The IMF has advised Japan to gradually increase its consumption tax rate to 15 percent by 2030 and 20 percent by 2050 to finance aging costs and ensure fiscal sustainability.
Japan increased its consumption tax from 8 percent to 10 percent in October. In its concluding statement to its Article IV mission to Japan, released November 25, the IMF urged Japan to increase its consumption tax rate even more, stating that “the cost of postponing adjustment is substantial and would benefit the current elderly to the detriment of future generations.”
The IMF said Japan’s population will decrease by over 25 percent in the next 40 years. The population decrease “will depress growth and productivity due to a reduced labor force and magnify fiscal challenges as age-related spending rises while the tax base shrinks,” the IMF explained.
“Evidence so far indicates that the October consumption tax increase has been implemented smoothly, due to the government’s countermeasures,” IMF Managing Director Kristalina Georgieva said at a November 25 press conference in Tokyo. Georgieva’s comments are in line with the OECD’s predictions on the impact of the tax increase. The OECD stated that the consumption tax hike would likely have less of an impact than the April 2014 increase because of offsetting fiscal measures.
According to the IMF statement, some government countermeasures Japan implemented to mitigate the impact of the 2 percentage point increase in the consumption tax are: “(i) a point-reward program for cashless payments in [small and medium-size enterprises]; (ii) a tax allowance for automobile and house purchases; (iii) infrastructure investment; and (iv) additional spending for childcare and tertiary education.”
The IMF said extending these countermeasures in 2020 could ease the impact of the consumption tax rate increase, and that introducing other recommended tax changes could increase the credibility of Japan’s fiscal policy.
Japan’s economy still faces a range of risks, the IMF warned, emphasizing that a fall in consumption following the consumption tax rate increase could pose a near-term risk. Also, “given the importance of manufacturing in the Japanese economy, a further slowdown of global manufacturing would hurt Japan’s exports and investment — potentially turning into a significant downside risk to growth if the slowdown spills over to services,” the IMF explained.
The IMF recommended additional fiscal measures that Japan could implement to avoid economic risks, stating that in 2022 Japan should increase its capital gains tax rate 10 percentage points to “strengthen redistribution effects.” Further, the IMF suggested reintroducing a wealth tax and raising the carbon tax. “A new wealth tax with zero or very few exemptions, a high threshold, and a low flat rate would minimize administrative costs and help limit capital flight,” the IMF said.
The IMF emphasized that Japan’s 2019 fiscal stance is “broadly neutral,” but it said that “a well-specified framework to ensure fiscal sustainability is needed to reduce debt, lower uncertainty, and support reflation and growth.”