The International Monetary Fund said on Thursday that the coronaviruses are unlikely to have a significant scarring effect on Japan due to substantial fiscal and monetary support, but the world's third-largest economy needs to come up with post-pandemic policies to ensure sustainable growth as its population shrinks.
The IMF also said in an assessment of Japan's economic developments and policies that there is still room to raise revenues, such as through consumption tax rate hikes, with the country s tax revenues relatively low among the Group of Seven industrialized nations.
The Washington-based institution holds regular consultations with member countries, usually annually. In its preliminary findings, the International Monetary Fund estimated that Japan's growth will increase to 3.3% in 2022, following a 1.6% rise in 2021, on the back of strong fiscal support, a high COVID 19 vaccine rate and the easing of global supply constraints. The economy suffered a 4.5% contraction in 2020.
The surge of the highly transmissible omicron variant of the coronaviruses in Japan could slow growth momentum in the first quarter of 2022, but a strong rebound is expected in the second quarter as the wave dissipates, the IMF said.
It also warned of the unusual uncertainty around the pandemic, touching on the recovery of services consumption if strict containment measures are necessary as a result of omicron cases overwhelming the health system.
The scarring effects of the health crisis - meaning the extent to which growth will return to its pre-pandemic level - will be limited in Japan due to the support provided to companies and households, said Ranil Salgado, assistant director of the IMF's Asia and Pacific Department, who led the mission to Japan in an online news conference.
As we exit the pandemic, households will have substantial savings that have been built up during the epidemic, which is often different from what you see in other crises. He said firms were able to retain workers.
A fiscal stimulus package announced in November could have been better targeted, such as lowering the income threshold for cash transfers to child-rearing households, but it will provide needed support, the International Monetary Fund said.
Japan's debt-to- GDP ratio was raised from 236% in 2019 to 259% in 2021 because of the exceptional fiscal support and the sharp output drop during the pandemic.
Since debt rollover and issuance risks are contained in the near term, debt sustainability risks will increase due to demographic trends weigh in the medium and long term, with health care and long-term care spending expected to continue rising, according to the International Monetary Fund.
Salgado told Kyodo News in a written interview that the Japanese economy is facing a lot of challenges over the long term due to a possible shrinking of the labor force and low productivity growth.
The IMF laid out options to raise revenues, including raising the current 10% consumption tax rate, without specifying an exact level, and strengthening property taxation through the removal of preferential treatment of residential land.
The Bank of Japan's 2% target for medium-term inflation is projected to remain well below the Bank of Japan's 2% target.
In this regard, Salgado strongly supports the Bank of Japan's commitment to accommodative monetary policy until inflation is above target, according to Salgado.
The IMF official said interest rate differentials could weaken the yen further, as it is expected that monetary tightening is already underway in some advanced economies due to higher inflation.
A weaker yen would be a boon for export-oriented firms, as their overseas profits would gain a boost when they were repatriated.
The official said that a tightening of global financial conditions could lead to increased risk aversion and an appreciation of the yen, which is perceived as a safe-haven.