The nation’s economy will stall for the next few years against the backdrop of the planned two-stage sales tax hike, the Organization for Economic Cooperation and Development projects in its biannual report released Tuesday.
The world’s third-biggest economy would see its gross domestic product growth slow to 1.5 percent in 2014 and 1.0 percent in 2015, adjusted for inflation, following a 1.8 percent expansion in 2013, the OECD said in its report.
The Paris-based club of 34 economically advanced nations, meanwhile, urged Japan to craft a “credible” strategy to attain its fiscal reconstruction goal, indicating Prime Minister Shinzo Abe’s government would be forced to work harder to shore up the economy and restore its debt-ridden public finances simultaneously.
“A strong cyclical upturn has occurred in Japan this year, helped by the large monetary stimulus, favorable financial conditions and improved private-sector confidence,” the OECD said, praising the effects of the “Abenomics” policy mix.
“However, fiscal consolidation, including reductions in public investment and the rise in the consumption tax rates in 2014 and 2015, will exert a substantial drag on activity in the next two years and gradually moderate the pace of the upturn,” it added.
The OECD welcomed Abe’s decision to raise the sales tax to 8 percent from the current 5 percent next April, saying it is “an important first step to achieve fiscal sustainability.”
The organization also asked Japan to lift the rate to 10 percent in October 2015 as scheduled to promote fiscal rehabilitation, as the country’s fiscal health is the worst among major developed nations.
“With gross public debt surpassing 230 percent of GDP, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by fiscal 2020 is a top priority to sustain confidence in Japan’s public finances,” the OECD said.
Abe’s government has pledged to halve the ratio of the primary balance deficit to GDP by fiscal 2015 from the level in fiscal 2010 and turn the balance into a surplus by fiscal 2020. A deficit in the balance means the country cannot finance government spending other than debt-servicing costs without issuing new bonds.
To keep budget austerity from stifling the economy, the OECD has asked Japan to carry out “bold structural reforms,” saying they would help maintain confidence in the three arrows of Abenomics.