IMF Advises Japan to Adopt Wage Hike Policy to Achieve Inflation Target - TheStreet

The International Monetary Fund said Japan needs a "coordinated policy upgrade" to address its weak economic outlook. The statement was released today in conclusion to the IMF's regular visit to Japan.

The organization said that while recent government policies - comprised mainly of monetary and fiscal policies such as the negative interest rate, adoption of a fiscal stimulus, and the postponement of the scheduled 2017 sales tax hike - were likely to help the economy, the growth outlook for the country remains subdued. Excluding the impact of the planned supplementary budget, the IMF expects the Japanese economy to expand by about 0.5% in 2016 before slowing to 0.3% in 2017.

Growth in Japan's core consumer price index has been hovering between the positive and negative territories since 2005, with consumer prices dropping 0.3% in April, barely scratching Bank of Japan's 2% inflation goal first set in 2013. Prices have fallen in two out four months this year. The central bank now expects the economy to achieve the target in 2017.

In addition to monetary and fiscal policies, the IMF said income policies and labor market reforms should come to the forefront. It advised Japan to adopt a policy to ensure that profitable companies raise annual salaries by at least 3% to help the economy achieve its long overdue 2% inflation goal. 

"Monetary and fiscal policies in isolation cannot achieve the inflation target in the envisaged time frame," the IMF said, emphasizing that income policies and labor market reforms should come to the forefront. "Reinvigorating wage-price dynamics can generate sustained cost-push inflation, a powerful tool to first raise actual and then expected inflation."

The IMF suggested that the government can introduce a "comply or explain" mechanism for profitable companies, and back this with stronger tax incentives or penalties "as a last resort". The organization also advised on labor market reforms.

In the long run, Japan needs to gradually raise the sales tax to at least 15% to reduce the economy's excessive reliance on the BOJ's monetary easing policies and to support growth while achieving fiscal sustainability in the long run, the IMF said.

Given the aging population, a failure to adopt "high-impact" reforms would reduce potential economic growth from 0.5% in 2015 to close to zero by 2030, the organization warned.

Today, the Ministry of Finance said that Japan's trade balance had turned to a deficit for the first time in four months. Data showed that Japan posted a goods trade deficit of Y40.7 billion ($389.38 million) in May, with exports in steel, semiconductor parts, and organic compounds all down by more than 20%. Over the past month, the yen has appreciated from a Y110-range to a Y104-range to the dollar and from Y123-range to a Y118-yen range to the euro.

In Tokyo, the Nikkei 225 gained 2.34% to 15,965.30. The Topix closed up 2.27% at 1,279.19.