By Leika Kihara
WASHINGTON (Reuters) -A weak yen is beneficial for Japan's economy as the boost to exports exceeds the increase in the cost of imports, a senior International Monetary Fund (IMF) official said on Friday.
Nada Choueiri, the IMF's Japan mission chief, also urged Japan to raise interest rates at a gradual pace and compile supplementary budgets only when a big shock hits the economy.
"We would advise the Bank of Japan to remain cautious, as they have been so far, and to be gradual" in the pace of rate hikes, since there was high uncertainty over the inflation outlook, she said in an interview.
The yen has resumed its declines recently against the dollar on expectations that the U.S.-Japan interest rate divergence will remain wide, posing a headache for authorities who fret of the hit to households from rising import costs from a weak yen.
But Choueiri said the benefit from rising exports from a weak yen exceeded the rising costs in imports for Japan, which is "a very outward-oriented" economy. "So, the yen depreciation on net benefits growth in Japan," she said.
The yen's falls triggered warnings from Japanese Finance Minister Katsunobu Kato, who said on Wednesday the yen's recent "one-sided, rapid" moves warranted "heightened vigilance."
"It's important to recognize that the Japanese authorities are committed to a flexible exchange rate regime," she said, when asked whether rapid yen moves would justify Tokyo intervening in the currency market.
TREADING CAUTIOUSLY
After exiting from a decade-long, radical stimulus in March, the Bank of Japan raised short-term interest rates to 0.25% in July and signaled its resolve keep hiking if the economy makes progress toward durably hitting its 2% inflation target.
The IMF expects Japan's inflation to sustainably hit 2% with price growth increasingly driven by domestic demand, Choueiri said, meeting the prerequisite for more rate hikes.
But the Bank of Japan must tread cautiously in raising rates given various risks, such as the potential hit to exports from trade fragmentation, the chance of consumption and wage growth weakening, and the fallout from yen moves on inflation.
"The first priority is to remain data-dependent and analyze all the data that comes, and to be very, very gradual in the process of raising the policy rate," she said.
The Bank of Japan is widely expected at a two-day policy meeting next week to keep its short-term policy rate steady at 0.25%. Most economists polled by Reuters expect it to hike rates again by March next year.
In its World Economic Outlook issued this month, the IMF projected Japan's economic growth to accelerate to 1.1% in 2025 from 0.3% this year as rising real wages boost consumption.
Japan was seeing early signs of strengthening consumption, and had "real chances" of achieving strong wage hikes next year, Choueiri said.
With the weak yen pushing up the cost of fuel and food, however, politicians are keen to cushion the blow to households from rising living costs.
Japan's new prime minister, Shigeru Ishiba, has pledged to compile a supplementary budget to fund another large-scale spending package after the general election on Sunday.
Such a step would come on top of numerous spending packages deployed since the COVID-19 pandemic, which included blanket subsidies to curb gasoline and utility costs - moves that have added to Japan's already huge public debt.
"The practice of supplementary budgets is better left for times when there are big shocks in the economy that cannot be accommodated by automatic stabilizers," Choueiri said.
Any spending increase must go to areas that promote growth, such as infrastructure, and targeted to those who need support rather than blanket subsidies like those to curb fuel costs, she said.