Washington –

If Japan faces a significant economic shock in the future, the pace of deterioration in its debt levels could exceed that seen during the COVID-19 pandemic, senior International Monetary Fund official Vitor Gaspar warned in a recent interview.

Gaspar, who heads the IMF's Fiscal Affairs Department, went on to emphasize the urgent need for fiscal consolidation in light of the debt risk.

The IMF predicts that Japan's debt will exceed 250% of its gross domestic product (GDP) this year before gradually decreasing to 245% by the end of the decade.

Gaspar noted that Japan's debt-to-GDP ratio increased by 22 percentage points during the pandemic. "If one has a severe adverse scenario in Japan, the jump-up in public debt would be larger than what happened during the year of the pandemic," he said.

Expressing his concern, Gaspar described Japan's debt risk as "considerable," and stressed the need for fiscal consolidation in the near term, deeming it "a very important priority for Japan."

Meanwhile, with Japan's general election scheduled for Sunday, Prime Minister Shigeru Ishiba has indicated plans for a large supplementary budget, suggesting a lack of momentum toward fiscal consolidation.

Given Japan's aging population and declining demographics, Gaspar emphasized the need for a long-term strategy for fiscal reconstruction, adding that such a strategy could be "well served by a credible medium-term fiscal framework."

The Bank of Japan's commitment to gradual interest rate hikes could further strain the fiscal situation. Nonetheless, Gaspar said, "The need to anchor inflation and inflation expectations at target is particularly strong (in Japan)."

Gaspar stressed that stabilizing debt levels hinges on factors such as real interest rates and real growth rates, excluding the impact of inflation. He called for structural reforms to promote sustainable growth, as well as effective investment in human resources and infrastructure. The "quality of public spending is extremely important," he said.