* Sees Europe-driven market stress as biggest risk to global
outlook
* Says BOJ has room for unconventional steps such as
expanding QE
* Some emerging nations to mull IMF fund contributions
(Adds quotes, details)
By Leika Kihara
WASHINGTON, April 19 (Reuters) – The Bank of Japan should
ease monetary policy further to support its still-fragile
economy as it has room to take unconventional steps, a senior
International Monetary Fund official said, warning that a lack
of action could deepen deflation.
Naoyuki Shinohara, the IMF’s deputy managing director, also
said the global economic outlook remained highly uncertain with
the biggest risk posed by possible renewed market strains from
Europe’s debt crisis.
His comments come ahead of the Bank of Japan’s closely
watched policy meeting next week where sources say it may ease
monetary policy further in a show of its determination to
achieve its 1 percent inflation goal.
“Looking at Japan’s economy, I don’t see any fears of
inflation. Rather, there’s a risk deflation may worsen given its
demographics and weak economic growth,” Shinohara told Reuters
in an interview on Thursday.
“Japan, with little room for additional fiscal stimulus,
needs to rely more on monetary policy,” he said, adding that the
central bank has room to boost asset purchases and expand
quantitative easing.
But Shinohara, a former top Japanese financial diplomat,
said the lack of a credible road map by the government to fix
the country’s tattered finances may make the central bank
hesitant to ease policy further.
The BOJ has nudged interest rates to virtually zero and
bought assets ranging from government bonds to corporate debt in
an effort to beat more than two decades of grinding deflation.
MORE CONTRIBUTIONS TO IMF
The government is struggling to get Japan’s fiscal house in
order due to strong political opposition toward tax hikes that
analysts say is crucial to rein in the country’s fiscal deficit,
at double the size of its economy the biggest among advanced
nations.
BOJ Governor Masaaki Shirakawa said the central bank will
continue its powerful monetary easing, signaling its readiness
to offer further stimulus if needed to support the economy. But
he warned that fiscal reforms were needed to ensure Japan does
not lose market confidence over its finances.
Shinohara said that while Japan’s economy is expected to
perform relatively well due to spending for reconstruction from
last year’s earthquake, time was running short to tackle
structural woes hampering growth such as persistent deflation, a
shrinking labor force and worsening public finances.
Still, he said Japan was unlikely to run a current account
deficit in the years to come because income gains from overseas
investments would make up for any deficit in the trade balance.
Shinohara said Japan’s pledge to contribute $60 billion to
the IMF to boost its firepower was a welcome move that led to
many other countries either announcing or preparing to offer
their own commitments.
Some emerging economies are expected to examine contributing
funds to the IMF, even if they do not go as far as making firm
commitments at this weekend’s G20 and IMF meetings, he said.
“No country does not see the need to strengthen the IMF’s
resources, regardless of whether they put up money or not,” he
said.
The IMF’s bid to win a big boost in funding to handle the
euro-zone debt crisis hit a speed bump on Thursday when Brazil
demanded more power at the IMF for emerging economies as a
condition for lending it extra cash.
(Reporting by Leika Kihara; Editing by Tim Ahmann and Jonathan
Hopfner)
