IMF cuts Japan’s growth forecast on hit from Ukraine war fallout

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A man walks through a street in Tokyo's Shinjuku district

By Leika Kihara

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

While rising commodity costs could push up inflation, the Bank of Japan (BOJ) must maintain ultra-easy policy for a prolonged period to sustainably hit its 2% inflation target, the IMF said in a staff report after its Article 4 policy consultation with Japan.

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

“In view of elevated uncertainty including from the pandemic and the conflict in Ukraine, the authorities could consider preparing a contingency plan that is readily implementable” in case its economy faces a severe shock, it said.

The IMF said it now expects Japan’s economy to grow 2.4% this year, lower than a projection for 3.3% expansion made in January, due to an expected contraction in the first quarter and the spillover effects of the Ukraine war.

Domestic demand will likely slow from surging commodity prices, while geo-political tensions and a sharper-than-expected slowdown in China’s growth were risks to exports, it said.

On prices, the IMF said Japan will likely see inflation momentum pick up on higher commodity prices, and an expected rebound in consumption as coronavirus infection cases fall.

“A prolonged period of monetary policy accommodation will be required,” however, as headline consumer inflation is expected to stay at 1.0% this year, it said.

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

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 dubbed yield curve control (YCC), the BOJ guides short-term interest rates at -0.1% and the 10-year government bond yield around 0%. The 10-year yield cap has been criticised by some analysts for flattening the yield curve and crushing the margin of financial institutions.

The IMF released the final version of its Article 4 staff report, signed off by its executive board, after issuing a preliminary finding in January.

(Reporting by Leika Kihara; editing by Richard Pullin)