Japan : IMF calls for Japan reforms, plan to clear debt

Japan : IMF calls for Japan reforms, 

plan to clear debt

The International Monetary Fundsays Japan's economy is recovering from years of stagnation, but that far-reaching reforms and a ``credible plan'' are needed to reduce its debt mountain and sustain growth in the long run. 

The IMF's assessment, in a report issued Monday, says the near-term outlook of the world's third-largest economy ``has improved considerably'' thanks to monetary easing and increased government spending under the administration of Prime Minister Shinzo Abe. 

It forecasts that Japan's economy will grow 2 percent in 2013, helped by stronger demand at home and overseas, but will expand only 1.2 percent in 2014 as consumers tighten their belts following an expected increase in sales tax. 

The IMF's report, based on a consultation with the Abe government last month, echoes earlier comments by the World Bank's lending arm on the ``Abenomics'' strategy of breaking out of a long spell of debilitating deflation by flooding the economy with money. At Abe's behest, Japan's central bank is striving to generate 2 percent inflation within the next two years. 

But the report emphasized the need for ``significant adjustments'' to help reduce Japan's public debt, which will amount to nearly 250 percent of the country's gross domestic productthis year. 

``The growth outlook is subject to significant risks, primarily stemming from incomplete domestic reforms and a weaker external environment,'' the report said. It said a ``credible medium-term fiscal plan should be adopted as quickly as possible as fiscal risks have risen further.'' 

A central concern is a potential loss of confidence in Japan's ability to service its debt, given that repaying just the interest on government bonds is consuming a growing share of the country's limited tax revenues. Japan's parlous fiscal situation is compounded by surging health and welfare costs due to the fast-expanding share of elderly in the population. Rising inflation would inevitably push interest rates on government bonds higher, adding to the burden. 

Uncertainty over the resilience of the recovery has prompted debate in Tokyo over whether the government should follow through on its pledge to raise the sales tax from 5 percent to 8 percent by next April, and eventually doubling it to 10 percent by 2015. 

Unlike some other countries facing crushing levels of public debt, such as Greece and Cyprus, Japan's financial system remains generally sound, the report said. 

Most public debt is held by Japanese investors and financial institutions, helping to reduce the threat of a rapid and destabilizing exodus of cash. Japan's banks have relatively low levels of debt, while a rally in share prices since late last year has burnished their financial performances. 

Over the long run, Japan's economic growth will likely settle near about 1 percent, as government spending on reconstruction from the March 2011 tsunami disaster is wound down, taxes increase and the pool of employable workers ages and shrinks, it said. 

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