IMF warns Japan must avoid over-reliance on weak yen

23-Jul (Reuters, via CNBC) – Japan must avoid overly relying on a weak yen to reflate the economy by deploying a new round of structural reforms such as steps to boost labour market participation, the International Monetary Fund said on Thursday.

The global lender also warned that while inflation is seen accelerating to about 1.5 percent over the medium term, hitting the Bank of Japan’s 2 percent target remained “challenging.”

The BOJ must stand ready to expand stimulus to meet its target, though further easing without bolder structural reforms and a credible fiscal strategy could lead to over-reliance on yen depreciation to reflate the economy, it said.

“Abenomics needs to be reloaded so that policy shortcomings do not become a drag on growth and inflation,” the IMF said in a statement after Article 4 consultations with Japan.

The IMF said further declines in the yen relative to its 2014 average was beneficial for Japan’s economy and would help boost exports and aggregate demand, but had to be accompanied by policy changes.

“With the depreciation of the yen … further monetary easing without bold structural reforms and a credible medium-term plan could lead to sluggish domestic demand and over-reliance on yen depreciation,” Japan mission chief Kalpana Kochhar said on a conference call with reporters, noting that yen appreciation could also undermine the recovery.

“The risks are on the downside, including from external developments, weaker growth in the United States and China and global financial turbulence that could lead to safe-haven appreciation of the yen, which would take the wind out of the recovery to some degree.”

[source]

PG View: Japan needs to do more, but further weakening of the currency is not advised. It hasn’t really worked anyway . . .