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IMF says Japan can ramp up fiscal stimulus if tax hike sinks growth

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IMF says Japan can ramp up fiscal stimulus if tax hike sinks growth
A shopping district is pictured in Tokyo, Japan October 1, 2019. REUTERS/Kim Kyung-Hoon   -   Copyright  KIM KYUNG-HOON(Reuters)
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By Leika Kihara

WASHINGTON (Reuters) – Japan can ramp up fiscal stimulus if the hit to the economy from October’s sales tax hike proves bigger than expected, International Monetary Fund (IMF) Deputy Managing Director Mitsuhiro Furusawa said on Thursday.

Furusawa also said there was no change to the IMF’s long-standing proposal for Japan to continue raising the tax rate in small increments over several years to 15%.

“If downside risks materialise and economic growth slows more than expected, additional fiscal support may be necessary, accompanied by continued easy monetary policy,” Furusawa, a former senior Japanese finance ministry official, told Reuters.

Prime Minister Shinzo Abe proceeded with a twice-delayed increase in the sales tax rate to 10% from 8% in October as part of efforts to rein in Japan’s huge public debt.

Abe hopes the increased sales tax will support the fast-ageing population and rein in the industrial world’s heaviest public debt burden, more than twice the size of Japan’s $5 trillion (3.9 trillion pounds) economy.

The government has taken steps to ease consumer pain due to the tax, such as offering shopping vouchers and discounts for cashless payments, as the previous hike to 8% from 5% tipped the economy into recession.

Still, some analysts worry the higher levy may add to pains for an export-reliant economy already feeling the pinch from the U.S.-China trade war.

Abe has so far refrained from committing to bigger fiscal spending, but has stressed his readiness to act swiftly to fend off risks to the economy.

The IMF warned on Tuesday the U.S.-China trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, adding that the outlook could darken considerably if trade tensions remain unresolved.

Japan’s growth is seen slowing to 0.5% next year from 0.9% this year due partly to the impact of the tax hike, according to the IMF.

Furusawa was sanguine on China’s economic slowdown, saying it was due not just to the trade spat with the United States but also to regulations Beijing put in place to contain rapid credit growth.

“The trade friction was unintended, but the regulation aspect was something intended to put China’s economy on a more sustainable growth path,” he said.

But he warned that a faster-than-expected slowdown in China was among risks clouding Asia’s economic outlook.

The IMF projects China’s growth to slow to 5.8% in 2020 from 6.1% this year, falling below the 6% target set by Beijing.

Asian central banks can keep monetary policy loose to battle headwinds from the trade tensions and slowing Chinese demand, but also need to prevent cheap borrowing costs from causing a build-up of excess debt, Furusawa said.

“The accommodative policies are helping mitigate the slowdown in economic growth. But as they are increasing liquidity, they could lead to an increase in debt in emerging economies including those in Asia,” he said.

“That’s not to say Asian central banks should withdraw monetary stimulus. It’s just that they need to be mindful of the various impacts their policies could have.”

(Reporting by Leika Kihara; Editing by Andrea Ricci)

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