By Leika Kihara
TOKYO, Aug 5 (Reuters) - The International Monetary Fund
said it was essential that Japan go ahead with a scheduled
two-stage doubling of its sales tax from next year amid signs
the government is reconsidering the plan out of concern it could
derail a nascent economic recovery.
The IMF also called for the Bank of Japan to be ready to
expand its asset-buying scheme or shift the mix of assets being
purchased if inflation does not pick up as envisaged, or if
government bond markets became volatile again.
With Japan's huge public debt leaving the country little
room to offer additional fiscal stimulus, monetary policy should
be the first line of defence against risks to growth such as
weakening exports to China, the IMF said in a detailed report on
its annual consultations with policymakers released on Monday.
Japan is due to raise its sales tax in April to 8 percent
from 5 percent, and to 10 percent in October 2015. The IMF said
the hike was an 'essential first step' to fix Japan's fiscal
problems, and should not be delayed.
'The absence of credible fiscal and structural reforms could
weigh on confidence and undermine the success of the started
reforms. This would not only be detrimental to Japan, but also
for the rest of the world,' the IMF said.
'As Japan's debt would remain unsustainable, a global tail
risk of a spike in yields and volatile capital flows would
remain on the table.'
The central bank has unleashed an intense burst of stimulus
to end 15 years of deflation, promising to double the supply of
money to achieve its 2 percent inflation target in two years.
Its strategy rests on buying around 7.5 trillion yen ($76
billion) of long-term government bonds per month, as well as
risky assets like corporate bonds and trust funds investing in
stocks and property.
The IMF said expectations of inflation are rising, a sign
the government's efforts are working so far. But the test will
be whether markets will eventually expect inflation to reach the
government's 2 percent target, Jerry Schiff, the IMF's mission
chief to Japan, said in an interview.
'Two percent inflation expectations would signal that the
Bank of Japan's efforts are now fully credible,' he said. 'So
we're not there. But we have moved in that direction.'
The BOJ should stand ready to boost asset purchases, or
shift the composition of purchases to buy more risky assets than
government bonds, if risks to Japan's recovery heightened and
prevented inflation from picking up, the IMF said in the report.
Japan's public debt is the largest among major
industrialised nations at more than twice the size of its 500
trillion yen economy, and the sales tax hike is considered a
test of the government's commitment to reform.
Sources have said Prime Minister Shinzo Abe has ordered a
study of alternatives to the planned increases to avoid
derailing an economic recovery he has tried to foster through a
policy mix that has been dubbed 'Abenomics'.
The IMF has backed Abenomics, which combines aggressive
monetary easing and fiscal stimulus with structural reforms. But
it has also said Japan must eventually increase the sales tax
rate to at least 15 percent and craft a credible fiscal
consolidation plan as soon as possible to reduce its debt.
The IMF's Schiff said the hike in the sales tax should move
ahead as planned in order to convince investors Japan was
serious about tackling its fiscal issues.
'Everybody knows that Japan has a very large debt burden ...
and they need to make a down payment on a medium-term plan to
bring debt-to-GDP down,' he said.
Schiff said the consumption tax could slightly hurt growth
next year as consumers scale back purchases, but the effect
would be less than the government's projections for a hit to GDP
of 0.6 percentage points.
If growth were to slow further due to the tax, Japan could
consider other ways of boosting the recovery, such as an
investment package or more monetary stimulus.
'But that would be preferable to not going forward at all
with the consumption tax, because we think that's really
critical for maintaining investor confidence,' Schiff said.
The IMF's report estimated that if the sales tax were not
increased, Japan's net public debt would rise to around 245
percent of GDP by 2030, compared with 210 percent if the tax
hikes was implemented as scheduled.
Still, there are disagreements even within the IMF on the
feasibility of the two-stage tax hike plan, according to a
statement issued by the IMF's decision-making Executive Board.
Directors of the board 'generally supported' Japan's plan to
double the sales tax rate by 2015, although a few 'expressed
concern over the possible adverse impact on growth.'
($1 = 98.7650 Japanese yen)
(Additional reporting by Anna Yukhananov in Washington; Editing
by John Mair and Leslie Adler)
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