IMF wants Japan to revamp

The International Monetary Fund (IMF) has urged Japan to overhaul its economic policy to combat a range of pressing issues

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By Jackson Lewis 05.10.2018

The International Monetary Fund (IMF) has urged Japan to overhaul its economic policy to combat a range of pressing issues, including a rapidly aging and shrinking general population, a slowdown in growth and low inflation.

IMF Managing Director and Chairwoman Christine Lagarde said on Thursday that the world’s third-largest economy must face up to a perfect storm of challenges to ensure that it remains a global leader throughout the coming decades. She believes that an economic “revamp” is necessary.

Touching on Prime Minister Shinzo Abe’s current policies, Lagarde said that Japan’s ultra-loose monetary measures combined with structural reforms and fiscal stimulus are no longer generating the required results. She added that a “fresh look” to so-called “Abenomics” could mitigate growing risks and lay the groundwork for growth in the coming years.

“We believe that it will require a revamping of policies,” Lagarde noted during the IMF’s annual mission to Japan. “The basic principles in our view are still valid but need to be broadened, sustained and accelerated.”

The IMF warned that growth could soon slow due to Japan’s upcoming rise in consumption tax from 8% to 10%, which will take effect next year. The possibility of further geopolitical shocks and rising trade tensions may also have an impact on the yen. Lagarde believes that Japan should green-light domestic investment to prevent economic drag and offset the tax rise.

While the IMF said that a refresh of Abeonics is necessary, it did offer its support to the Bank of Japan’s commitment to an accommodative monetary policy and hopes that it will continue to pursue this stance in the short to medium term. Lagarde added: “We believe that the fiscal stance should remain neutral, at least for the next two years.”

She also warned that the economic challenges that Japan needs to address will “only grow” as its population gets older. According to UN estimates, one-third of people in the country will be aged 65 and over by 2040. The IMF also noted that Japan’s population and economy will shrink by a quarter by around 2060.

While Japan has some long-term worries, it should still log a 1.1% uptick in growth for the year, according to IMF predictions. However, this figure should cool slightly to 0.9% in 2019. One other area of concern is inflation, which is still well short of hitting the country’s 2% goal. Rising prices, up 0.4% in August year-over-year, will also fan pressures. Lagarde expects a “slow upward trend” for now, but prices will moderate over the next few years.

Further down the line, the IMF has concerns that Japan’s public debt could spiral out of control, as it is “not yet on a sustainable path.” Lagarde has called for fiscal tightening plans to rein in the world’s largest public debt and increase consumption tax beyond 15%. However, policymakers have yet to broach the idea of increasing the tax rate beyond 10%.

Consumption tax rate hikes are in the offing, and next year will see a two-tier system so that food and other essentials remain at an 8% rate. Lagarde is skeptical of the plan, as the IMF believes that “one single rate is probably the most efficient way to design, structure and collect your value-added tax.” However, she added that protecting low earners is also important.

Finally, Lagarde said that more effort needs to take place to get women into work, as the latest cabinet reshuffle means that there are 24 men in the senior team of 25. She concluded: "I think that encouraging long-term employment for Japanese women would certainly be one of the responses to the challenges of the day."

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