In its biannual World Economic Outlook report released on Wednesday, the International Monetary Fund forecasts that Japan's depression will be far deeper than it previously thought. It said the economy is likely to shrink 6.2 per cent in 2009, down 0.4 percentage points from its previous mid-March forecast, but expects it to start picking up in the second half of this financial year. This forecast makes Japan's the worst economic growth projection among major industrialised nations.
IMF states that the Japanese economy is projected to contract by over six per cent in 2009 since the yen's strength and tighter credit conditions have added to the problems of the export sector. Mild deflation is expected to persist at least through 2010.
Japan's real GDP contracted at an annualized rate of 12.1 in the fourth quarter, the steepest fall in about 35 years for Japan's economy. (See: Japan heading for worst recession since WW II: S&P)
IMF advocated Japan should to scrutinise and analyse its fiscal policy measures, as these may increase the country's deficit to a dangerous point. According to the Organization for Economic Cooperation and Development, Japan's debt is already the largest in the world and is likely to increase to 197 per cent of gross domestic product next year.
It had registered a current account deficit of 172.8 billion yen ($1.8 billion) in January for the first time in 13 years. (See: Japan reports current account deficit of $1.8 billion in January)
The report said, "In Japan, the downturn Ö is being driven largely by trade, which has been hit hard because of the economy's heavy reliance on manufacturing exports, and by spillovers to domestic investment.''
IMF expects Japan's growth to recover to 0.5 per cent in 2010. Charles Collyns, IMF deputy director of research, said that Japan's record 15.4 trillion yen ($153 billion) stimulus package unveiled in early April in order to boost its economy will help its growth to start recovering in the second half of this year.
"We do think that the combination of these measures will help to prop up the Japanese economy, particularly once the fiscal spending measures come into play around the second half of this year," said Collyns at a news conference in New York. "So we do expect Japan, in fact, to register a couple of quarters of positive growth later this year.''
IMF expects the April stimulus package of 15.4 trillion yen to help the country through 2009 and 2010, as Japan has been aggressively propping up its economy and coming out with various measure in the wake of the global financial crisis.
But the report warned that the series of fiscal stimulus steps that Tokyo has taken had expanded its deficit to an increasingly precarious level. ''With the deficit projected to be close to 10 per cent of GDP in 2009 and net debt to exceed 100 percent of GDP, room for additional stimulus is close to being exhausted. Attention should shift now to putting in place an ambitious medium term plan to secure fiscal sustainability,'' it said.
To address the slowdown in growth and the tightening financial conditions, the central bank has cut rates to virtually zero, increased liquidity provision, broadened the range of eligible collateral, and started purchasing commercial paper and bonds to ease corporate funding pressures.
''With the constraint of zero interest rates, the challenge will be to implement further easing by expanding and broadening the range of instruments that support credit to address tightening financial conditions,'' it said.