WASHINGTON – The government of Prime Minister Shinzo Abe should step up efforts to revamp the labor market, encourage businesses to raise wages and restore the nation’s debt-ridden finances through consumption tax increases as part of efforts to spur the flagging Abenomics policy mix, the International Monetary Fund said Tuesday.
With Japanese policymakers finding it ever more difficult to rely on exports, increased debt and further monetary easing for revitalizing the economy and achieving the Bank of Japan’s 2 percent inflation target, the IMF urged Japan to promote labor market reform by addressing the wage gap between regular and nonregular employees, as well as boosting participation in the labor force by female, elderly and foreign workers.
“The ambitious targets of Abenomics — consumer price inflation at 2 percent, real gross domestic product growth at 2 percent and a primary budget balance by 2020 — remain out of reach under current policies,” the IMF said in its annual review of Japan’s economy.
Japan has “limited room for monetary and fiscal stimulus,” given its ballooning public debt and the introduction of a negative interest rate, it said.
“Abenomics needs a significant policy upgrade to regain traction,” it said. “Ambitious income policies supported by demand stimulus are a priority to spur inflation through wage-price pressures.”
This, according to the report, calls for incentivizing profitable companies to increase wages, raising administratively controlled wages in line with the inflation target and addressing the gap in wages and job security between regular and nonregular employees.
Nonregular workers include part-timers, contract workers and temp staff dispatched by personnel agencies.
Citing fiscal sustainability as a key long-term challenge for Japan, the report recommends that the government adopt “a gradual but steady path of consumption tax increases, starting as soon as possible.”
It suggests that Japan commit to increasing the consumption tax rate to “at least 15 percent” from the current 8 percent “in increments of 0.5 to 1 percentage points over regular intervals,” a step it said “would better balance the objectives of supporting growth and achieving fiscal sustainability in the long run.”
“Starting the increases as soon as possible and replacing the currently planned 2019 hike with such a pre-announced, gradual path would enhance the credibility of the long-run fiscal adjustment effort, reduce uncertainty for consumers, and avoid large intertemporal shifts in spending around the time of the tax hikes,” it said.
The OECD has similarly suggested that Japan raise the consumption tax to “at least 15 percent” in the future, citing the nation’s high public debt to GDP ratio and low sales tax rate compared with other developed countries.
Japan’s fiscal health is the worst among major industrialized economies, with public debt at more than 200 percent of nominal GDP due mainly to swelling social security costs amid a rapidly aging population.
Referring to Japan’s new ¥28.1 trillion ($274 billion) economic stimulus package, the IMF said additional fiscal support “could boost growth in the near term.”
However, downside risks persist given “weak external and domestic demand, uncertainty about the sustainability of low interest rates in a high public debt environment, and financial stability risks in the context of unprecedented monetary easing,” it said.
Last month, the IMF forecast Japan’s economy will expand at a moderate pace of 0.3 percent in 2016 before slowing to 0.1 percent in 2017, excluding possible effects of the new stimulus package.
Tuesday’s report said the outlook for growth and inflation in Japan “remains subdued,” with weakness in the global recovery propelled by Britain’s vote in June to leave the European Union and the recent appreciation of the yen likely to pose a drag on exports and foreign investment
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