--IMF: BOJ Should Show Asset Buying Target Beyond End-2014 --IMF: Japan Calendar 2014 CPI Excluding Tax Impact Seen +1.1% --IMF: Japan Can Hit 2% Inflation by 2017, Later Than BOJ Expects --IMF Japan GDP Fcast Remains at +1.4% in 2014, +1% in 2015 --IMF: Japan Near-Term Risks Balanced --IMF: Sustained Medium-Term Growth at Risk on External Factors --IMF: Spike in Japan Bond Yields Key Medium-Term Tail Risk --IMF: Japan Economy To Weather Drag From Sales Tax Hike --IMF: Sustained Japan Growth Needs Structural, Fiscal Reforms
TOKYO (MNI) - The International Monetary Fund said Friday in its staff report that it agrees with the Bank of Japan leadership that the economy does not need additional monetary easing at this point and the bank would act swiftly to counter a heightened downside risk.
In its 2014 Article IV Consultation on Japan, the IMF urged the BOJ to present its asset purchase target beyond the end of 2014. When the BOJ launched its aggressive easing in April 2013, it set the target for just the two years from end-2012.
"With actual and expected inflation steadily progressing toward the 2% target, increasing asset purchases now to raise the probability of meeting the target sooner is not needed and policy space should be preserved to address downside risks," the IMF said.
"However, the current aggressive pace of monetary easing may need to be maintained for an extended period, suggesting that providing more information about asset purchases beyond end-2014 could further enhance transparency," the report said.
The IMF also said the BOJ "should act quickly if actual or expected inflation stagnates or growth disappoints," echoing oft-repeated remarks by BOJ Governor Haruhiko Kuroda that the bank would conduct more easing "without hesitation" to anchor Japan's inflation around 2% in about two years from April 2013.
Policy options include expanding purchases of private assets and government bonds, and further lengthening the maturities of assets being purchased, the IMF said as forecast by market participants and economists.
The latter would accelerate portfolio rebalancing by insurance companies and pension funds and further reduce banks' duration risks, thereby facilitating risk taking, it said.
In addition, to further enhance the monetary policy transmission, there is room to expand the Loan Support Program, including by increasing the size, reducing the funding cost, and lengthening the term beyond the current four years, it added.
After recent meetings with Japanese policymakers, the IMF mission left the organization's April projections in its World Economic Outlook unchanged that Japan's GDP will grow 1.4% in calendar 2014 and above-potential 1% next year.
The IMF also forecast that the annual inflation rate - excluding the temporary impact of the consumption tax hike - will rise to 1.1% in calendar 2014.
"Staff expects that 2% inflation will be achieved by 2017, later than envisaged by the BOJ as we expect a more gradual closure of the output gap and rise in inflation expectations," it said.
The median forecast for core CPI by the BOJ's nine-member policy board is +1.3% in fiscal 2014, +1.9% in fiscal 2015 and +2.1% in fiscal 2016 that ends on March 31, 2017, all excluding the direct impact of the two-step sales tax hike.
The BOJ board has said 2% inflation will be achieved toward the end of its latest three-year projection period through fiscal 2016.
In April, the IMF forecast that Japan's CPI will rise 2.8% in calendar 2014 and 1.7% the following year, with a two-step sales tax hike in April 2014 and October 2015 accelerating the pace of increase from the 0.4% rise in both the total and core readings.
At the time the IMF didn't provide its CPI forecasts excluding the impact of the fiscal tightening.
"Near-term risks to the outlook are balanced, but the sustainability of the recovery over the medium term is at risk," the IMF said. The strong performance in the first quarter suggests that growth could be higher than currently forecast, but this upside is broadly offset by external risks, it said.
"A sharper than expected moderation of growth in China could delay the recovery of net exports," the IMF warned. "Geo-political risks, including in the Ukraine and Thailand, could raise energy prices, disrupt supply chains, trigger safe-haven appreciation, and weaken inflation momentum."
Failure to implement ambitious structural reforms in Japan could derail confidence in the near term and limit gains to potential growth over the medium term, it said.
The near-term outlook remains favorable and the economy is expected to weather well the consumption tax increase, the IMF said.
Over the medium term, transitioning to self-sustaining growth requires greater structural and fiscal reform efforts to avoid slipping back into deflation, overburdening monetary policy, and undermining confidence in the sustainability of government debt.
"A sharp rise in bond yields is the key medium-term tail risk, which could be triggered if monetary policy becomes overburdened and markets lose faith in the ability of policies to restore fiscal sustainability," it said.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: msato@mni-news.com