TOKYO (MNI) – The International Monetary Fund on Tuesday said while
the yen is overvalued in the medium-term, threatening exports, it still
believes Japan’s economy will continue to recover and that GDP will grow
2% this year and 1.7% next year as forecast.

The Japanese economy has shown a solid recovery from the 2011
earthquake disaster and the recovery will be supported by demand for
rebuilding in disaster-hit areas and strong consumer spending, the IMF
said in its 2012 Article IV Consultation Discussion with Japan.

But the IMF also warned that risks to the recovery outlook “have
shifted decidedly to the downside,” due to the European debt crisis and
signs of slowdowns among advanced and emerging economies.

“A weak external environment, particularly in Europe, is likely to
dampen demand for exports and weigh on business sentiment,” it said.

“Moreover, the exchange rate has appreciated over the past year
partly because of safe-haven capital inflows, and our analysis suggests
that the yen is moderately overvalued from a medium-term perspective.”

The IMF said a series of monetary easing by the Bank of Japan has
supported the domestic economic recovery and is “helping Japan exit
deflation.”

“Nevertheless, IMF staff believes that additional easing could be
delivered — including expanding the asset purchases program — to
increase the likelihood of achieving the (BOJ’s) 1% inflation goal by
end-2014 under the IMF staff’s economic outlook,” it said.

The IMF forecasts that Japan’s annual inflation measured by
consumer prices will rise to +0.5% in 2014 and reach 1% only by 2017,
saying “the much-needed fiscal consolidation would likely dampen
domestic demand.”

Despite the European financial crisis, Japan’s financial system has
remained stable, the IMF said.

But it also noted that Japanese banks’ core profitability remains
weak and their large holdings of Japanese government bonds and equities
“raise some concerns about financial stability.”

tokyo@marketnews.com
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