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Japan must continue fiscal stimulus until 2 pct inflation is hit: Citi's Buiter

Citigroup Chief Economist Willem Buiter lashed out against Japanese Prime Minister Abe's fiscal policies on Tuesday, saying the latest package was insufficient.

"Japan has to get serious about sustained, large-scale, continuing stimulus until inflation hits the 2 percent target," Buiter told CNBC's Squawk Box ahead of Abe's announcement of a 13.5 trillion yen ($132.04 billion) package of fiscal stimulus aimed at reviving the flagging Japanese economy.

While the move was welcomed, Buiter warned that a one-time injection wasn't enough to boost an economy mired in deflation. Data for June showed consumer prices dropped for a fourth straight month, while household spending fell in 10 of the past 12 months.

"They have the tools to stimulate demand for goods and services directly in the form of child-care and increased pensions but it has to be on a scale sufficient to do the job ... You have to have continued stimulus until households and corporates are able and willing to keep up spending themselves."

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Moreover, authorities aren't taking advantage of the additional fiscal space provided by the Bank of Japan's (BOJ) aggressive balance sheet expansion, he continued.

The central bank has been buying up exchange-traded funds (ETFs) and Japanese government bonds (JGBs) under its quantitative and qualitative easing program. It doubled ETF purchases on Friday in an attempt to match Abe's proposed fiscal stimulus that was announced last week.

"The BOJ's asset purchases make it possible for authorities to cut taxes—Japan still has a 35 percent corporate income tax rate—but authorities are reluctant to aggressively fill the additional fiscal space created by the BOJ," Buiter said.

He also pointed to the long-awaited structural reforms, which were part of Abe's election campaign back in 2012, as proof that the Prime Minister's administration wasn't doing enough.

"If you de-regulate services, open up tradable services to competition and non-tradeable services to foreign direct investment, you could in time boost gross domestic product by 40 percent. But this isn't going to happen because electorally-sensitive interests would be hurt. The price of that is stagnation."

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