By Leika Kihara
WASHINGTON (Reuters) - International Monetary Fund First Deputy Managing Director David Lipton welcomed the Bank of Japan's new policy framework as a boost to its credibility, but called for more vigorous fiscal and structural policies to reflate a fragile economic recovery.
Lipton also shrugged off the view that monetary policy was nearing its limit as a means to revive economies across the globe, stressing that central banks must be open to new ideas to help spur growth.
"Central banks have to always be ready to do whatever they can based on the realities they face," Lipton told Reuters on Saturday. "The BOJ has been an example of imaginative approaches."
The BOJ last month switched its policy target to interest rates from the pace of money printing, after years of massive asset purchases failed to jolt the economy out of stagnation.
Fears that central banks have nearly exhausted the limits of what monetary policy can do have been among topics of debate at this week's G20 finance leaders' gathering and IMF meetings.
The increasingly radical monetary experiments by the BOJ are being closely watched by other global central banks which are also struggling to revive growth.
Under a new "yield curve control" framework, the BOJ pledged to keep the 10-year bond yield around zero percent. It also maintained a 0.1 percent interest it charges on some excess reserves financial institutions park with the central bank.
Some academics voiced doubts about whether the BOJ could control such a long end of the curve and whether it was feasible for a central bank to forcefully cap rates at a set level.
Lipton said the IMF now believes that the BOJ's yield curve control is "not just possible but a good idea."
"I think it's good that the BOJ intensifies its efforts to try to reflate the economy," he said. "The steps they've taken will give them more flexibility of action and enhance their credibility," he added. "It's a step in the right direction."
But Lipton said Japan must fire "with vigor" the two other arrows of premier Shinzo Abe's "Abenomics" stimulus policies - flexible fiscal policy and structural reforms - to achieve sustainable and balanced economic growth.
"We can't expect the best outcome relying just on monetary policy," he said. "Combining the three-arrow approach with a stronger focus on boosting incomes would be one way to take some of the heat off the central bank."
With countries increasingly forced to deploy full-strength fiscal and monetary policies to battle low growth, Lipton warned that central banks and governments must ensure they are cooperating - not depending on each other - to help the economy.
"We're for central bank independence but we're also for cooperation," he said, referring to the need for central banks to be independent from government interference in setting monetary policy.
"There should be a process under which there can be dialogue between central bank and governments that leads to better combination of policies."
(Reporting by Leika Kihara; Editing by Bill Rigby)