IMF: Japan needs “once-in-a-lifetime economic regime shift”

24 Jul 15

Abenomics has worked, but Japan need to maintain its focus on economic and fiscal reform in order to bring about a “once-in-a-lifetime” regime shift, the International Monetary Fund said following its annual Article IV consultation.

However, the IMF noted that Japan’s public debt was unsustainable and needed to start to come down, without derailing growth. Japan’s debt is already at about 245% of its annual gross domestic product, equivalent to 1 quadrillion yen ($11 trillion) and expected to rise to 247% in 2016.

“The overarching message of this year’s consultation is that Abenomics has lifted Japan out of the doldrums, but it now needs to be reinforced to accomplish [the] desired once-in-a-lifetime economic regime shift.

“A credible medium-term fiscal consolidation plan is needed to remove uncertainty about the direction of policies that may be holding back domestic demand.

“In terms of fiscal policy, the overarching goal should be to put debt on a downward path through gradual but steady consolidation that does not derail growth and inflation momentum. A credible and concrete medium-term fiscal plan should be based on prudent economic assumptions and identify structural revenue and expenditure measures up front.”

Looking forward, Japan needs to implement structural reforms while balancing the need to reduce debt and encourage growth, the IMF said.

For example, when the consumption tax increase (from 8% to 10%) comes into effect in April 2017, the government should be ready to take measures to offset the drag on growth that are likely to result.

On the overall economic outlook, IMF projects Japan’s growth to be 0.8% in 2015 and 1.2% in 2016, and potential growth over the medium term under current policies is estimated to be about 0.6%.

“Although this near-term growth forecast looks modest, we would like to emphasise that it is above potential and, therefore, we think that the output gap will be closing by early 2017,” the fund said. 

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Public Finance International and Public Finance. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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