The International Monetary Fund urged Japan on Tuesday to promptly draw up “clear and credible” medium-term plans to return to fiscal sustainability and buttress investor confidence.
In its latest Fiscal Monitor report, the IMF said Japan’s planned two-stage hike in the consumption tax “will not be sufficient” to lower the record-high debt ratio to gross domestic product. Bills to raise the 5 percent tax to 8 percent in April 2014 and to 10 percent in October 2015 cleared the Diet in August.
To slow the pace of debt accumulation, Japan “needs to proceed with a decisive debt reduction plan, including both further revenue reform and entitlement reform,” the report says.
The U.S. should promptly define reasonable measures to avoid the “fiscal cliff” threat, the report adds. Washington must also raise revenues, given the size of its deficit and relatively low tax ratio.
European countries are implementing further fiscal reforms, but consolidation efforts have shown “little progress” in some countries, including Greece and Spain, it says.
“Swift implementation of European-level commitments” remains key to rebuilding trust in the euro, the report says, calling on the activation of the European Stability Mechanism, the region’s new permanent bailout fund, and harmonized banking oversight.
“Most countries (in the world) have made significant headway in rolling back fiscal deficits,” but “consolidation efforts will need to persist,” the report says.
Interdependence is key
Sri Mulyani Indrawati, managing director of the World Bank Group, has stressed that Japan and other countries should remain aware of the importance of interdependence of their economies.
The relationship between the bank and Japan, which marks the 60th anniversary this year of its participation in the International Monetary Fund and the World Bank, is one of the few excellent examples in the world, Indrawati said recently.
Pointing out that Japan achieved its postwar economic recovery very quickly, she said the fact that the country began contributing to the International Development Association, a World Bank fund for the poorest countries, in the 1960s when it was still a debtor nation is relevant in current times.
Indrawati suggested that many middle-income countries that are switching from debtor to creditor nations should act as Japan did, noting that money spent as assistance to other countries “will return back to you” in some way at some point in the future.
She also said it is important for Japan to remain connected with other nations through trade, investment and official development assistance even though its fiscal conditions are tough.
Indrawati meanwhile pointed out that Japan’s past ODA programs for Indonesia and other developing countries in Asia mostly came in the form of lending rather than as an organized support system.
It is sometimes crucial to tailor assistance to the needs of recipient countries because lending may not always be the best solution, especially for countries in the early stages of development, she said.
Japan’s support for these countries has been usually tied to Japanese companies’ interest, with some cases excluding communities and resulting in “certain negative sentiment,” she said.
With Indonesia starting to become a support provider, it needs to “learn from Japan in order . . . not to repeat the same mistake,” she said.