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July 14 (Bloomberg)--The International Monetary Fund said Japan’s plan to balance its budget in 10 years would be more credible if the government gave specifics on how it will boost revenue, including details on a sales tax increase. Prime Minister Naoto Kan’s fiscal strategy outlined last month “will only become fully credible once details of the necessary revenue measures are agreed on including the timing and scale of a consumption tax increase,” the IMF staff wrote in a supplement to its annual review of Japan’s economy. Kan, who took office five weeks ago, stoked voter resentment by calling for a debate on whether to raise the 5 percent sales tax and lost control of parliament’s upper house in July 11 elections. The IMF report recommended a “modest” increase of the sales levy as part of fiscal adjustments.
While welcoming the strategy announced by Kan as “an important step forward,” the IMF staff said a plan to stabilize the world’s largest debt by 2020 leaves the country vulnerable to shocks for a longer time than if the country adopted measures recommended by the Washington-based lender. The government’s fiscal strategy released June 22 plans to restrict bond sales. Under the plan, ministries must follow a so-called “pay-as-you-go” principle when compiling their budgets. The IMF praised the move, adding it still “sees a need for a cap on public debt to anchor expectations.” Japan’s gross debt is 215 percent of its gross domestic product, according to the IMF, which forecasts growth of 2.4 percent this year and 1.8 percent next year in the world’s second-largest economy.
Yen Value
The fund said its assessment of the fiscal plan, which was announced by the government after the IMF prepared its report, “doesn’t alter the thrust of the staff appraisal” of Japan’s economy. The report mentions that the current value of the yen is “consistent with medium-term fundamentals,” and that the effective exchange rate was “estimated close to its medium-term equilibrium value” as of March. In a note following an internal debate on the report, the IMF executive board warned that “carry trade activities and their impact on the exchange rate would need to be monitored closely.” The board’s report also says that the Bank of Japan could help support the recovery and reduce deflation pressures, including through purchasing a wider range of assets and by extending the size and maturity of its operations to supply funds to the economy.
As part of the central bank’s “proposal to support growth, consideration could be given to improving access to credit for small and medium-sized enterprises,” the IMF staff said. Bank of Japan Governor Masaaki Shirakawa and his board will keep the main interest rate at 0.1 percent and forgo fresh liquidity injections tomorrow, according to all 16 economists surveyed by Bloomberg News. Shirakawa said last week that the economy is “likely to stay on a recovery trend” and domestic demand is poised to rise.