Japan’s economy is set to make a notable comeback with an expected growth of 1.4% in 2023, surpassing last year’s 1.0% rise, according to the International Monetary Fund’s (IMF) latest projection. The bright economic outlook comes as pandemic restrictions are eased, stimulating increased consumer spending and overall economic activity.

Pierre-Olivier Gourinchas, the IMF’s chief economist, expressed cautious optimism in a news conference held in Tokyo. He noted that Japan’s ultra-loose monetary policy could continue to provide support in the near term, but he advised authorities to brace for potential inflationary risks. Recent robust wage negotiations have further fueled concerns about rising inflation, prompting the IMF to urge Japan to consider raising interest rates when necessary.

“Our advice for Japanese authorities there is that right now, monetary policy can remain accommodative, but it needs to prepare itself for the need to maybe start hiking,” Gourinchas emphasized, urging a proactive stance in dealing with potential inflationary pressures. He also suggested that Japan should consider moving away from its current yield-curve control mechanism to maintain flexibility in navigating the evolving economic landscape.

While the economic recovery paints a promising picture, the IMF did not shy away from expressing apprehension over mounting inflationary pressures. Inflation has already surpassed Japan’s 2% target, and the IMF warned that the risk of it remaining elevated is significant. However, specific details on the inflation outlook were not disclosed.

The IMF attributed the projected economic expansion to “accommodative policies” pursued by Japan, including the maintenance of low-interest rates and substantial fiscal spending to mitigate the impact of rising living costs.

Japan’s 2023 growth forecast closely aligns with the average 1.5% expansion estimated for advanced economies by the IMF. However, the IMF cautioned that the pace of growth is expected to taper off to 1.0% in 2024 as the effects of past stimulus measures gradually dissipate.

Market participants are keenly awaiting the Bank of Japan’s decision, as it concludes a closely-watched policy meeting later this week. The bank is expected to release fresh quarterly projections and deliberate on the progress made in achieving the inflation target in a sustainable manner.

The IMF’s optimistic growth projection for Japan comes as encouraging news for policymakers, businesses, and investors, although the warning against inflationary pressures underscores the need for vigilant economic management in the months ahead.

By: Montel Kamau Serrari Financial Analyst 25th July, 2023

photo source: Google