IMF lowers Japan’s growth forecast following Ukraine war fallout

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TOKYO — The International Monetary Fund (IMF) on Thursday cut Japan’s economic growth forecast and urged policymakers to consider preparing a contingency plan in case the Ukraine crisis derails a fragile recovery.

While rising commodity prices could drive up inflation, the Bank of Japan (BOJ) needs to maintain ultra-accommodative policy for an extended period to sustainably hit its 2% inflation target, the IMF said. in a staff report after its consultation on the Article 4 policy with Japan. .

“The escalation of the Ukraine conflict poses significant downside risks to the Japanese economy,” the IMF said, pointing to the potential impact on trade and noting that rising commodity prices could stifle domestic demand.

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“Given the high uncertainty, especially due to the pandemic and the conflict in Ukraine, authorities may consider preparing an easily achievable contingency plan” in case its economy faces a severe shock, he said. -he declares.

The IMF said it now expects Japan’s economy to grow 2.4% this year, down from a 3.3% expansion projection made in January, due to an expected contraction. in the first quarter and the fallout from the war in Ukraine.

Domestic demand will likely slow due to soaring commodity prices, while geopolitical tensions and a sharper-than-expected slowdown in Chinese growth posed risks to exports, he said.

On prices, the IMF said Japan is likely to see inflation momentum pick up on the back of rising commodity prices and an expected rebound in consumption as COVID-19 cases rise. coronavirus will decrease.

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“A prolonged period of monetary policy easing will be needed, however,” as headline consumer inflation is expected to remain at 1.0% this year, he said.

The IMF reiterated its recommendation to the BOJ to make its policy more sustainable, for example by steepening the yield curve by targeting a shorter maturity than the current 10-year rate.

The BOJ said it saw no need to adjust its current framework and “expressed concern” over the IMF’s recommendation to shorten the yield curve target, according to the staff report.

Under a policy called yield curve control (YCC), the BOJ is guiding short-term interest rates to -0.1% and the yield on 10-year government bonds around 0%. . The 10-year yield cap has been criticized by some analysts for flattening the yield curve and crushing financial institutions’ margins.

The IMF has released the final version of its Article 4 staff report, signed by its executive board, after issuing a preliminary conclusion in January. (Reporting by Leika Kihara; editing by Richard Pullin)

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