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TOKYO (Reuters) - The Bank of Japan's massive stimulus is working, the International Monetary Fund's mission chief to Japan said, and there is still room to increase purchases of government bonds and exchange-traded funds if a further boost was needed.
Jerry Schiff, who is also deputy director of the IMF's Asia-Pacific Department, stressed he saw no need for the central bank to offer additional stimulus for now with the world's third-largest economy in good shape.
"There's no need for the BOJ to change what they're doing," Schiff said. "There's a rise in actual inflation and a rise in inflation expectations. Neither are very dramatic yet, but are certainly in the right direction," he told Reuters on Tuesday.
While market volatility and capital outflows have hurt emerging Asian economies, he said some signs in the region suggest Japan will get more support from exports next year.
Indeed, Anoop Singh, the IMF's top official for Asia, told a seminar in Tokyo that Prime Minister Shinzo Abe's aggressive stimulus, dubbed "Abenomics", had helped counter the outflows from the region triggered by expectations of a tapering of the U.S. Federal Reserve's asset-buying program.
The BOJ currently buys about 7 trillion yen ($72 billion) in government bonds each month, as well as riskier assets such as exchange-traded funds, under the stimulus it launched in April to try to escape deflation and drive inflation to 2 percent in roughly two years.
Schiff did not see buying mortgage-backed securities (MBS), an idea floated by one of Abe's aides, as a realistic option for the BOJ given markets for the assets in Japan were quite small.
Some analysts believe the central bank may have to expand its stimulus next year if wages do not rise much or a rise in the consumption tax in April triggers a downturn in the economy.
"There's a danger of appearing too reactive and changing your policy too quickly," Schiff said, adding the tax rise did not automatically serve as a reason to expand monetary stimulus.
He said the BOJ may need to consider further action if the tax rise damaged economic momentum more than it expected, or if there was a lack of progress in lifting wages and inflation expectations.
"We still believe that if necessary, they can increase their purchases (of JGBs)," Schiff said, although he cautioned that buying too much could stoke fears the BOJ was directly bankrolling government debt.
Japan's economy has outpaced its G7 peers this year as Abe's stimulus policies bolstered business sentiment and consumer spending. The economy grew at an annualized pace of 3.8 percent in the second quarter.
However, export volumes have sagged largely due to the slowdown in emerging Asia, casting some doubt on the sustainability of Japan's recovery.
The IMF cut its world economic forecast earlier this month, citing slowing emerging market growth. It expects Japan's economy to expand 2 percent this year and slow to 1.2 percent in 2014, due to the tax increase.
Data on Tuesday showed consumer spending jumped more than expected and the jobless rate fell in September, highlighting that the benefits of "Abenomics" remain alive.
"It does seem like Japanese large corporates are at least saying they are willing to think about raising basic wages," Schiff said, adding that tightening labor market conditions could eventually push up wages even in Japan, which has long prioritized job security over wage growth.
($1 = 97.7100 Japanese yen)
Editing by Shinichi Saoshiro and John Mair