The International Monetary Fund has applauded Japan's 'Abenomics' strategy by saying that it has helped the economy to counteract capital outflows due to fears about the US Federal Reserve tapering.

IMF Asia-Pacific Department Director Anoop Singh said in a seminar in Tokyo that the strategy resulted in "significant capital inflows into Japanese bonds and equity markets, mainly driven by foreign investors."

"The new policy framework provides a unique opportunity for Japan to end decades-long deflation and sluggish growth, and reverse the rise of public debt," said Singh in the seminar on 'Abenomics Approaching Its One-Year Mark'.

"Japan's foreign direct investments (FDI) and bank lending to many Asian countries increased significantly, helping counteract concerns about Fed tapering and related capital outflows."

Singh noted that the Japanese economy grew strongly in the first half of 2013 on the back of "sizeable stimulus spending, robust private consumption and a rise in exports". In addition, the country's inflation rose significantly in recent months while long-term inflation expectations have been favourable.

He added that the country's decision to raise sales tax would ensure fiscal sustainability.

Three-Arrow Strategy

Having taken office at the end of 2012, Japan's Prime Minister Shinzo Abe has advocated massive fiscal and monetary easing measures to pull the country out of a 15-year deflationary period and boost economic growth.

He and the Bank of Japan led by Harushiko Kuroda unveiled a series of stimulus measures that attracted global attention due to its large sizes. The three-arrow strategy dubbed 'Abenomics' involves aggressive monetary policy, flexible fiscal policies, and growth reforms.

"The first phase of Abenomics-aimed at improving confidence and jumpstarting the economy-has gone well, and there are encouraging signs that a policies-led recovery is underway," Singh said.

"Furthermore, there are signs that Abenomics, by increasing Japan's foreign engagement, is benefitting not only Japan but also the region."

'Success is not Guaranteed'

Singh, however, noted that Japan's economy is not secure and is facing a number of challenges.

"In the near term, the challenge will be to achieve a successful transition to the next phase of Abenomics, which should be characterized by self-sustained, private demand-led growth, and by a steady increase in inflation," he said.

"Over the medium term, Japan will need to achieve higher growth, which is essential to ensure fiscal sustainability and lower public debt."

He noted that Japan has to effectively tackle issues including high public debt, low wages and investment growth, and structural reforms.