The International Monetary Fund yesterday lowered its 2011 growth forecast for Japan and called on the world’s third largest economy to adopt “more ambitious” measures to tackle its huge debt.
The IMF cut its growth forecast for Japan in 2011 to minus 0.7 per cent from the plus 1.4 per cent it had predicted in April after the country was hit by its biggest recorded earthquake and a devastating tsunami.
However, the fund said it expected Japan to stage a rebound after the summer and upped its 2012 GDP growth forecast to 2.9 per cent from an earlier estimate of 2.1 per cent.
“Japan’s economy continues to face headwinds from the earthquake but should start to recover strongly in the second half of the year,” the IMF said in a statement.
“The initial shock of the disaster was severe, but swift and decisive action by the government and the Bank of Japan helped to limit its impact on the economy,” it said.
The impact of the earthquake, tsunami and a subsequent nuclear emergency at the crippled Fukushima Daiichi nuclear plant plunged Japan into its worst crisis since World War II, with nearly 24,000 people dead or missing.
The economy slipped into a technical recession, after many of Japan’s biggest firms faced massive production disruption amid power shortages and broken supply chains.
The government last month passed an emergency reconstruction budget. In the aftermath of the disasters, the BoJ injected a record amount of cash into the banking system, and set up a lending scheme for banks in disaster-hit areas.
Power infrastructure must be fully restored to ensure stable production and economic activities, IMF officials said, as companies scramble to devise ways to save on energy use.
Analysts have meanwhile warned that the costs of reconstruction threaten to further pressure a public debt that, at around 200 per cent of GDP, is the industrialised world’s highest.
The IMF said given Japan’s fiscal pressures it could finance reconstruction work with various tax measures and needed to implement a more aggressive plan to lower its debt to maintain global investor confidence.
“Japan needs a more ambitious medium-term strategy for bringing down public debt to maintain confidence in public finances,” the IMF said, adding that this could be helped by increasing the five percent consumption tax.
The IMF report assumes a consumption tax hike to about seven or eight percent from next year, and ultimately to about 15 per cent in a decade.
IMF acting managing director John Lipsky said Japan’s economic partners also demand Tokyo to put its finances in order.
“Japan’s partners are not particularly worried about Japan’s growth outline. What they are concerned about is the importance of Japan establishing credible, medium-term fiscal consolidation policies,” Lipsky told reporters.
“It’s obviously not possible to imagine that Japan’s debt to GDP ratio will continue to rise indefinitely in the future,” he said.
“It seems clear that actions will be needed to halt and ultimately reverse this trend,” he said.
Japan has one of the planet’s lowest birth rates and highest life expectancies, but political turmoil after Prime Minister Naoto Kan last week offered to resign in the future has raised doubts over the government’s ability to formulate effective policy.
Lipsky added the yen’s current strength would not be a problem for Japanese growth but that G7 nations stand ready to intervene again following the group’s joint currency market move after the yen soared in the wake of the disasters.