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Japan Should Increase Taxes, Says IMF

by Mary Swire, for LawAndTax-News.com, Hong Kong

13 August 2007


The International Monetary Fund (IMF) last week published the conclusions reached by its assessment team during the recently completed Article IV consultation with Japan.

According to the IMF, in 2006, GDP grew at 2.2%, led mainly by business investment and net exports, and Japan's external position remained strong.

The Fund also observed that the country's financial and corporate sectors continue to strengthen, and suggested that the near-term economic outlook is favorable. GDP growth is projected at 2.6% in 2007 and 2.0% in 2008, increasingly driven by domestic demand.

Over the medium term, growth is expected to slow to an estimated 1.7%.

The IMF assessment stated that:

"Executive Directors welcomed Japan's continued economic expansion and its solid underpinnings. Supported by appropriate macroeconomic and structural policies, growth has become more broad-based; the financial and corporate sectors have strengthened further, and the labor market continues to improve. Directors took note that inflation remains very low but expected it to pick up gradually as the economy operates close to full capacity."

"Directors observed that Japan's recovery has been accompanied by greater financial and trade linkages with the global economy that are creating new challenges for policies. In this regard, Directors stressed that achieving fiscal sustainability, promoting sustained non-inflationary growth, strengthening further the financial system, and boosting productivity through additional structural reforms would help Japan reap more fully the benefits from globalization."

The Article IV report continued:

"Most Directors considered that given the size of the task at hand, additional revenue measures will be needed, including for base broadening. They indicated that revenue measures could be best identified in the context of a broad reform of the tax system that addresses the challenges posed by Japan's aging society and globalization. Among possible measures, increasing the consumption tax has the benefit of being less detrimental to growth and equitable across generations. Some Directors, however, viewed the authorities' focus on expenditure adjustments as broadly appropriate at this juncture."

"Directors considered that monetary policy remains appropriately accommodative, given very muted inflation risks. Some Directors pointed out that low interest rates in Japan are contributing to capital outflows, including speculative carry trades, that complicate policy setting in some recipient countries. On balance, Directors agreed that monetary policy should remain focused on domestic price stability. With no signs of worrisome financial imbalances, a return to a neutral monetary stance should proceed in tandem with inflation prospects. Many Directors considered that to better guide expectations, communication of the monetary framework could rely more on forward-looking policy statements and a greater emphasis on the 1 percent median within the Policy Board members' range of understanding on price stability."

"Directors felt that, with the health of the banking system improving, financial policies are rightly focused on the challenges ahead. They urged the authorities to maintain regulatory vigilance and ensure sound risk management by financial institutions in the face of a growing appetite for risky assets. Directors also highlighted the need to raise core profitability of banks, press ahead with reforms of government financial institutions, and further develop the capital markets."

"Directors stressed that deeper structural reforms are needed to improve Japan's growth potential and competitiveness. The reform priorities are to improve labor utilization and promote competition through greater market opening and further deregulation. As highlighted by the recent Multilateral Consultation, such reforms would also facilitate an orderly resolution of global current account imbalances."


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