Japan needs to stick to a consistent policy and its central bank must be more effective in communicating its policy if it is to defeat the country's deflationary conditions, the International Monetary Fund said in a paper released on Monday.
The IMF paper, which is put together by its staff members, calls for policy predictability and credibility in order for the central bank to impact long-term interest rates, anchor inflation expectations and reduce asset price volatility. It also pushes Japan to set a wage inflation goal of around 3 percent in order to end low wage growth and for prices to increase in line with the bank's inflation target of 2 percent.
"The adoption of an explicit inflation target in January 2013 constituted a major advance in transparency….However, after three years, the need for stronger communications, as part of a more effective strategy, is suggested by the fact that the economy remains in a dark corner, with interest rates at their floor, and long-term inflation expectations well below the 2 percent target," the paper said.
The paper proposes a comprehensive policy package to get the Japanese economy to a higher sustainable growth path and end deflation. Referring to it as 'Three Arrows Plus' – monetary, fiscal, structural and income policies – the paper looks at how coordination of these policies could have maximum impact of success.
"An unorthodox component of the package is an incomes policy aimed directly at sluggish wage-price dynamics. We build on the authorities' current policies by emphasizing the need for more credible and transparent monetary and fiscal frameworks that reinforce each other to reduce policy uncertainty and raise policy effectiveness," the paper said.