Tokyo: Japan is falling short of its economic targets, and needs to reload the “three arrows” of Abenomics to support higher wages and labor-market reforms, the International Monetary Fund said in a report published on Monday.
“Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the time frame set by the authorities,” the fund’s staff wrote in a report at the conclusion of annual talks in Tokyo. “Monetary and fiscal policies in isolation cannot achieve the inflation target in the envisaged time frame.”
This year’s consultation “highlighted the continuing challenges that Abenomics faces in the effort to achieve its goals: the objectives of higher growth, higher inflation, and fiscal sustainability,” said David Lipton, the IMF’s deputy managing director.
Abe came into power in 2012 championing a three-pronged strategy of bold monetary easing, flexible fiscal policy and a growth strategy to boost the competitiveness of the world’s third-largest economy. While the strategy has weakened the yen and boosted stocks, the 2% inflation target has been elusive.
Japan also has to reduce the world’s biggest debt burden through spending cuts or tax increases. The fund urged modest fiscal expansion in the near-term, coordinated with monetary stimulus.
“Without bolder structural reforms and credible fiscal consolidation, domestic demand could remain sluggish, and any further monetary easing could lead to over-reliance on depreciation of the yen”, according to the report. Without a significant policy upgrade, the IMF warned there will be “very limited” space for more fiscal and monetary stimulus.
The IMF also said that the government needs to chart a credible fiscal consolidation course, which should include gradual increases of the sales tax toward at least 15%, instead of a planned rise to 10% planned in 2019. The levy currently stands at 8%.
It’s difficult to spur inflation without raising wages, Lipton said in Tokyo at the release of the report. Negative rates are a welcome policy addition in Japan, although it will be difficult for Japan to hit 2% inflation in 2017, he added.
“I think we shouldn’t lose sight of the fact that Abenomics has major accomplishments in moving an economy that really had deep problems with growth and disinflation and revitalizing it. I think that in each of the three arrow areas there has been progress,” Lipton told reporters. Bloomberg