The yen's depreciation since last year has left it slightly below a level consistent with Japan's medium- to long-term economic fundamentals, a senior International Monetary Fund official said on Friday.
David Lipton, the first deputy managing director of the IMF, said the yen's current depreciation is not problematic if accompanied by fiscal and structural reforms Prime Minister Shinzo Abe has promised to deliver.
Lipton also said the yen and the current account balance should move to levels consistent with economic fundamentals as fiscal and structural reforms, which are part of a package dubbed "Abenomics," are put in place.
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Previously, the IMF had said that the yen was moderately overvalued. The change in tone shows that while the IMF now thinks that yen weakness has gone a little too far, it expects this trend to correct itself over time.
"We appreciate that the attempt to escape deflation has had an effect on the exchange rate and our assessment is right now that leaves the exchange rate moderately below what would be consistent with medium-term norms," Lipton said.
"But our judgement is that given the full 'Abenomics' plan...we would expect to see external balances and the real exchange rate adjust in an appropriate fashion."
Lipton was addressing a news conference after the IMF's annual consultations on Japan's economy and economic policies.
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The IMF has said it fully backs "Abenomics," which combines aggressive monetary easing and fiscal stimulus with structural reforms, and has emphasized that the country must pursue steps to fix its public finances and to carry out structural reforms.
Data earlier on Friday showed Japan's factory output picked up in April and deflation abated slightly as a weaker yen and firmer overseas demand boosted growth, boding well Abe's efforts to shake the world's third-largest economy out of nearly two decades of stagnation.
However, with core consumer prices continuing to fall and manufacturers forecasting further weakness ahead, the data also underscored the challenges the Bank of Japan, under new Governor Haruhiko Kuroda, faces in meeting its 2-percent inflation target.