The scheduled consumption tax hike to 10 percent this fall is “essential” to ensure Japan’s fiscal sustainability, a top Organisation for Economic Co-operation and Development official said Monday.

At a news conference unveiling its biennial Economic Surveys report on Japan, OECD Secretary-General Angel Gurria urged the Japanese government to adhere to a clear plan to stabilize its budget.

Gross government debt reached 226 percent of GDP last year, the highest in the OECD and far exceeding that of Greece and the United States. Prime Minister Shinzo Abe plans to go ahead with the oft-delayed tax hike to 10 percent from the current 8 percent in October, completing the Diet’s decision to double the rate in two stages from 5 percent.

“Spending restraint needs to be accompanied by measures to increase government revenues,” Gurria said at the Japan National Press Club in Tokyo, adding that the consumption tax should continue to be raised gradually over the years.

The OECD report assesses a country’s range of policies in such areas as the labor market, public spending and health care, and provides policy recommendations.

Regarding the effects of the looming tax hike, the report gave an optimistic view, saying it would be less intense than the 2014 hike “thanks to offsetting fiscal measures.”

The government has a target of achieving a primary surplus by 2025, but the OECD projects that Japan won’t reach it even if it goes ahead with the tax hike.

“Japan needs to take more steps to try to achieve this 2025 target,” said Randall Jones, head of the OECD’s Japan/Korea desk.

While Japan’s economy has expanded in the past six years under Abenomics, as Abe’s economic policies are known, the OECD also recommends that the government accelerate structural reforms to counter the graying population and embrace the entry of women, the elderly and foreign nationals in the country’s labor market.

The report particularly took issue with Japan’s conservative labor market practices, including the mandatory retirement age, seniority-based wages and lifetime employment. Getting rid of those practices would encourage women and seniors to work, it said.

“Japan needs to shift to more flexible employment, more flexible wage systems based on performance rather than age,” Gurria said. “And then, it will be possible to better utilize human capital.”

As for its aging population, the report says it is important to shift long-term care out of hospitals and to use more generic drugs to curb Japan’s ballooning health care spending. The share of generic drugs in Japan’s pharmaceuticals market is around 40 percent, as opposed to more than 50 percent on average in the OECD and over 80 percent in the U.S..

The OECD report approved Japan’s move to welcome foreign workers, describing it “a major step” to address labor shortages. The country is slated to accept up to around 340,000 blue-collar workers in 14 sectors over the next five years.

“Japan really is a front-runner, and everyone will be watching how Japan addresses these issues,” Jones said.

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