The IMF yesterday urged Japan to speed up the pace of structural reforms and the disposal of banks' bad loans, saying it should not rely on a weak yen to lift the fragile economy.
"Restoring the banking system to health is a pre-requisite for a return to sustainable growth," Horst Koehler, managing director of the IMF, told a news conference in Tokyo.
But he stressed that the Washington-based institution never suggested Japan should consider across-the-board injection of public money into the banking sector. That, he said, would be "a vehicle of last resort" in case all other options were exhausted.
Japan's banks are struggling to rid their balance sheets of loans to borrowers that are bankrupt or at risk of it totalling ?11.7 trillion (US$97.32 billion). The government has set a deadline of three years for banks to write the loans off.
Koehler, who is in Tokyo for a two-day trip, said recent economic indicators in Japan have been shaky, but added that he still believed the IMF's forecast for Japan to grow around 0.5 percent in 2001 was attainable.
"The core problem is the lack of confidence. Japanese citizens are insecure about the future. This means they need to know their pensions are secure, they need to know their jobs are secure, they need to have trust in their government," he said.
He said this situation would improve given the reform programs set by new Prime Minister Junichiro Koizumi.
"The strong support for the government provides a real window of opportunity to take bold measures ... I have no doubt Japan will soon resume its position as a power engine for regional and global growth," he said.
Koehler warned Japan not to resort to a weaker yen as a quick fix to ease deflationary pressure in the world's second-largest economy, which has been suffering from a decade of stop-go growth.
"It helps to strengthen growth, but a weak yen should not be used as a vehicle to overcome difficulties," he said.
A weaker yen would help Japan's powerful exporters by boosting the value of overseas sales, but Japanese authorities have stressed they would not drive the yen lower for the purpose of boosting the economy.
Regarding the current dollar rate of around ?120, Koehler said it was not worrisome, without elaborating.
He did point out, however, that deflationary pressure in Japan remained strong.
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