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IMF warns Japan of over 25% economic shrinkage in 40 years

In this April 19, 2018 photo, International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at the panel Reforming the Euro Area: Views from inside and outside of Europe, during the World Bank/IMF Spring Meetings, in Washington. (AP Photo/Jose Luis Magana)

NEW YORK (Kyodo) -- The International Monetary Fund warned Japan Wednesday against a possible economic shrinkage of more than 25 percent in the next 40 years due to the rapidly greying population in the country.

The Washington-based agency also said in a new report on Japan that if structural reforms meant to improve productivity are carried out, it can significantly offset the adverse effect of the county's demographic headwinds.

"IMF staff simulations estimate that the level of real GDP (gross domestic product) will decline by over 25 percent in about 40 years due to demographics under current policies," it said.

However, the IMF also said the GDP level will be boosted by about 15 percent in 40 years from the "current policies" scenario if reforms in the labor market, corporate sector and international trade are implemented along with monetary accommodation and debt stabilization.

Among the IMF's recommended reform measures are a gradual introduction of contracts that replace currently prevalent regular and non-regular contracts, higher labor force participation of women and older workers, and increased migration by 1 percent of the labor force.

"Reforms that lead to an increase in labor supply are designed to partly offset the effects of an ageing and declining population and labor force," the IMF said.

The measures also include corporate governance reform that allows surplus cash held by companies to be used for investment and a reduction of all tariff and nontariff barriers with its partners in major free trade deals with Asia-Pacific nations and the European Union.

The IMF said it now expects the Japanese economy to post a 1.1 percent growth in 2018 from the previous year but to slow down to 0.9 percent in 2019 due to the planned hike in the consumption tax to 10 percent from the current 8 percent on Oct. 1.

While having consistently called for a higher value-added tax rate for Japan, the IMF said in another report that "concerns remain that the VAT rate increase targeted for October 2019 may trigger a sharp macroeconomic contraction."

To ease the detrimental impact from the consumption tax hike, the agency laid out tax incentives for purchases of cars and houses as possible steps to take, as mooted by the government of Prime Minister Shinzo Abe.

"For example, abolishing the automobile acquisition tax will help partly offset the VAT rate increase, likely moderating the impact on an important component of durables consumption," the report said.

"The transactions-based real estate acquisition tax could be abolished with any lost revenue made up using higher recurrent -- and less distortionary -- property taxes," it said.

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