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IMF Warns Japan: Don't Cut Consumption Tax!
18 Feb
Summary
- IMF advises against consumption tax reduction due to fiscal risks.
- Interest payments on Japan's debt may double by 2031.
- BOJ should proceed with monetary policy normalization, IMF says.
The International Monetary Fund (IMF) has urged Japan to avoid cutting its consumption tax, warning that such a move would exacerbate fiscal risks. The fund projects that interest payments on Japan's outstanding public debt could double by 2031 compared to 2025 levels, as maturing debt is refinanced at higher rates.
This advice comes as Prime Minister Sanae Takaichi considers speeding up deliberations on potentially pausing the sales tax on food for two years. While acknowledging that a temporary, food-specific tax pause would moderate fiscal impact, the IMF suggests that more effective price relief would be budget-neutral and targeted at vulnerable households and firms.
Furthermore, the IMF called on the Bank of Japan to continue normalizing its monetary policy, anticipating interest rates to reach a neutral level of 1.5% by 2027. The fund also welcomed Japan's commitment to a flexible exchange rate regime, supporting price stability goals.
