By Nick Mann | 12 June 2012

Japan needs to move more forcefully to tackle ‘deep-rooted’ fiscal problems that have increased public debt ten-fold over the past 20 years, the International Monetary Fund said today.

At the end of its annual review of Japan’s finances, the IMF said immediate action was ‘crucial’ to tackle the debt, which is now 125% of gross domestic product.

This increase has taken place against the backdrop of a rapid rise in social security spending, it said, which makes the passage of current tax and social security reforms ‘crucial to demonstrate a commitment to fiscal reform and sustain investor confidence’.

Additional measures will also be needed to achieve an overall fiscal consolidation of 10% of GDP over the next decade, it said. ‘Careful design of these measures would help limit their impact on growth,’ it added.

At the same time, a ‘bold and comprehensive’ package of structural reforms is needed to raise growth, reduce the debt-to-GDP ratio and end price deflation. Japan’s government should address the decline in labour force caused by the country’s ageing population, low levels of female participation in the labour force and limited availability of capital.

Japan’s economy had shown ‘remarkable resilience and adaptability’ in the aftermath of last year’s earthquake and is now expected to grow by 2% this year. This growth will be sustained by reconstruction spending and stronger private consumption.

But that growth is expected to slow to 1.75% next year and Japan also faces challenges from the external environment, and Europe in particular.

‘Risks to the outlook have shifted decidedly to the downside with the turmoil in Europe intensifying and the other advanced and key emerging market economies showing signs of slowing,’ the IMF said.

The IMF review was carried out in Tokyo between May 30 and June 12 under Article IV of the fund’s Articles of Agreement. This requires all IMF members to work with the fund and one another to promote economic and fiscal stability.