Asia Times: IMF predicts 1.4% contraction in Japan, urges BOJ to ease credit



	April 23, 1999	atimes.com

Japan Economy

IMF predicts 1.4% contraction in Japan, urges BOJ to ease credit

Washington - Japan's economy will shrink for a second straight year, the International Monetary Fund said, undercutting government claims that the country is on track for recovery in coming months.

The world's second-largest economy will contract 1.4 percent this year after shrinking 2.8 percent last year, the IMF warned in its latest World Economic Outlook. Prime Minister Keizo Obuchi has projected 0.5 percent growth this year.

The IMF also joined the chorus of calls for the central bank to further loosen credit and urged the government to keep pouring money into public works projects. Bank of Japan and government officials acknowledge that easy access to credit and the public works programs are the main reasons the economy isn't sinking deeper.

''Activity will again weaken before moderate recovery begins in 2000,'' the IMF said in its report. ''It remains critical to ensure that the fiscal stimulus already planned is implemented in full to provide support to the economy."

Japan's economy has been stagnant for nine years - longer than it took the country to recover from World War II. Even though the government has set aside about 120 trillion yen ($1.02 trillion) since 1992 to crank up the economy, the jobless rate is at a record high and consumers balk at spending enough to fire recovery.

The IMF's pessimism comes as the Japanese government and the central bank are saying the nation's economy has stopped its slide, for now, even if recovery isn't around the corner.

''A slide of the economy has stopped - this perception is spreading among our region's businesses,'' Minoru Masubuchi, head of the BOJ's Osaka branch, said. Japan's top economic planner, Taichi Sakaiya, has even staked his job on getting the economy to grow.

Obuchi must seek re-election as president of the ruling Liberal Democratic Party in September and face a national election a year later. To weather those two tests, he's counting on an end to Japan's longest postwar recession.

The only way to make sure that happens is to keep up the government life-support, the IMF said.

''It will be important to maintain adequate fiscal stimulus until recovery in private demand is underway, and then to proceed gradually with the consolidation of the public finances that is needed over the medium term,'' the IMF wrote.

That's for starters. The IMF also urged the central bank to ease credit even further, by stepping up its daily purchase of bills and bonds from banks and insurance companies. The BOJ has already cut overnight lending rates - equivalent to the Federal Reserve's fed funds rate - to virtually zero.

The weighted average of the unsecured overnight call rate was settled at 0.03 percent on Tuesday, unchanged from Monday, the Association of Call Loans and Discount Corporations said. Five years ago, the rate was 4.5 percent.

So, with prices still declining, the BOJ may be forced to use numerical targets for money growth and pump as much money into the money market as necessary to meet the target, the IMF said.

The chief domestic advocate of this approach, the so-called ''quantitative easing,'' is Nobuyuki Nakahara, a member of the BOJ board and a former president of oil refiner Tonen Corp.

At a Feb. 25 board meeting Nakahara called on the central bank to strive for annual growth of 10 percent in base money to inflate the economy. Nakahara repeated this line on March 12, the minutes show, and was defeated eight votes to one.

To increase the supply of money, Nakahara said the bank should increase excess reserves by 500 billion yen and continue to expand the amount.

Some BOJ members are worried about a money supply growth target, minutes of the March 12 meeting show. Those members say the steps could lead to high inflation down the track.

Still, with prices declining, and the economy showing no real sign of recovery, the BOJ may buckle.

''To convince markets of its determination to combat deflation, the central bank might adopt a supplementary operating target,'' the IMF wrote.

Such a move ''would provide a means of signaling its willingness to ease liquidity until the objective of price stability is assured,'' the report said.

(Bloomberg)

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