By Nell Mackenzie
LONDON (Reuters) - Japan would face "a fairly strong" recession if it were to raise interest rates, Olivier Blanchard, former chief economist at the International Monetary Fund, said on Monday.
Blanchard delivered his remarks on the same day the Bank of Japan was widely suspected of having intervened in the currency markets to boost the yen, which has fallen sharply this year to 34-year lows against the dollar.
Part of the decline in the currency has been blamed on Japan's ultra-loose monetary policy, as interest rates are far lower than in other major economies, even though the central bank ended negative rates in March.
"They're economically stuck," said Blanchard who cited the drop in workers' real wages and the country's growing deficit.
Blanchard, who is now a professor emeritus at Massachusetts Institute of Technology (MIT), was addressing attendees at the AIM Summit in London.
Japanese workers wages adjusted for inflation fell in February for a 23rd consecutive month, data showed earlier this month, suggesting higher prices kept up pressure on consumers' spending appetite.
The wage trend is among the key data the Bank of Japan examines for pay and inflation outlooks, crucial factors for the central bank to consider in deciding whether to unwind its stimulus policy further.
Furthermore, Japan's government debt-to-GDP ratio is also one of the highest in the world, having more than trebled to close to 260% from 85% back in 1994.
Looking at the bigger macro picture, Blanchard said a second term for former President Donald Trump was his biggest fear for the global economy.
A second term posed more risk than his first because during the first term he was prevented from making policy decisions that would have adversely affected the U.S. economy, Blanchard said.
This time, Blanchard said he believes Trump would staff his cabinet, and make key political appointments, with people he was more "comfortable with".
"When he replaces the Chairman of the Fed with someone who allows him to lower rates because then he can spend more, it'll be catastrophic for the whole world," Blanchard said.
The current chair, Jerome Powell, is serving a second four-year term as head of the U.S. Federal Reserve that is due to end in 2026.