IMF urges Asia to be mindful of spillover risks from monetary tightening

The spillover risk applies particularly to the most vulnerable economies, said the IMF's deputy managing director. PHOTO: REUTERS

TOKYO (REUTERS) - Asian economies must be mindful of spillover risks as a decade of unconventional easing policies by major central banks is unwound faster than expected, International Monetary Fund (IMF) deputy managing director Kenji Okamura said.

This risk applied particularly to the most vulnerable economies, said Mr Okamura.

Asian economies faced a choice between supporting growth with more stimulus and withdrawing it to stabilise debt and inflation, he said.

The Bank of Japan's (BOJ) easing policy - which the IMF has described as quite effective - runs counter to a global shift towards monetary tightening, with central banks in the United States, Britain and Australia having already raised interest rates.

The widening gap between Japanese and US interest rates has been a major factor behind the recent yen depreciation to two-decade lows.

"You can mostly explain the recent movements, especially the last month, in the yen based on essentially tighter global monetary policy" including the US Federal Reserve, said Mr Ranil Salgado, assistant director and Japan mission chief at IMF's Asia and Pacific Department.

"The yen depreciation on balance helps Japan," Mr Salgado added, echoing views of BOJ governor Haruhiko Kuroda.

Mr Okamura, a former Japanese vice-finance minister for international affairs, said the Covid-19 pandemic, the war in Ukraine and tighter global financial conditions would make this year challenging for Asia.

The war was affecting Asia through higher commodity prices and slower growth in Europe, he said.

Speaking at his first media event since becoming one of four deputy managing directors at the global lender in December, Mr Okamura warned about the prospect of even more forceful tightening if inflation expectations kept on drifting.

"There is a risk that drifting inflation expectations could require an even more forceful tightening," he said, calling for calibrated policies and clear communication.

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