http://home.kyodo.co.jp/all/display.jsp?an=20010811035
By Yoichi Kosukegawa WASHINGTON, Aug. 10, Kyodo - The International Monetary Fund (IMF) on Friday cut its economic growth projection for Japan in 2001 to a contraction of 0.2% from a 0.6% growth estimate in April and urged the Bank of Japan (BOJ) to expand its quantitative monetary-easing steps. The IMF also called on Japan to promote Prime Minister Junichiro Koizumi's economic reform program, particularly stressing the need to clean up bad loans at banks. But it cautioned against tightening fiscal policy too rapidly as that could damage the fragile economy.
IMF executive directors ''were concerned that Japan could reenter a cycle of slowing activity, rising bankruptcies, and a deteriorating banking system, which would, in turn, exacerbate the global downturn,'' the Washington-based institution said in an annual report assessing Japan's economic conditions.
The IMF said the Japanese economy grew 1.5% in 2000. The modest economic recovery, however, has given way to renewed weakness, reflecting a slowdown in the global electronics industry, slow progress with bank and corporate restructuring, and questions about the long-term fiscal situation.
It called on the BOJ to take further monetary-easing steps, saying the current policy would not be enough to stave off deflationary pressure resulting from economic reform.
''Most directors...suggested that the BOJ should not delay in raising its quantitative target for current account balances, while being prepared, if necessary, to increase purchases of longer-term government securities to meet the higher target,'' the report said.
In March, the BOJ adopted its strategy of targeting cash balances held by financial institutions at the central bank, instead of the existing policy of targeting key short-term interest rates.
Under the quantitative easing strategy, the BOJ is keeping the balance of commercial bank current accounts at the central bank at around 5 trillion yen, about 1 trillion yen above the average balance before the new strategy was adopted.
On Japan's fiscal policy, the IMF said Japan should not be in a hurry to trim government spending at a time when the economy remains weak. Koizumi is known as a strong advocate of fiscal rebuilding.
''In the near term, most directors emphasized the fiscal policy should remain responsive to changing economic circumstances, and cautioned the authorities against getting locked into commitments that could result in too rapid a pace of fiscal consolidation,'' the report said.
A few were less convinced about the need for a supplementary budget in the near term, remarking that a clear departure from the pattern of stimulating fiscal packages may be a strong confidence-boosting move.
The IMF, however, said most directors agreed that should a supplementary budget be needed later this year, it should focus on measures that support restructuring, including steps to expand the social safety net, rather than on low-quality public works.
The IMF also said fixing the bad-loan crippled banking sector is ''key to restoring healthy growth in Japan.'' Targeted capital injections may be needed to help banks clean up their bad loans, it added.
''While unviable financial institutions should be encouraged to exit, undercapitalized banks with healthier prospects are likely to need public funds to prevent a credit crunch and maintain systemic confidence,'' the report said.
The IMF said its directors recognize Koizumi's drastic reform program could adversely affect output and employment in the short run.
However, Japan ''has little choice but to embark on the long-delayed restructuring needed to achieve sustained medium-term growth,'' the report said.
http://home.kyodo.co.jp/all/display.jsp?an=20010811035
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