IMF staff warn BoJ against unconventional monetary policies

The International Monetary Fund has warned the Bank of Japan (BoJ) not to employ experimental new policies, even as it called for further fiscal and monetary easing measures.

The fund today (June 20) published the concluding statement of its Article IV health check of the Japanese economy, expressing concern at the waning efficacy of the 'Abenomics' medicine.

The IMF staff team say that, without significant structural reforms, both fiscal and monetary policy will have "very limited" room for manoeuvre. Nevertheless, the statement calls for additional fiscal and monetary stimulus "in the near term", alongside a government commitment to consolidate its budget in the medium term.

Although they recognise the BoJ's unprecedented programme of quantitative easing is adding to strains on financial markets, IMF staff urge the central bank not to try anything more radical.

"Shifting to even more unorthodox policy packages, such as explicit monetisation of public debt, would entail high potential stability risks that could arise from adverse confidence reactions to such policy packages," the statement says.

With Japan's government debt-to-GDP ratio close to 230%, and a significant proportion of that debt now on the books of the central bank, some have called for the BoJ to simply write off a portion. Such a move would reduce the debt burden and create a pure monetary stimulus, a form of "helicopter money".

The IMF staff recommend a solution with structural reforms at its heart, however. As well as labour market reforms, the statement suggests the government consider "income policies", including a "comply or explain" mechanism, requiring firms to raise wages by the inflation target plus average productivity growth – a total of around 3% – each year, or explain why they have failed to do so.

According to the team's report, weak "wage-price dynamics" are a major reason why the BoJ is struggling to boost prices, as weak wage growth holds down (and is in turn held down by) inflation expectations. The staff urge the BoJ to improve its communications to help improve its credibility.

"Clearer communication and better use of forward guidance by the BoJ – including by publishing the staff forecast, communicating willingness to overshoot the inflation target and committing to maintain a large balance sheet – can help strengthen monetary policy credibility and raise inflation expectations," staff say in the statement.