Japan must raise its sales tax again to conquer one of the world’s heaviest public debt burdens, the International Monetary Fund said on Thursday, as it called for deep economic reforms.
The recommendations, outlined in the Washington-based fund’s annual country report, come four months after Tokyo ushered in its first sales levy increase in 17 years, which sparked concern it would derail a recovery in the world’s third largest economy.
Boosting the tax rate to 8 percent from 5 percent was aimed at bringing down Japan’s staggering debt. But Prime Minister Shinzo Abe has wavered on whether Tokyo would approve a second rate hike to 10 percent, which would still be low compared with some Western nations.
The IMF report said the country had little choice.
“Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline,” it said.
Millions across Japan made a last-minute dash to stores in a national buying spree before prices rose on April 1 — followed by an immediate drop in spending that some feared would dent producers and curb their expansion plans.
The deflation-plagued economy had been on a roll after Abe swept to power in late 2012 with a three-pronged plan to wage war on years of falling prices and kick-start growth.
His blueprint called for big government spending and huge monetary easing from the Bank of Japan, moves that boosted growth and stoked a stock market rally.
But experts remain divided over the long-term success of the plan, dubbed “Abenomics,” and say Abe must shake up his nation’s protected and highly regulated economy.
In its report, the IMF said Japan’s economy was likely to expand 1.6 percent this year, “buoyed by strong business investment and last-minute consumer spending ahead of the consumption tax increase in April.”
“However, structural reforms have progressed slowly and a medium-term fiscal plan beyond 2015 is still to be articulated,” it added.
“Uncertainty is therefore high whether the recovery and exit from deflation will become self-sustained under current policies.”
Abe has pledged to cut corporate taxes, usher in sweeping labor reforms, restructure the farming sector, and lure more women into the workforce, but many of the promises have yet to be seen and he faces a tough battle taking on Japan’s powerful vested interests.
“Abenomics is gaining traction, but progress . . . has been uneven and medium-term risks remain substantial,” the IMF said.
“If Abenomics does not deliver on its reform promises, growth expectations could falter and concerns about the health of public finances could rise.”
The IMF also said the central bank could hold off further monetary easing measures for now, after it launched an unprecedented asset-buying plan last year that was similar to the Federal Reserve’s quantitative easing program.
“As long as Japan continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will be positive for the global economy,” it said.