By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Monday said the Japanese economy is expected to grow to 2.0 percent (2.0%) in 2013, mainly as a result of the new fiscal stimulus and monetary easing feeding through to private consumption and with some lag to investment.

This is coming on the heels of the conclusion of the IMF’s Executive Board 2013 Article IV Consultation Discussions with Japan.

The IMF said a strengthening of external demand, helped by depreciation, and frontloading of consumption ahead of the April 2014 consumption tax increase further supports the recovery.

The IMF affirmed that in 2014, growth is expected to moderate to 1.2% as a continued pick-up in private domestic demand is offset by fiscal withdrawal from the consumption tax increase—from 5% to 8% and an unwinding of reconstruction spending.

“Over the medium term, growth is expected to converge to 1 percent as a recovery in investment is offset by a slowdown in labour supply due to population aging,” the IMF said.

Also, the Fund said capital positions of major financial institutions have improved due to strong equity performance, rising income from securities trading, and capital gains on Japanese Government Bonds and foreign asset holdings, while credit costs in banks remain limited. “Profits for internationally active banks have also risen due to relatively high net interest margins on overseas loans, which rose by 20% (year-on-year). Implementation of Basel III requirement has commenced in March 2013,” the IMF said.

The executive board in its assessment noted that the country’s near-term economic prospects have improved with the adoption of vigorous macroeconomic policies combining fiscal stimulus with unprecedented monetary easing.

The IMF directors said however, that the growth outlook is subject to significant risks, primarily stemming from incomplete domestic reforms and a weaker external environment, and that sustained implementation of the authorities’ reform program is the best way to minimise these risks.

Also, new monetary policy framework, which should make an important contribution to end deflation, was endorsed. “Careful communication and flexibility in execution are essential to contain market volatility and ensure effective policy transmission,” the IMF Directors said.

The IMF directors agreed that a credible medium-term fiscal plan should be adopted promptly to contain fiscal risks and reduce policy uncertainty. “Bringing down public debt as a share of Gross Domestic Product (GDP) will require a significant adjustment over the next decade”

The directors further endorsed the Japanese authorities’ plans to double the consumption tax rate by 2015, while underscoring that additional revenue and expenditure measures will be needed beyond 2015.

According to the directors, the Japanese financial system is generally sound, but low profitability and exposure to interest rate risk remain a concern. They agreed that the successful implementation of a comprehensive structural reform package would contribute to enhancing financial sector  stability; while  welcoming recent progress on regulatory reform, but called for a strengthening of capital standards for regional banks, and for careful monitoring of foreign-funding by major banks.

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