By Nick Mann | 1 August 2012
Japan needs a programme of sustained fiscal consolidation over the next decade to reduce its public debt burden, the International Monetary Fund said today.
In a note issued at the conclusion of its annual review of the Japanese economy, the IMF hailed Japan’s ‘remarkable resilience and adaptability’ in the wake of the March 2011 Great East Japan earthquake.
Following a contraction of 0.75% last year, Japan recorded gross domestic product growth of 4.75% in the first quarter of 2012. Growth for this year as a whole is expected to be around 2.5% before slowing down to around 1% in the medium term.
The Japanese economy could be affected by a worsening of the eurozone crisis or a sharper-than-expected slowdown of China’s growth – but its main challenge is to reduce its public burden, the IMF said.
Government debt increased from 183% of GDP in 2007 to 229.9% last year. It is expected to grow further to 234.5% of GDP this year and 240% in 2013.
The IMF welcomed the progress of legislation in Japan’s Parliament, the Diet, that would double the country’s consumption tax rate to 10% by 2015. This has been passed by the lower house and now waits approval of the upper house. The measure would help to reduce Japan’s structural fiscal deficit, which is expected to reach 7.5% of GDP this year, by 5% of GDP over the next decade, the IMF noted.
It added: ‘Additional fiscal consolidation measures, designed to limit any adverse impact on growth, would be needed beyond 2015 to put the public debt ratio firmly on a downward path.
‘Of particular importance will be pension reform to contain social security spending while balancing inter-generational equity.’
In light of Japan’s rapidly ageing population, the IMF also called for speedy implementation of structural reforms aimed at increasing employment of women and older workers as well as encouraging immigration.
Easing regulation of agriculture and service sectors could also help to raise growth, as could taking part in additional free trade agreements.
