WASHINGTON – The International Monetary Fund has underscored the need for Japan to promote structural reforms quickly in light of its worst gross domestic product contraction in 13 quarters.
“With the near-term outlook looking increasingly uncertain, the government needs to move quickly on the third arrow of structural reforms,” the IMF said in a report released Friday, referring to Prime Minister Shinzo Abe’s three-pronged economic package dubbed “Abenomics.”
The report, titled “Structural Reforms Can Help Japan’s Post-Consumption Tax Blues,” was compiled by Stephan Danninger, a division chief in the IMF’s Asia and Pacific Department.
Due mainly to a severe downturn in personal consumption stemming from the April 1 sales tax hike to 8 percent from 5 percent, Japan’s GDP in the April-June quarter sank a real 6.8 percent from the previous quarter on an annualized basis, “more than many had forecast including us here at the IMF,” the report said.
At the same time, the report said, “This and next year’s consumption tax rate increase to 10 percent would reduce the (Japanese government’s) deficit by about 2 percent of GDP, an important down payment toward restoring fiscal sustainability.”
Despite the alarming GDP report, the report said that “Japan’s post-consumption tax growth outlook is still favorable.”
“But reforms need to march on as quickly as possible to eliminate key constraints on potential growth, and strengthen confidence,” the report said.
Regarding the Bank of Japan’s radical quantitative and qualitative monetary easing policy, the report said it is “appropriately accommodative at the current time.”
If progress in raising inflation were to stall, however, the central bank “should act swiftly and expand its asset purchases,” it added.