August 2, 2016 / 1:47 PM / 3 years ago

UPDATE 1-IMF urges Japan to coordinate fiscal stimulus with further BOJ easing

(Adds comments from IMF news conference in Washington)

By Tetsushi Kajimoto

TOKYO, Aug 2 (Reuters) - The International Monetary Fund said Tuesday Japan should coordinate fiscal stimulus with further central bank easing measures that could include rate cuts and more asset purchases.

The Fund’s annual report on Japan’s economy came as the country’s government announced a new fiscal stimulus package of $13.5 trillion yen (about $132 billion) and the central bank announced a comprehensive review of monetary policy, keeping alive expectations for “helicopter money” - printing money for government debt.

The IMF’s Japan team leader, Luc Everaert, told a news conference in Washington the new stimulus package would “slightly improve” Japan’s economic outlook, but it was too soon to assess its full impact.

He said that stimulus needed to be part of a full suite of policy actions, including monetary easing, efforts to boost wages and remove structural barriers to full-time work to combat a shrinking labor force, including improved child care benefits.

Japan needs to show it will regain fiscal discipline with gradual increases in the consumption tax and an explicit cap on social security spending, he said.

“If these policies are not completely implemented, there will be less growth, and there will be less inflation and that means there will be less policy space in the future,” Everaert said.

The IMF said there were merits in using all policy tools, including asset purchases, purchases of assets held outside the banking system, and modest additional cuts in deposit rates.

“Fiscal and monetary actions should be closely coordinated in terms of timing, mix, and level of stimulus,” the IMF said in a staff report for its annual consultation with Japanese policymakers.

The report followed an earlier version issued in June, in which the global lender urged Tokyo to overhaul its economic agenda by prioritising income policies and labor market reforms.

It said short-term fiscal and monetary policy stimulus could make it easier for higher wages to lift consumer prices.

However, it warned that encouraging companies to raise wages may not reduce the risk of deflation if companies try to hire more part-time workers, who earn less than full-time employees.

The BOJ on Friday decided to double purchases of exchange-traded funds (ETF), but kept its base money target unchanged at 80 trillion yen and maintained the existing pace of purchasing non-ETF assets, such as Japanese government bonds.

It kept the 0.1 percent interest it charges on a portion of excess reserves financial institutions park with the central bank, underscoring some market views that monetary policy is reaching its limits. (Additional reporting by David Lawder in Washington; Editing by Sam Holmes)

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