World Economy

IMF Tells Japan: Reload Abenomics

IMF Tells Japan: Reload AbenomicsIMF Tells Japan: Reload Abenomics

Japan needs bolder income policies such as penalizing profitable companies that do not increase wages, the International Monetary Fund said on Monday after concluding its annual economic assessment of the country.

Despite initial success, progress under Abenomics, Prime Minister Shinzo Abe's trademark economic policies, has stalled in recent months. The inflation rate has entered negative territory again, while economic growth has remained anemic, Nikkei reported.

The IMF now expects Japan's economy to grow by about 0.5% in 2016, before slowing to 0.3% in 2017, with potential growth sliding to close to zero by 2030, due to the declining demographics.

"Abenomics needs to be reloaded," the IMF said in its report and argued that income policies combined with labor market reforms should "move to the forefront" of the country's fight against lagging growth.

"The government can introduce a 'comply or explain' mechanism for profitable companies to ensure that they raise base wages by at least 3% and back this up by stronger tax incentives or—as a last resort—penalties," the IMF wrote. Promoting intermediate contracts that balance job security and wage increases will "reinforce income policies," it added.

"Our perception is that much of the stasis of inflation (in Japan) comes from the legacy, the history of having negative inflation," said David Lipton, first deputy managing director at the IMF, in a press conference in Tokyo. "Certainly firms have at this point the cash flow and resource at hand to provide some wage increases. There are wage increases evident in a wide range of companies across this economy, so our thought is to suggest that this be a broader practice and that it be more uniform."

The fund noted that these reforms need to be backed up by measures to support demand as well as credible fiscal plans, and argued that the consumption tax hike to 10%, which the government delayed until October 2019, should be replaced by a gradual increase towards "at least 15%."

"Starting the increases soon and replacing the currently planned 2019 hike with such a pre-announced, gradual path would enhance the credibility of the long-run fiscal adjustment, reduce uncertainty for consumers and avoid large inter-temporal shifts in spending around the time of the tax hikes," the IMF said.

The Bank of Japan in February introduced a negative interest rate in part to support domestic demand. However, in the event that the IMF's suggestions will not be implemented, Japan will lack growth and therefore would need a longer time to get its fiscal books in order. In that scenario, the IMF called on the bank to scrap its time frame for achieving its 2% inflation target, which the BoJ now sets at somewhere in fiscal 2017