Japan Needs Swift Fiscal Action Amid Rising Risks
Key Points:
* IMF warns Japan of limited fiscal space to address shocks
* Japan's primary deficit projected to widen slightly
* Public debt servicing costs expected to increase 25%
* IMF supports BOJ's gradual rate normalization approach
Details:
The International Monetary Fund (IMF) has urged Japan to take immediate action to address its fiscal health due to mounting risks from natural disasters and rising social security costs. IMF Japan mission chief Nada Choueiri emphasized the need for fiscal planning to accommodate spending needs without increasing deficits.
Japan is facing increased spending pressures, particularly in national defense and birthrate initiatives. However, its financing costs are rising as a result of the Bank of Japan's (BOJ) recent rate hikes. Japan already has the highest public debt burden among developed nations.
The IMF estimates that Japan's debt will reach 232.7% of GDP this year. Debt servicing costs are projected to jump 25% by fiscal year 2028. Choueiri advised the government to prepare for potential yield increases.
The IMF projects a slight widening of Japan's primary deficit to 2.2% of GDP by 2025. Choueiri stressed the need for a downward sloping deficit path to ensure fiscal sustainability.
Opposition parties have pushed for increased government spending, further complicating the fiscal situation. The government has approved a supplementary budget and a record initial budget for the upcoming fiscal year.
On monetary policy, the IMF supports the BOJ's gradual approach to interest rate normalization. The BOJ has recently raised rates three times, bringing the policy rate to 0.5%. The IMF expects rates to rise towards the neutral rate of 1.5% by late 2027.
The IMF observes positive signs in Japan's economy, including strengthening inflation expectations and consumption growth. However, Choueiri urged the BOJ to remain cautious and flexible in rate adjustments, considering global economic uncertainties and US tariff announcements.