TOKYO (MNI) – International Monetary Fund researchers on Friday
stuck to their earlier proposal that Japan must quickly embark on fiscal
reform by raising the 5% sales tax, starting next year, despite high
uncertainty about global growth and the threat of the strong yen.

Analysis by the IMF has found that a modest two percentage point
increase in the consumption tax would lower Japan’s economic growth by
between 0.3 and 0.5 percentage point in the near term, said Kenneth
Kang, division chief for Japan at IMF’s Asia and Pacific Department.

“But over the longer term, as confidence improves with fiscal
adjustment, we could see an increase in the growth rate,” he told an IMF
seminar here.

“Although the uncertainties about the global outlook have
increased, our forecast and most other forecasts for growth next year
are still pretty robust above 2%,” he said.

“So I think the economy can withstand a modest increase in the
consumption tax.”

The revenue that is generated from increasing the consumption tax
increase would be used entirely for reconstruction spending and help the
economic recovery from the March earthquake disaster, said Kang.

But Tsutomu Fujita, vice chairman of Citigroup Global Markets
Japan, told the seminar that Japan must not jump to a conclusion on
a tax hike based on what he called the wrong assumption that the JGB
market would collapse without quick fiscal consolidation.

“I’m not against a tax hike but we need to go through a process,”
he said.

While Fujita agreed with the IMF on the need for fiscal reform, he
argued that it has to be combined with an economic growth strategy,
government balance sheet reform and structural spending reform
(including raising the retirement age to 75 from the current 65).

Motohiro Sato, a specialist in public finance at Hitotsubashi
University, pointed to the lack of political will to implement a tax
hike after the “political trauma” suffered the last time the tax was
raised nearly 15 years ago.

In April 1997, the government of Ryutaro Hashimoto lost public
support after it went ahead with a sale tax hike to 5% from 3%. The tax
hike was quickly followed by the Asian financial crisis and an economic
downturn in Japan.

“We don’t have strong political leadership or commitment,” said
Sato. “We have to convince tax payers … we know that there is deep
distrust in government.”

In June, the IMF urged Japan to raise the 5% sales tax gradually to
15% over 10 years starting next year as part of its fiscal
consolidation, which it said should boost the economy’s long-term growth
prospects.

tokyo@marketnews.com
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