IMF Urges Japan to Raise Consumption Tax from FY '11

Washington, July 14 (Jiji press)--The International Monetary Fund
on Wednesday urged Japan to start raising the consumption tax in fiscal 2011
in order to restore its fiscal health.
"Fiscal adjustment should begin in FY 2011 to capitalize on the
cyclical recovery and be sustained for at least a decade," the IMF said in a
report on its annual review of the Japanese economy.
In addition to letting fiscal stimulus expire, a move which enables
the heavily indebted country to save one to 2 pct of its gross domestic
product, the main elements of a "credible" adjustment package could include
a consumption tax hike and means to curb government spending, the report
said.
The international lending agency's Executive Board members
generally agreed that Japan's fiscal adjustment efforts "should focus on a
gradual increase in the consumption tax, supported by comprehensive tax
reform, limits on nonsocial security spending growth, and reforms to
entitlement programs," it pointed out.
"A gradual increase of the consumption tax to 15 pct beginning in
FY 2011 and distributed over several years, could generate 4-5 pct of GDP of
revenue," the IMF estimated. It also presented other fiscal consolidation
scenarios with assumed consumption tax rates ranging from 14 pct to 22 pct.
But the pace, timing and composition of consolidation measures
"would need to be carefully planned, with special attention to their impact
on consumption, investment, and growth," the report cited a prevailing
opinion among the board members, stressing a consumption tax hike should be
combined with a cut in personal income tax allowances and corporate tax
reform to stimulate domestic investment.
The IMF's views are expected to influence tax reform discussions in
the Japanese government, which is leaning toward delaying reform efforts
following the ruling Democratic Party of Japan's defeat in the House of
Councillors election on Sunday, pundits said.
The report also said Japan needs to reduce its primary deficit by
about one pct of GDP for the next 10 years.
While welcoming policy measures taken by the Bank of Japan to
combat deflation and support growth, the IMF in the report underscored the
need for the central bank "to stand ready to take additional easing
measures, if deemed necessary in response to weakening recovery or renewed
deflationary pressures."
On foreign exchange rates, the report said that "the current value
of the yen is consistent with medium-term fundamentals."


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