IMF Urges Japan to Avoid Fanning Fiscal Risks With Sales Tax Cut

Japan should refrain from cutting the consumption tax to avoid fanning fiscal risks, the International Monetary Fund said, as Prime Minister Sanae Takaichi prepares to speed up debate on a potential suspension of the sales tax on food.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Japan should refrain from cutting the consumption tax to avoid fanning fiscal risks, the International Monetary Fund said, as Prime Minister Sanae Takaichi prepares to speed up debate on a potential suspension of the sales tax on food.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.“The authorities should avoid reducing the consumption tax, an untargeted measure that would erode fiscal space and add to fiscal risks,” the IMF said Wednesday in its latest concluding statement after an Article IV consultation on Japan. It projects interest payments on outstanding public debt will double by 2031 compared with 2025, as maturing debt is refinanced at higher yields.“High and persistent debt levels, together with a deteriorating fiscal balance, leave Japan’s economy exposed to a range of shocks,” the fund warned.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.The IMF’s projection is in line with the Japanese government’s estimate.

The Finance Ministry expects the nation’s interest payments to double to ¥21.6 trillion in fiscal year 2029 from the current year, assuming an annual nominal economic growth rate of 3%, according to a document seen by Bloomberg. The ministry also expects debt-servicing costs to rise to around ¥41.3 trillion from ¥28.2 trillion over that same timespan.The IMF’s advice comes as Takaichi prepares to fast track deliberations on possibly pausing the sales tax on food for two years. She had pledged to accelerate those discussions while campaigning for the Feb. 8 snap election where she ultimately led her Liberal Democratic Party to its most sweeping electoral triumph in history. After the election, Takaichi said the plan wouldn’t require additional bond issuance to cover the estimated ¥5 trillion ($32.7 billion) annual hit to revenue.The fund acknowledged that limiting the tax suspension to food and keeping it temporary would help moderate the fiscal impact. Still, more effective price relief would be budget neutral, time-bound and targeted at vulnerable households and firms.On broader fiscal policy, the IMF urged Japan to adopt a credible medium-term framework, anchored by a clearly articulated fiscal target. Takaichi has said her administration will focus on lowering the nation’s debt-to-GDP ratio, effectively downplaying a long-standing goal to achieve a primary balance surplus, a tougher yardstick.Separately, the fund called on the government to rein in extra budgets to reduce the risk of abrupt moves in the Japanese government bond market. In the first months after Takaichi took office in October, JGBs came under pressure as investors worried that her expansionary policies could worsen the fiscal picture. In January the rout pushed yields beyond 4% on the longest-dated JGBs.The market has calmed somewhat since the election, as Takaichi has repeatedly assured investors she intends to stay prudent.With regards to monetary policy, the IMF said the Bank of Japan should press ahead with normalizing its policy settings, projecting the interest rate will rise to a neutral level of 1.5% in 2027. Most economists expect the BOJ to hold its benchmark rate at 0.75% when it next sets policy on March 19, with many seeing the possibility of a hike the following month.The fund “welcomes” the BOJ’s actions over the past year, noting it paused rate increases during a period of global uncertainty before resuming tightening in December as confidence in the inflation outlook took hold.It expects Japan’s key price gauge to move to the BOJ’s 2% target in 2027 after price pressures temporarily ease in 2026 as food and energy effects moderate. Recent data showed the main inflation gauge stayed above 2% for four consecutive years through 2025, with data due next week expected to price growth slowed to that threshold in January.The fund added that the BOJ’s independence and credibility remain essential to keeping inflation expectations anchored.It also welcomed Japan’s continued commitment to a flexible exchange rate regime. The comments follow repeated verbal warnings from finance officials against sharp yen swings in recent months, as well as reported rate checks in January that prompted the currency to strengthen to 152 per dollar from 159 in a matter of hours.“Exchange rate flexibility should continue to help absorb external shocks and support monetary policy’s focus on price stability,” the IMF said.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.