By Leika Kihara

TOKYO (Reuters) – Cancelling or postponing the Tokyo Olympics Games probably will not hurt Japan’s economy much, but may require the government to offer targeted support for hard-hit small firms, a senior International Monetary Fund official said.

While the government plans to proceed as scheduled, a renewed spike in coronavirus infections and slow vaccine rollouts have added to worries about the fate of the Olympics, set to start in July after being delayed from last year.

“A change to the plans for the Olympics would have a limited impact on overall near-term growth prospects, given that Japan is a large and diversified economy,” said Odd Per Brekk, deputy director of the IMF’s Asia and Pacific department.

Most of the infrastructure needed for the Games is already in place, and the hit to growth from an evaporation of inbound tourism would be small, he added.

“That said … we should be mindful that cancelling the Olympic Games would have disproportionate impact on the service sector in Tokyo, especially among small- and mid-sized firms,” he told Reuters in a written interview on Tuesday.

The government may need to offer support to such firms, as survey-based analysis suggests that cancelling the Olympics could lower their sales growth by more than 5%, he added.

BROADER ASSESSMENT NEEDED

Japan’s economy has emerged from last year’s slump caused by the pandemic, though analysts expect any recovery to be modest as a renewed spike in infections weighs on consumption.

The western Japan region of Osaka reported record infections on Tuesday as a mutant strain of the virus fuelled a rebound in cases.

The IMF upgraded Japan’s economic forecast to 3.3% for this year, as robust exports and the effect of massive fiscal stimulus underpin growth.

“Like in all countries, the growth outlook in Japan is subject to significant downside risks stemming from uncertainty about the evolution of the virus and the vaccine rollout, both domestically and globally,” Brekk said.

The pandemic has further delayed achievement of the Bank of Japan’s 2% inflation target, forcing it to conduct in March a review of its tools to make them more sustainable.

Brekk welcomed the BOJ’s policy review as including “steps in the right direction” to tackle the cost of prolonged easing.

But inflation will stay below 2% in the medium term, due to the hit from the pandemic and Japan’s low potential growth that diminishes the impact of monetary easing, Brekk said.

“Looking ahead, a broader assessment may be needed of how overall economic policies, including monetary, fiscal, structural, and deregulation policies, could be brought to bear in realizing sustainable growth and achieving the 2% inflation target,” he said.

As part of its March review, the BOJ created a scheme to compensate banks for the hit from negative interest rates.

The key aim was to convince markets that, with such tools to deal with the side-effects, the BOJ can take rates deeper into negative territory to combat economic shocks.

Brekk, however, said the chance of the BOJ deepening negative rates was low.

“While the scheme signals that the BOJ would be ready and able to go deeper with negative rates, and as such represents helpful forward guidance, we do not see a rate cut in the near future, unless there are intensified deflation pressures.”

(Reporting by Leika Kihara; Editing by Clarence Fernandez and Sam Holmes)