IMF Urges Japan to Avoid Consumption Tax Cut

Tokyo, Feb. 18 (Jiji Press)–The International Monetary Fund on Wednesday urged Japan to avoid cutting the consumption tax, as such a move would increase fiscal risks. “The authorities should avoid reducing the consumption tax, an untargeted measure that would erode fiscal space and add to fiscal risks,” the IMF said in a statement following its annual review of the Japanese economy. “Limiting the consumption tax cut to essential goods and ensuring it is temporary would help contain fiscal costs,” the statement said, referring to a plan by Japanese Prime Minister Sanae Takaichi to reduce the consumption tax rate on food items to zero for two years. The IMF had proposed raising the consumption tax rate in a statement last year. In the latest statement, the IMF referred to a system of refundable tax credits that is being considered for introduction after the tax cut, saying that “if well designed, (the system) could provide better-targeted support to the most vulnerable Japanese households.” Regarding the fiscal situation at present, the IMF said, “current spending remains elevated compared to pre-pandemic levels,” underlining the need to “eliminate poorly targeted subsidies, including energy subsidies.” The IMF also said that “the use of supplementary budgets should be restricted to responding to large, unexpected shocks,” as the country compiles an extra budget almost every year. Also in the statement, the IMF said, “Foreign investors are playing a growing role” in the Japanese government bond market, “making it more sensitive to fiscal news and global developments.” It said that the Bank of Japan “should be prepared to make exceptional targeted interventions, such as temporary JGB purchases.” On the central bank’s monetary policy, the IMF said that “the BOJ is appropriately withdrawing monetary accommodation, and gradual hikes should continue to move the policy rate toward neutral.” In an online press conference on the same day, Rahul Anand, who is in charge of Japan, said he expected two rate hikes in 2026 and one in 2027. END [Copyright The Jiji Press, Ltd.]