By Leika Kihara

TOKYO (Reuters).-The International Monetary Fund cut Japan’s growth forecast Thursday. It urged policymakers that they prepare a contingency strategy in the event of a Ukraine crisis.

Rising commodity costs may cause inflation to rise, however, the Bank of Japan’s (BOJ), must continue its ultra-easy policy over a longer period of time in order to hit the 2% inflation target. The IMF stated this in a Staff Report after it had completed its Article 4 policy consultations with Japan.

“Escalation from the Ukraine conflict poses significant downside risk to Japan’s economy,” said the IMF, noting the impact potential trade could have on the Japanese market and noting the fact that commodity prices may stifle domestic consumption.

The authorities may consider “preparing a contingency strategy that is easily implementable in the face of high uncertainty” to protect their economy from severe shocks, in light of the outbreak in Ukraine.

The IMF stated that Japan will see a 2.4% increase in its economy this year. This was lower than the January projection of 3.3% growth.

Domestic demand will likely slow from surging commodity prices, while geo-political tensions and a sharper-than-expected slowdown in China’s growth were risks to exports, it said.

According to the IMF, Japan is likely to see an increase in inflation due to rising commodity prices. This will be followed by a rebound in consumption when coronavirus cases decrease.

It stated that “a prolonged period of Monetary Policy Accommodation will be necessary” but noted that headline consumer inflation was expected to remain at 1.0% for the year.

IMF reiterated the recommendation to BOJ that it make its policies more durable, by steepening yield curves and targeting shorter maturities than current 10-year yields.

According to the staff report the BOJ claimed it didn’t see any need to adapt its current framework, and expressed “concern” about the IMF recommendation to lower the yield curve goal.

A policy known as yield curve control, the BOJ sets short-term interest rates at 0.1% and 10-year bonds yields around 0%. Some analysts have criticised the 10 year yield cap as flattening and crushing financial institution margins.

Following a January preliminary finding, the IMF has released its final Article 4 Staff Report. It was signed by its Executive Board.