FIMF: Japan's economic recovery will be gradual, not a source of turmoil

WASHINGTON - Normalization of monetary policy will be gradual, well communicated and not a source of turmoil, told Nikkei in an interview with Vitor Gaspar, director of fiscal affairs for the International Monetary Fund.

Q: The Federal Reserve will soon start eliminating asset purchases and may raise interest rates next year. What is the risk of countries accumulating debt?

A: Under our baseline, this recovery in economic activity and the return of economic activity to the pre-COVID - 19 path will happen slowly over time. The current inflation pressures will prove transitory. But the inflation rate will eventually normalize, but that is something that was well anticipated and well communicated under the baseline.

Since we have a situation where there will be a gradual and well-understood adjustment, risks of disturbances will not materialize under the baseline, and bond markets and financial markets in general will benefit from price stability.

Now we recognize that uncertainty is still elevated under COVID - 19 A.

Q: The IMF Fiscal Monitor - a multilateral surveillance of fiscal developments - has noted that most of the $16.8 billion in fiscal measures announced to fight the pandemic will expire this year. What are your views on the so-called fiscal cliff?

A: The figure of $16.8 trillion is the total of discretionary pandemic measures announced since March 2020. Some of these measures span multiple years while some of these measures have already expired.

If you look at the primary deficit in advanced economies, you have quite a sharp increase in fiscal deficit relative to pre-COVID - 19 projections in 2020. The deficit persists at a lower level in 2021, and goes back to levels very close to pre-COVID - 19 projected levels by 2024. Fiscal policy is going along with what is happening to economic activity and employment.

If you look around the world, what you see is that public debt increased in 2020 - almost 99% of GDP; In our baseline, debt is expected to stabilize in 2021 and 2022 by 1 of GDP and then decline to about 97% of GDP.

How should emerging markets and low-income countries respond to the risk of high level debt and tightening financial conditions?

In almost all cases, they will be required to make a substantial increase in their ability to collect revenue. They will also need to invest in tax capacity so that they have a national fiscal framework to sustain their development goals. The recently consolidated allocation of special drawing rights contributes to improve liquidity conditions around the world. Its high-income effects can be exponentiated through voluntary rechanneling from low-income economies to higher income countries.

Q: The new prime minister of Japan, Fumio Kishida, has said that he aims to create a virtuous cycle of growth and distribution. What kind of fiscal policy do you think a Japan government should adopt?

A: Japan was one of the first countries in the world to experience the demographic transition related to the decrease in the total population and the decline in the labor force. The phrase virtuous cycle of growth and distribution seems to me very appropriate to the Japanese situation.

In Japan, as all around the world, the first priority is the control of pandemics. The announcement from Prime Minister Kishida of a new package of fiscal support is appropriate at the end of this year.

At the same time, it is very important to remember long-term priorities as well. Regaining growth, supporting productivity, should go hand in-hand with addressing inequality, and our understanding is that this is what is intended in the agenda of Prime Minister Kishida.

Our understanding is that the objective of having a credible middle-term fiscal balance by 2025 holds and that could be compatible with a primary balance advocated in the Fiscal Monitor.