Japan Economy from Darkness

Independent Films, Politics

The massive earthquake in northeast Japan in March this year has led to additional government spending which is pushing the country’s public debt to higher levels. The world’s third largest economy must consolidate its fiscal position over the medium-term if it is to continue being a positive force in the region, says the IMF in its regular assessment of the country’s economy.

Japan’s public debt is over 220 percent of the country’s GDP in gross terms--the highest level among advanced economies. In their “Article IV” report on the state of the Japanese economy, IMF economists proposed reforms to bolster confidence in public finances, including reining in social security spending, increasing the country’s tax revenue, and boosting growth through structural reforms.

Economic activity has started to recover following the March earthquake and tsunami, but a high degree of uncertainty remains with the recovery dependent on the easing of supply bottlenecks, a stable long-term supply of electricity, and the recovery of sentiment.

Reconstruction spending is likely to further increase Japan’s sizable public debt--one of the highest among OECD countries—and the report predicts GDP growth is likely to slow to -0.7 percent this year before rising to 2.9 percent in 2012.

The IMF report suggests reconstruction spending could be financed by a modest increase in the consumption tax from 5 to 7–8 percent in 2012, with a greater and continued increase up to 15 percent thereafter. This is also needed to bring down Japan’s high level of public debt.

This island nation has one of the lowest tax revenue levels in the world—about 17 percent of GDP—and this gives the northeast Asian country ample space to use taxes as a way of consolidating the country’s fiscal position.

The country’s authorities have already outlined plans to double the sales tax to 10 percent by the mid-2010s to help meet its target of halving the primary deficit (in percent of GDP). This forms part of a package of measures unveiled in June which included reforms to social security spending, a proposal to raise the retirement age, and adjusting pension benefits.

The IMF economists welcomed the government’s plan for fiscal consolidation, but called for more vigorous action to reduce the public debt levels at a faster rate within the next five years. They believe the economic slowdown prompted by the Great East Japan earthquake, provides an opportunity to kick-start much-needed structural reforms.

Although in the short-term fiscal adjustment could reduce domestic demand, over the longer term, lowering the level of public savings would help improve confidence, spur investment and boost household incomes, suggests the report.

Despite Japan’s economic slowdown in recent years, and the disaster in March, the report says that as one of the largest and richest economies in the world, Japan remains an important contributor to regional growth and stability. “To maintain these positive spillovers fiscal and structural reforms are essential,” it concludes.

Directors:

• Muhamed Sacirbey (UNTV-IMF)

Producers:

• Susan Sacirbey (UNTV-IMF)