The International Monetary Fund Tuesday cut its forecast for Japan’s growth this year and 2013, saying a slowdown in disaster reconstruction spending will weigh on the world’s third-largest economy.
In its latest World Economic Outlook, the Washington-based IMF projected that Japan’s economy would grow 2.2 percent and 1.2 percent in 2012 and 2013, respectively, down from its July forecast of 2.4 percent and 1.5 percent.
Japan’s economy shrank 0.7 percent in 2011 as it was hit by the March 11 quake-tsunami and resulting nuclear crisis, as well as heavy flooding in Thailand that hammered factory output for Japanese firms with plants there.
“Much of the recent strength is attributable to reconstruction activity and some rebound in manufacturing activity in the first half of the year following the supply shocks associated with the March 2011 earthquake and tsunami and the Thai floods in October 2011,” the IMF report said.
“Earthquake-related spending has lent support to growth in 2012 but will decline sharply in 2013.”
Japan’s export-oriented economy has also been hit by a slump in orders from its major European market.
In a bid to address the problem Japan announced it was pledging $60.0 billion to the IMF as part of the organisation’s bid to boost a global firewall against further eurozone debt crises.
However, an escalation in the eurozone’s debt crisis could be magnified in Japan because the central bank’s ultra-low interest rate policy largely rules out further cuts to stoke the economy.
The Bank of Japan’s easing measures – mainly through tweaking a now 80 trillion yen ($1.02 trillion) asset-purchase programme – were “welcome and should help support economic growth and an exit from deflation”, the IMF said.
“However, further easing of monetary policy may be needed to accelerate achievement of the Bank of Japan’s inflation goal of 1.0 percent,” it added.
The IMF also applauded a move earlier this year to double the nation’s sales tax to 10 percent by 2015 as an “important step toward putting public debt on a sustainable trajectory”.
But it warned that “further consolidation measures are needed to achieve this goal”.
Japan is grappling with a debt standing at more than double gross domestic product, the highest ratio in the industrialised world, which is poised to grow as a rapidly ageing population turns to public pensions.