The International Monetary Fund slashed Japan's economic growth forecast for 2022 to 2.4 percent from its earlier estimate of 3.3 percent in a report released Wednesday, citing elevated uncertainty stemming from Russia's war in Ukraine.
"Escalation of the Ukraine conflict poses significant downside risks to the Japanese economy through commodity prices, financial and trade spillovers, supply-chain disruptions" and other factors, the IMF said.
The report, issued based on consultations between the IMF and Japanese authorities, reaffirmed that the recovery of the world's third largest economy from the downturn triggered by the coronavirus pandemic is expected to continue this year, through strong fiscal policy support and steady progress in the rollout of COVID-19 vaccines.
But the Washington-based organization said the downward revision reflects a contraction in the first quarter and incorporates the direct and spillover effects of Russia's invasion of Ukraine, which started on Feb. 24.
"The pace of recovery for domestic demand will be slowed by high commodity prices and elevated uncertainty relating to the Ukraine conflict," the report said, noting that external demand will also be affected by the geopolitical tensions, due mainly to an expected slowdown in Europe.
Given Japan's close trade ties with China, a sharper-than-expected slowdown in the world's second largest economy also poses downside risk to external demand, it said.
Japan's near-term fiscal policy should be "nimble and flexible," including contingency planning in case of an escalation of the Russia-Ukraine conflict, the IMF said.
The IMF is planning to cut its global growth projection in its semiannual World Economic Outlook report to be released on April 19 due to the impact of the war, as it has triggered massive economic sanctions on Moscow from the United States, the European Union and U.S. allies and partners including Japan.
The IMF has urged countries to brace for the impact of the war through three main channels -- higher prices for commodities, which will weigh on demand, hardships in neighboring economies due to trade disruptions and a surge in refugees, and reduced business confidence along with higher investor uncertainty.
Russia is one of the world's largest oil producers and was the world's largest natural gas-exporting country in 2021, according to U.S. government data. Russia and Ukraine are both major commodities producers, with the two countries making up 30 percent of the world's total wheat exports.
In an update of the World Economic Outlook report in January, the IMF had revised upward Japan's year-on-year growth projection for 2022 by 0.1 percentage point to 3.3 percent, following the rollout of additional fiscal stimulus.
It had also projected global growth for this year to be 4.4 percent, with disruptions related to the pandemic and inflation weighing on the United States and China.
In the assessment released on Wednesday, meanwhile, the IMF upgraded Japan's growth forecast for 2023 to 2.3 percent from an earlier estimate of 1.8 percent.