The IMF's new chief Rodrigo Rato on Tuesday urged governments to take advantage of economic good times to cut deficits and counter the impact of high oil prices on inflation with appropriate monetary policy.
On the first leg of a debut Asian trip, International Monetary Fund Managing Director Rato urged Washington to reduce its public deficit and called on Beijing to "slow down" the red-hot Chinese economy to a more sustainable pace.
Rato met Japanese Prime Minister Junichiro Koizumi and Finance Minister Sadakazu Tanigaki on a two-day visit to Tokyo that ended Tuesday. He will also visit Beijing June 23-24, Singapore June 25 and Hanoi June 26.
Despite high energy costs, the IMF chief remained optimistic about global growth for this year, which he estimated at "4.6 percent or maybe higher.
"This clear moment of upswing is a very good moment to put forward reforms that could (support) the possibility of sustained growth ... and a reduction of public debt in ageing populations," Rato said.
Rato, who took office earlier this month, praised Koizumi for his reforms that have helped turn the economy around after a decade of stagnation.
At the same time, he urged Tokyo to take advantage of high economic growth, estimated by the IMF at four percent for this year, to start reducing public debt while using monetary policy to "completely root out deflation" that has depressed salaries and retail sales.
Once all trace of deflation disappeared, the Bank of Japan should shift its ultra-loose monetary policy towards a more neutral one, Rato said.
"But I think right now, the (bank's task) is to completely (end) all the deflationary pressures," he added.
Japan's central bank has vowed to maintain its super-loose credit policy until a year-on-year change in the nation-wide core consumer price index, which excludes volatile fresh food prices, stays at or above zero.
Rato was confident that policymakers around the world would be able to contain the knock-on effect of high oil prices that have been pushed up by heightened Middle East tension and strong global demand.
"The world economy is seeing a change in monetary policy and already markets have factored it in," Rato said, referring to expectations that the US Federal Reserve will raise short-term interest rates to pre-empt inflation.
"We think that monetary authorities and governments are vigilant regarding the (knock-on) effect, which could be damaging for the world economy," he said, while adding that there has been no clear sign of increasing pressure on prices.
Rato described the current foreign exchange market as "much more stable" compared with a few months ago when Japanese and Europeans were concerned that a further sharp drop in the dollar's value could hurt their exporters' price competitiveness against the Americans.
Comparing European monetary union and the push for something similar in Asia, Rato said "monetary union is possible ... but it has some requisites, first of all economic and market integration and political commitment."
Rato, 55, lost his post as Spain's finance and economy minister when his party lost elections in March. He was appointed May 4 to a five-year term as the new IMF managing director to succeed Horst Koehler, who resigned to become Germany's president. He took office June 7.
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