IMF says yen overvalued, sympathetic to intervention
TOKYO, June 13 — The yen is moderately overvalued and intervention is an option to ease volatility, a senior International Monetary Fund official said, in a rare sign of understanding for Japan's battle with an appreciating currency.
The yen has been rising as it attracts safe-haven portfolio flows due to Europe's sovereign debt crisis, and the chance that Europe's problems worsen could lead to further yen gains and pose a risk to Japan's economy, the IMF said.
Major economies have criticised Japan in the past for its yen-selling intervention, but the show of understanding from the IMF could embolden Japan to enter the markets if another spike in the yen threatens exporters' earnings and the economy's recovery from last year's natural disaster.
"Our view is that Japan, like other advanced economies, should have a floating exchange rate set by the markets," David Lipton, the IMF's first deputy managing director, said on Tuesday.
"However, because of Europe we see volatile capital flows. Intervention can be used to avoid disorderly markets, but that should come in the context of free-floating markets."
Lipton spoke after the IMF released its annual consultations on the country's economy and fiscal policy.
Japanese authorities took a step toward intervening earlier this month and contacted several bank trading desks to check currency rates, sources with direct knowledge of the matter said, after weak US. payrolls data pushed up the yen.
Last November, Japan followed a record solo intervention with a series of undisclosed smaller purchases totalling about 1 trillion yen due to worries that exports would flag and the economy would fail to recover from a record earthquake on March 11, 2011.
Japan's economy is on track to grow about 2 per cent this year due to reconstruction from the earthquake and a rebound in private consumption, the IMF said.
Growth will then slow to around 1.75 per cent growth in 2013 as Europe's crisis and a strong currency weigh on external demand, the IMF said.
Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros to bail out its banking sector as a sovereign debt crisis that has its roots in unsustainable public debt engulfs the continent.
"What was done by Spain was an important step," Lipton said.
"The funds should help eliminate doubts about Spain being able to solve its problems by itself."
Sales tax increase needed
The IMF urged Japan to raise the country's sales tax and reform its welfare system to demonstrate a commitment to fiscal reform and sooth investors' fears.
Prime Minister Yoshihiko Noda has staked his political life on the plan's fate, aiming to pass the tax and social security bills during the current session that ends on June 21.
Japan's ruling and opposition parties launched talks on tax and welfare reforms last week, aiming to strike a deal by June 15 to secure parliamentary approval of a plan to raise the sales tax to 10 per cent by 2015 to fix tattered public finances.
"Passage of legislation to double the rate to 10 per cent in stages by 2015 is crucial to demonstrate a commitment to fiscal reform and sustain investor confidence," the IMF said in a statement following its annual review of Japan's economy and economic policies.
Japan could go a step further and raise the sales tax to 15 per cent as it is a stable source of revenue given the country's ageing society, the IMF said.
Investors and rating agencies see progress on the tax hike plan as a test of Tokyo's resolve to tackle its public debt, which is twice the size of its $5 trillion economy, the highest among industrialised nations.
Ratings agency Fitch cut Japan's credit rating last month, citing scant progress in coping with ballooning social security costs and describing Tokyo's fiscal consolidation plans as "leisurely."
The IMF said the government will need to take additional measures to reduce public debt and the Bank of Japan could ease policy further by increasing asset purchases to help end deflation. — Reuters