By Lily Nonomiya
April 11 (Bloomberg) -- A sustained rebound in consumer spending is crucial for Japan's economy to be able to weather a global slowdown, the International Monetary Fund said.
``A recovery in consumption is expected to largely offset some cooling of exports in view of the anticipated moderation of global growth,'' the fund said in its semiannual economic outlook released today. ``Near-term prospects depend crucially on whether a rebound in consumer spending'' is sustained.
Outlays by consumers, whose spending accounts for more than half of the economy, rebounded at the end of last year after falling at its fastest pace in a decade in the third quarter. Brighter job prospects have pushed unemployment to a nine-year low, which may help encourage consumers to spend, the fund said.
``We are quite optimistic that growth will be sustained in Japan,'' Simon Johnson, chief economist at the Washington-based IMF, said at a news conference on the World Economic Outlook report today. ``We think that their priorities are exactly right,'' focusing on reducing budget deficits while nurturing the economic expansion, he said.
The world's second biggest economy will probably grow 2.3 percent this year and 1.9 percent in 2008, the report said, little changed from the fund's September forecasts of 2.1 percent and 2 percent growth.
``Tightening of the labor market is likely to be increasingly reflecting in rising real wages, providing further support for household spending,'' the report said.
BOJ's Policy
The Bank of Japan has ``appropriately taken a cautious approach to raising interest rates'' since ending its zero-rate policy last year. ``Monetary accommodation should be removed only at a gradual pace,'' the report said.
Japan's central bank lifted its benchmark interest rate for a second time in seven months in February, to 0.5 percent, as the economy shrugged off seven years of deflation.
``Greater clarity'' over what the bank sees as a desirable rate for inflation would allow a smooth unwinding of carry trades, the IMF said. The yen has slumped since December 2006 as ``carry trade'' investors borrowed yen to purchase higher- yielding assets overseas.
The gap between borrowing costs in Japan, the lowest in the industrialized world, and other major economies has caused an increase in the trades, the fund said.
Japan's currency has slumped 10 percent against the euro in the past year, reaching a record low of 160.42 today. In January, the yen touched its weakest against the dollar since 2002.
The carry trade ``isn't as destabilizing'' as some analysts have said, Johnson said. There is ``no need for heavy handed intervention at this time'' to counter the carry trade, he said.
Japan hasn't intervened in the foreign-exchange market to buy or sell its currency since 2004.
To contact the reporter on this story: Lily Nonomiya in Tokyo at lnonomiya@bloomberg.net
Last Updated: April 11, 2007 10:03 EDT
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