The International Monetary Fund (IMF) warned on Thursday of “uncertainty” surrounding the direction of Japan’s monetary policy, saying a potential move to extremely low interest rates could have a significant impact on global financial markets.
Krishna Srinivasan, director of the IMF’s Asia and the Pacific Department, also highlighted the risks surrounding Asia’s economic outlook, including weakening exports to advanced economies, slowing productivity in China and the fragmentation of global trade.
“Over the medium term, we expect China’s economy to experience a slowdown in productivity and investment, which will reduce growth to below 4% by 2028,” he said.
“Furthermore, we see the risk of the global economy fragmenting into trade blocs,” which could deal a major blow to export-dependent Asia, Srinivasan said during a briefing at the Asian Development Bank’s annual meeting in Incheon, in South Korea.
While most Asian central banks are likely to continue tightening monetary policy, Japan remains an exception with inflation still subdued, although this could change.
“There is uncertainty about the direction of monetary policy in Japan due to rising inflation,” Srinivasan said.
“Changes in Japan’s monetary policy leading to further increases in government bond yields could have global spillovers through Japanese investors, who hold large positions in foreign debt instruments,” Srinivasan said.
With inflation exceeding its 2% target, markets are filled with speculation that the Bank of Japan may change its bond yield control policy in the coming months.
Japan’s central bank kept interest rates ultra-low on Friday but announced a plan to overhaul its policy moves, laying the groundwork for new bank president Kazuo Ueda to phase out his predecessor’s huge monetary stimulus program .
Source: Terra
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