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IMF urges gradual consumption tax hike in rapidly graying Japan

In this Sept. 30, 2019 file photo, preparations are under way at electronics retailer Bic Camera's shop in Tokyo, the eve of Japan's scheduled consumption tax hike from 8% to 10%. (Kyodo)

WASHINGTON (Kyodo) -- The International Monetary Fund on Monday called on Japan to further raise its consumption tax rate in stages to fund growing social security costs, while warning that its public debt may reach up to 2.5 times the size of its economy by 2030 without credible fiscal policy.

    The IMF proposal comes as Japan's consumption tax rate was raised to 10 percent from 8 percent on Oct. 1, after twice being delayed. It was the first such tax hike in more than five years.

    But in a report issued following annual consultations with the Japanese government, the IMF said the country's consumption tax would need to be lifted to 15 percent by 2030 and to 20 percent by 2050 to finance swelling costs due to an aging and shrinking population.

    "The consumption tax rate increases should be done gradually" on a regular, preferably legislated, schedule to smooth the economic impact and minimize policy uncertainty, the Washington-based institution said.

    It also said Japan's public debt is "unsustainable" under current policies and the country's ratio of government debt to gross domestic product could exceed 250 percent in 2030 in the absence of a "credible fiscal policy framework including a concrete medium-term fiscal consolidation plan."

    Japan's fiscal health is the worst among major industrialized economies, with its public debt-to-GDP ratio standing at 237.5 percent in 2019, according to the Japanese Finance Ministry.

    Noting that the population in Japan is estimated to age and shrink by over 25 percent in the next 40 years, the IMF said the result will be depressed growth and productivity due to a reduced and aging labor force, which will "magnify" fiscal challenges as age-related spending rises while the tax base shrinks.

    In addition to raising the consumption tax, the IMF proposed reforms to curb healthcare spending, the introduction of a wealth tax and a higher carbon tax as an incentive to reduce energy use.

    "Without meaningful change to pension, health, and long-term care spending, fiscal sustainability may remain out of reach," the report said.

    The IMF announced its preliminary findings of the consultations with the Japanese government in November.

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