IMF urges Japan to keep low rate policy as global crisis widens

WASHINGTON, Oct. 8 Kyodo - The International Monetary Fund urged Japan on Wednesday to carry on with its growth-supportive monetary settings for now and consider easing its credit grip further if the widening global financial hurricane engenders an unexpected sharp downturn in the country.

In its semiannual World Economic Outlook report, the IMF said the U.S. economy
appears increasingly likely to slide into a recession, owing to the fallout
from its subprime mortgage meltdown.
The Washington-based institution also said the global economy is entering a
''major downturn'' in the face of ''the most dangerous financial shock in
mature financial markets since the 1930s.''
On Japan, the IMF cut its growth outlook to 0.7 percent for 2008 and 0.5
percent for 2009, down 0.8 and 1.0 percentage point, respectively, from its
previous forecasts released in July.
''The outlook is subject to considerable uncertainty surrounding the external
environment, with the overall risks tilted to the downside,'' it said,
referring to the Japanese economy's export-reliant nature.
''In Japan, the monetary policy stance remains accommodative and should remain
so, given that the economy is weakening and that underlying price pressures are
well contained,'' the IMF said.
''A sharper-than-expected slowdown of the economy may justify a further
reduction of the policy interest rate,'' it said, adding that given the
already-low current rate, there is limited room for additional reduction.
On Tuesday, the Bank of Japan kept its benchmark interest rate unchanged at 0.5
percent as the central bank is increasingly concerned about the impact of the
ongoing global financial crisis.
As for the United States, the IMF projected that its economy -- the world's
largest -- will rack up a growth of 1.6 percent and 0.1 percent in 2008 and
2009, respectively, up 0.3 point and down 0.7 point from July forecasts.
''Activity is projected to decline in the final quarter of 2008 and the first
quarter of 2009, stabilize in the second quarter, and then embark on a gradual
recovery,'' it said.
''Particular concerns are that the credit crunch could impose an ever-greater
constraint on activity, that the house price correction could extend into 2010
and that inflation pressures may prove more persistent, '' it said.
While noting that the United States' immediate task is to stabilize the
financial conditions, the IMF said U.S. policymakers must ensure pro-growth
macroeconomic policy settings, including further rate cuts.
''The present highly accommodative monetary policy stance could be eased still
further if the downturn seems likely to deepen,'' it said. But it also called
for a ''more neutral'' policy stance eventually, in light of persistent
inflationary pressures.
As a priority beyond the near term, the IMF called on both Japan and the United
States to bring their debt-plagued state finances back in line as their fiscal
positions are among the worst in the industrialized world.
For Japan, the institution said the authorities' plans to achieve a primary
balance by fiscal 2011 to March 31, 2012, ''need to be strengthened further to
prevent net public debt from trending up.''
A primary balance surplus will be achieved when outlays other than
debt-servicing costs are covered by revenues without relying on fresh debt.
And for the United States, the IMF warned that the nation will remain under
spending pressures over the medium and long haul, in addition to the envisaged
gigantic impact of the recently enacted $700 billion financial bailout plan.
Last week, U.S. President George W. Bush signed the bailout package into law.
But global stock markets have so far shown no signs of picking up, with the Dow
Jones Industrial Average on Tuesday ending below 9,500 for the first time in
about five years.
In other parts of the report, the IMF trimmed its global economic forecasts to
3.9 percent for 2008 and 3.0 percent for 2009, down 0.2 and 0.9 point,
respectively. The fresh projections would mark the lowest global growth since
2002, when the world economy grew only 3.1 percent.
''Against an exceptionally uncertain background, global growth projections for
2009 have been marked down to 3 percent'' -- a boom-or-bust threshold for the
global economy, it said.
The institution said a ''gradual recovery'' is forecast to get under way later
in 2009 but global growth is ''not expected to return to trend'' until 2010.
It put growth estimates for China at 9.7 percent and 9.3 percent in 2008 and
2009, and for India at 7.9 percent and 6.9 percent in the same two years.
==Kyodo