The huge national debt and budget deficit are not sustainable long term and fiscal reforms are critically important for the government, a deputy chief of the International Monetary Fund said Wednesday.
Naoyuki Shinohara, a deputy managing director of the IMF, also said Japanese banks may need to secure more capital to be ready for future challenges.
“It is important to reach a specific agreement on how to restore public finances as soon as possible,” Shinohara, a former vice finance minister for international affairs, told a news conference after joining a seminar in Tokyo.
He was referring to efforts by Prime Minister Naoto Kan to outline social security and tax reforms by June, and opposition lawmakers’ reluctance to be lured into the debate.
The warning from the IMF came as Japan has been under growing pressure to restore its fiscal health, the worst among major developed countries. The central and local governments’ gross debt is approaching 200 percent of the nation’s gross domestic product.
Shinohara said Japan faces immediate danger from its fiscal problems. “The Japanese public has lots of savings, and most of the government debt is financed by domestic investors,” he said, denying any risk of massive selling of Japanese government bonds by foreigners, which would bite into the country’s external balance and trigger a long-term interest rate hike.
While acknowledging that the strength of the yen has hurt exporters’ earnings, Shinohara said its current level is “in a range almost consistent with medium-term fundamentals” of the economy.
On whether the IMF should consider the Chinese yuan as one of the world’s leading currencies and give it a share in the Special Drawing Rights, along with other major currencies, Shinohara suggested the fund is open to such a proposal.
The SDR is an alternative reserve currency set up by the IMF and made up of four major currencies — the dollar, euro, British pound and yen.
France, host of this year’s Group of 20 meetings, is expected to propose including the yuan in the SDR currency basket.
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