IMF Says Japan Must Increase Taxes To Restore Fiscal Health

by Mary Swire, Tax-News.com, Hong Kong

05 June 2003

The International Monetary Fund (IMF) issued a stark assessment of the Japanese economy this week, warning that the country must rein in its debt by increasing taxes and accelerating economic reforms, if it is to emerge from its long economic malaise.

IMF First Deputy Managing Managing Director Anne Krueger told a news conference in Tokyo this week that: "This strategy will not be an easy one to follow as it requires difficult choices and may involve short-run economic costs." She added: "There is not very much if any room for so-called fiscal stimulus. That in fact has been tried before and has perceptibly little effect."

The IMF's recommendations will not be welcomed by Prime Minister Junichiro Koizumi, who recently dismissed the idea of increasing taxes to pay for a rapidly inflating social security and pension system. In particular, there has been much speculation recently concerning the outcome of the government Tax Commission's review of the taxation system, and reports have indicated that a central plank of future tax reform should be a hike in consumption tax to help pay for social security costs.

However, the Prime Minister rejects such arguments and gave a robust response last week, telling the budget committee in the upper house that: "Consumer spending will help economic recovery, and that's why I refuse to raise the consumption tax. To think about raising the tax is a task for people who take my place after I resign."

Kreuger also observed that the fact that the Japanese national debt is approaching 150% of GDP- one of the highest levels in the industrialised world- was a "major cause for concern."

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