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. Last Updated: 07/27/2016

IMF Backs U.S. Calls for Fast Growth in Japan, Europe

FRANKFURT -- The IMF has thrown its weight behind U.S. calls for faster economic growth in Japan and Europe ahead of a key Group of Seven meeting outside Frankfurt on Saturday, international financial sources said.


In a secret briefing paper prepared for the G-7 meeting, the IMF basically backs U.S. demands for multi-year tax cuts in Japan and for further big reductions in European interest rates, the sources said.


But the IMF also argues that the renewed strength of the Japanese yen and U.S.-Japan trade tensions are hurting efforts to revive the moribund Japanese economy, undercutting business confidence there, several sources said.


"They (the IMF) agree by and large with the U.S. administration," was how one source put it.


That is significant. The IMF, which can act as a neutral arbiter in G-7 meetings, has often been skeptical of U.S. calls for faster world economic growth, fearful that it risked reigniting global inflation.


The sources, who insisted on anonymity, said the IMF expected Japan's economy to grow by only about 0.7 percent this year -- and that is after factoring in the impact of the 15.25 trillion yen ($145 billion) fiscal stimulus package unveiled by Tokyo earlier this month. Without the package, Japan's economy would not grow at all in 1994.


While the outlook for Europe is better, growth here is likely to fall well short of that needed to stop unemployment -- already at record levels -- from rising further this year.


IMF Managing Director Michel Camdessus will attend part of the G-7 meeting of economic policymakers from Britain, Canada, France, Germany, Italy, Japan and the United States.


Besides discussing ways to spark global growth, the G-7 is also set to discuss how best to help Russia reform its ramshackle economy. Russian Finance Minister Sergei Dubinin and other Russian officials will attend those talks.


U.S. Treasury Secretary Lloyd Bentsen signaled on Thursday that the need to pump up global growth was the number one U.S. concern. "Some useful steps have been taken but more needs to be done," he said before arriving in Frankfurt on Friday.


The IMF seems to agree. Several sources said it has urged Tokyo to extend the planned income tax cuts beyond the current year and to announce that it does not intend to offset them with consumption tax increases until the recovery in Japan is firmly in place.


That might help restore business and consumer confidence, essential for a recovery. Confidence would also be boosted by an easing in both trade tensions and the yen, a source said.


While the IMF estimates the Japanese stimulus package could boost economic growth by up to 1.5 percent over two years, the measurable, macro-economic effects are much smaller -- perhaps only 0.7 percent, sources said. With or without the package, the IMF expects Japan's economy to grow by 2.3 percent next year -- better than this year but not good by Japanese standards.


Perhaps more importantly from the U.S. point of view, the IMF expects the stimulus package to reduce Japan's trade surplus by only $2 billion this year and by minimal amounts thereafter, several sources said.


The IMF in September forecast 1994 European growth of 1.6 percent, and there is no reason to think that has changed.


"There have been small improvements here and there but nothing solid," one source said. The European economies "have not turned the corner yet."