The International Monetary Fund (IMF) has forecast Japan will not reach its inflation target of 2 per cent until 2017, later than expected by the Bank of Japan.
In its Article IV Consultation on Japan the organisation stated that Abenomics – prime minister Shinzo Abe’s set of reforms – “has been successful in planting the seeds for a more dynamic Japan”.
It warned, however, that “over the medium term, transitioning to self-sustaining growth requires greater structural and fiscal reform efforts to avoid slipping back into deflation, overburdening monetary policy, and undermining confidence in the sustainability of government debt”.
Among the ‘three arrows’ of Abenomics one of the key aims is to break the deflationary cycle seen in the country and reach an inflation level of 2 per cent in a time frame of “about two years”, according to the monetary easing plan unveiled by the Bank of Japan in April 2013.
But in its statement the IMF warned: “Staff expects that 2 per cent inflation will be achieved by 2017, later than envisaged by the Bank of Japan as we expect a more gradual closure of the output gap and rise in inflation expectations.”
The IMF added that completing Abenomics would be beneficial for the global economy as spillovers through capital markets would help cushion the effects of tightening global financial conditions, including those in emerging markets.
But it concluded: “As long as Japan continues to proceed with its reform agenda, these positive spillovers will dominate. But they could turn negative if monetary easing is not adequately supported by fiscal and structural reforms, leading to further yen depreciation, concerns about fiscal sustainability, and potentially higher interest rates. Hence, carrying forward structural and fiscal reforms is essential for Abenomics to sustain its positive spillovers.”