IMF: Japan needs sales tax hike for fiscal sustainability

Tomohiro Ohsumi | Bloomberg | Getty Images

Japan should stick to its plan to raise the sales tax to 10 percent from 8 percent in April 2017 in order to deliver fiscal sustainability, a senior official at the International Monetary Fund said on Tuesday

Vitor Gaspar, the head of the IMF's fiscal department, also said policymakers in Japan and other major economies need to stand ready to follow a "comprehensive approach", including monetary, fiscal and structural reforms to achieve 2 percent inflation.

"We are of the view that gradual adjustment over time is also necessary for Japan to have sound long-term public finance prospects," Gaspar told Reuters.

"Japan needs to have a medium- to long-term fiscal framework in order to be able to manage the public finance risk that it faces," he added.

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Japan's public debt stands at more than twice the size of its economy, the highest ratio in the developed world, with its fast-ageing population boosting social security costs and straining the fiscal situation.

The IMF staff discussion paper on Tuesday highlighted the fiscal challenges shrinking and ageing populations pose, with projected rises in pensions and health care spending not just in Japan but also many other countries by the end of this century.

Without reforms of public pension and healthcare systems, age-related expenditures could cause unsustainable rises in public debt, sharp cuts in other spending, or necessitate big tax increases that could stymie economic growth, it warned.

Gaspar, former Portuguese finance minister who was the architect of the country's austerity measures, said the inflow of foreign workers and greater participation of women in Japan's labor force are promising options to reduce age-related expenditures.

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Turning to monetary policy, Gaspar said Japan and other countries could make a successful transition to inflation at 2 percent and sustainable growth if they pursue comprehensive policies.

"If monetary policy proves ineffective at reaching 2 percent target in a timely manner, a comprehensive approach involving fiscal and structural (policies) may be necessary to make sure it works," he said.

"If this comprehensive approach is followed, it is possible to affect expectations in an effective way and therefore guarantee adjustment towards sustainable growth with moderate inflation at 2 percent."

With inflation at a standstill, the Bank of Japan meets for a policy review on Friday amid market speculation that it may expand its already massive monetary stimulus in order to hit an ambitious 2 percent price goal next year.