WASHINGTON – Japan should avoid lowering the consumption tax, the International Monetary Fund said Tuesday, cautioning that such an “untargeted measure” to deal with the rising cost of living could further deteriorate the country’s fiscal health.
The warning came as Japanese Prime Minister Sanae Takaichi aims to suspend the 8 percent tax on food and beverages for two years, after her ruling party’s historic election win earlier this month.
“Support for vulnerable households and firms most affected by rising costs of living or large external shocks should be budget neutral, temporary, and targeted to these groups,” the IMF said in a statement after concluding regular consultations with Japanese authorities.
The IMF sounded the alarm that Japan’s public debt, the highest among major economies, is projected to grow over the long term, although spending restraints and stronger tax collection have had positive effects on its post-pandemic fiscal consolidation efforts.
The Washington-headquartered organization said that instead a “system of refundable tax credits,” which the Japanese government is considering introducing after the two-year suspension, “if well-designed, could provide better-targeted support to the most vulnerable Japanese households.”
In the Feb. 8 general election, nearly all Japanese political parties campaigned on suspending or scrapping the consumption tax on food amid voter frustration over rising living expenses.
In her policy speech to be delivered on Friday, Takaichi will vow to expedite discussions on the suspension with the aim of drawing an interim conclusion before this summer, according to a Japanese government source in Tokyo.
Introduced in 1989 to cover swelling social security costs, Japan’s consumption tax is currently set at 10 percent for most other products and services.
As always, the IMF analyzed multiple dimensions of the Japanese economy, not only its fiscal conditions. It said risks to the economic outlook are “tilted to the downside,” citing factors such as renewed strains in Japan-China relations.
“Domestically, the main risk remains weak consumption if real wage growth fails to turn positive,” it added.
Welcoming the Bank of Japan’s gradual rate hikes, the statement described the central bank’s monetary policy as appropriate and called for a continued unwinding of monetary easing.
By doing so, it said, the policy rate could reach a neutral level, neither stimulating nor dampening the economy, in 2027.
AloJapan.com