SINGAPORE (MNI) – The International Monetary Fund on Tuesday called
for more fiscal reform in Japan and better fiscal support in China as it
lowered its growth forecasts for both countries in reports that gave a
relatively gloomy picture of the global economy.

In an update to its World Economic Outlook (WEO), released together
with its Fiscal Monitor Update, the IMF said Japan is expected to grow
1.7% this year and 1.6% next year, down from the 2.3% and 2.0% growth it
predicted last year. China is seen growing 8.2% in 2012 and 8.8% in
2013, down from 9.0% and 9.5% previously.

The IMF raised the possibility of investors souring on debt issued
by the U.S. and Japan, saying that both countries need fiscal
consolidation to offset that possibility.

“Another downside risk arises from insufficient progress in
developing medium-term fiscal consolidation plans in the United States
and Japan,” the IMF said in its WEO update.

“In the short term, this risk might be mitigated as the turbulence
in the euro area makes government debt of these economies more
attractive to investors. However, as long as public debt levels are
projected to rise over the medium term, and in the absence of
well-defined and credible fiscal consolidation strategies, there is the
possibility of turmoil in global bond and currency markets.”

It said both countries should organize and implement medium-term
consolidation plans “because neither country can take for granted its
status as a safe haven.”

Japan has already suggested it will use tax reform as one measure
to control debt, but the IMF said in the fiscal report that more will be
needed.

“As part of its medium-term fiscal strategy, the government is to
submit a tax reform bill, including its proposal for doubling the
consumption tax rate to 10% by 2015, but this will not be sufficient in
itself to put the debt ratio on a downward path,” it said.

It said “an adjustment path that allows debt ratios to begin
declining by the middle of this decade is called for.”

Earlier on Tuesday, Japan said the combined primary budget deficit
for the central and regional governments is estimated to total Y16.8
trillion in fiscal 2015, or 3.3% of nominal GDP, even with a proposed
sales tax hike to 10% from the current 5%.

This indicates Japan will not be able to meet its target that the
primary fiscal deficit — the budget deficit excluding debt-servicing
costs from expenditures and bond issuance income from revenues — should
be halved to 3.2% of GDP by fiscal 2015 from the fiscal 2010 level.

For China, the IMF suggested fiscal support would be affordable if
needed, “by deferring consolidation plans, through lower social
contributions and consumption taxes. There is also scope to accelerate
investment in social housing.”

But in an oblique criticism of the support offered during the
Lehman-prompted crisis in 2008, it said such support should be on-budget
and transparent.

“Unlike in 2008, fiscal support should be through on-budget
measures that promote transparency and accountability,” the IMF said.

China is still unravelling the bad debts in the tangle of local
government stimulus spending, supported by the use of special purpose
vehicles, used to promote a myriad of projects to keep growth ticking
over in 2008 and 2009.

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