Japan's Rates `Appropriately Accommodative,' IMF Says

Japan's Rates `Appropriately Accommodative,' IMF Says

http://www.bloomberg.com/apps/news?pid=20601101&sid=aY3qicEH.YDw&refer=japan

By Christopher Swann

Aug. 6 (Bloomberg) -- Japan's interest rates, the lowest among major economies, are appropriate and the central bank needn't rush to raise them because inflation isn't a threat, the International Monetary Fund said.

``Monetary policy remains appropriately accommodative, given very muted inflation risks,'' the Washington-based fund said today in its annual review of Japan's economy. ``A return to a neutral monetary stance should proceed in tandem with inflation prospects.''

The fund forecasts an annual inflation rate of zero this year and 0.5 percent in 2008. Growth in the world's second- largest economy will slow to 2 percent in 2008 from 2.6 percent this year, the fund said.

Bank of Japan policy makers led by Governor Toshihiko Fukui kept their key interest rate unchanged at 0.5 percent last month as they awaited more evidence economic growth will be sustained and consumer prices will rise. Core prices, which exclude fresh food, fell for a fifth month in June, undermining the case for an interest-rate increase.

Some directors at the fund said that low interest rates in Japan are encouraging investors to borrow in yen and then sell the currency to invest in countries where yields are higher. Even so, Japan should continue to focus monetary policy on keeping prices stable and the economy growing.

`Spillover Effects'

``There are spillover effects to the rest of the world, but in the end Japan's policy should be focused on what is best to sustain their recovery,'' Daniel Citrin, IMF deputy director and mission chief for Japan, said at a news conference in Washington.

IMF economists are surprised that inflation remains subdued even as the economic expansion is in its sixth year, Citrin said. He said a long history of low inflation may have suppressed expectations for price increases.

``The fact that Japan has such low inflation at a time when the country is approaching full capacity is a bit of a puzzle,'' said Citrin.

The IMF also praised Japan for refraining from intervening in the foreign-exchange market since March 2004, and it said that the yen ``should continue to be market determined.''

Directors added that the yen appears to be undervalued according to the IMF's economic models and can be expected to strengthen ``over time.'' The fund said that the yen is now at its weakest level in about 20 years.

Public Debt

The fund said Japan should press ahead with efforts to reduce its public debt, which at $6.8 trillion is the world's largest and 1.5 times the nation's gross domestic product.

Measures to increase revenue will be needed, the IMF said, singling out an increase in the sales tax as an option that's ``less detrimental to growth.'' The tax rate is now 5 percent.

Rising corporate tax revenue and spending cuts are expected to lead to a further decline in the primary deficit, which excludes government debt payments, to about 1 percent of gross domestic product in the 2007 fiscal year from 5 percent in 2002, the fund said.