UPDATE 2-IMF urges Japan to do more to reflate economy

Thu Feb 21, 2013 12:02pm EST

WASHINGTON Feb 21 (Reuters) - Concerns over the sharp depreciation of the Japanese yen are overstated and the Bank of Japan should act more forcefully to reflate its economy, the International Monetary Fund said in a report to the Group of 20 published on Thursday.

The report, which was circulated among G20 finance officials in Moscow last week, said a doubling of Japan's inflation target to 2.0 percent and a switch to open-ended asset purchases were steps in the right direction. But more is needed, such as substantially expanding the asset purchase program.

The G20 meeting was marked by concerns over a possible "currency war" after comments by Japanese officials on Feb. 8 that the yen had weakened more than intended, suggesting the authorities were targeting a specific value.

It said the U.S. dollar had depreciated modestly "toward medium-term fundamentals."

The IMF said economic activity across the globe was slow to pick up despite an improvement in financial market confidence, boosted by measures in Europe to tackle its debt crisis and last-minute efforts in the United States to avoid the "fiscal cliff."

"Lead indicators suggest that real activity will strengthen only gradually, as easier financial conditions take time to transmit to the broader economy," the IMF said.

It said policymakers could not afford to become complacent, especially in the euro zone where more progress is needed toward a banking union and greater fiscal integration.

It urged the United States to quickly reach a deal to avert automatic, deep spending cuts known as "sequestration" at the end of this month, warning that any delays could roil markets.

"If a resolution is not found, confidence in U.S. policymakers could rapidly erode, with potentially large spillovers to the rest of the world," the IMF said.

It said fiscal consolidation in advanced economies, where governments are struggling to boost growth, should proceed at a "gradual and sustained pace.

In emerging economies, the IMF cautioned that expected weaker growth could force cutbacks in investment and capital outflows, reducing short-term growth prospected.

It said some emerging economies could afford to maintain current monetary policy or ease if risks to the outlook increase, while others may have to gradually tighten financial conditions.

Brazil should begin unwinding monetary stimulus as its economy strengthens to ensure inflation expectations remain well anchored, the IMF added.

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