2014 Article IV Consultation with Japan �� Concluding Statement of the IMF Mission
1. Japan appears to be weathering well the effects of the consumption tax increase. Preliminary GDP data for the first three months of this year suggest that rush demand ahead of the consumption tax increase was stronger than anticipated. At the same time, underlying growth has been strengthening: business investment is picking up, labor markets are tightening, and capacity utilization is rising. Although the consumption payback in the second quarter will lead to a sharp growth contraction, we expect the recovery to resume in the second half of the year with further job growth and rising wages supporting moderate consumption growth. Exports are also forecast to rise on the back of last year’s yen depreciation and robust partner- country demand. Staff projects growth of 1.4 percent in 2014 and to remain above potential at 1 percent in 2015.
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7. Successive consumption tax increases are critical to establish a track record of fiscal discipline. The first increase in April was a major achievement and going ahead with the increase to 10 percent would strike the right balance between establishing fiscal policy credibility and preserving the recovery. There is a valid concern that the increase in October 2015 could harm low-income households. These equity concerns are best addressed through targeted subsidies instead of reducing tax rates on essential items as this would hurt efficiency, increase compliance and administrative costs, and result in permanent revenue losses.
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9. A post-2015 fiscal consolidation plan is urgently needed. Such a plan should be as growth friendly and equitable as possible and would allow more near-term flexibility to respond to downside risks. Options include gradually increasing the consumption tax to at least 15 percent, broadening the personal income tax base, and taking measures to contain pension and health care spending. As the consolidation effort will span a decade, it needs to be grounded in a stronger fiscal framework through adoption of medium-term rules to curb expenditures in the context of multi-year budget planning and limits on the use of supplementary budgets.
