IMF Managing Director Rodrigo de Rato said on August 3 in Tokyo that he was "very optimistic about Japan's economic prospects" for the near future but that the economy's longer-term fortunes depended on boosting its economic potential as its population aged. With deflation, by most measures, ended, there is reason for optimism.
Speaking at the Foreign Correspondents' Club, de Rato cited the IMF's recent upbeat assessment of the country's economy, which projects output growth at close to 3 percent this year, underpinned by rising employment, and financial and corporate sectors "in their best shape in over a decade." He was in Japan for meetings with Prime Minister Junichiro Koizumi, Finance Minister Sadakazu Tanigaki, Bank of Japan Governor Toshihiko Fukui, and other senior officials.
Looking ahead, de Rato noted that Japan will need to remain mindful of significant policy challenges, notably:
Regaining sustainability in public finances. Thirteen years of deficits have left Japan with a legacy of uncomfortably high public debt and limited resources to meet the demands of an aging society. The IMF's recent review of the Japanese economy commended the authorities for their commitment to address the fiscal imbalances but urged more ambitious steps in the upswing.
Boosting potential growth. To safeguard its living standards, Japan must boost productivity to offset a shrinking population. Japan has made much progress to date-notably in charting a course to scale down the role of government financial institutions in the economy. But more reforms will be needed, in particular to encourage more women, marginalized youth, and older workers to participate in the work force. Further efforts to strengthen competition in product markets can enhance the benefits of these labor market reforms.
Implementing a post-deflation monetary strategy. Given the limited risk of a surge in inflation and the costliness of any recurrence of deflation, de Rato cited the importance of a gradual return to more normal interest rate levels. He commended the Bank of Japan for adopting a new framework that helps anchor inflation expectations and brings a "risk management" approach to the conduct of monetary policy. Careful attention to the longer-term risks of financial or macroeconomic imbalances can also help avoid a recurrence of asset price bubbles.
The IMF and...