The International Monetary Fund on Wednesday urged Japan to continue tightening monetary policy and refrain from cutting its consumption tax.

The IMF warned that loosening fiscal discipline could heighten risks to the country’s already strained public finances.

In a statement issued after concluding its regular consultations with Japanese authorities, the IMF said the Bank of Japan is “appropriately withdrawing monetary accommodation” and should continue to raise interest rates gradually.

The goal, it said, is to guide the policy rate toward a neutral level by 2027, one that neither stimulates nor restrains economic growth.

The fund restated that the central bank’s “continued independence and credibility” are crucial to keeping inflation expectations well anchored, cautioning the government against excessive interference in monetary policy.

The remarks come as Prime Minister Sanae Takaichi has proposed suspending the 8 per cent consumption tax on food and beverages for two years, following a general election earlier this month.

Mr Takaichi has framed the measure as necessary relief for households grappling with higher living costs.

However, the IMF advised that any support for vulnerable households and firms affected by rising prices or external shocks should be “budget neutral, temporary, and targeted”.

It warned that reducing the consumption tax would “erode fiscal space and add to fiscal risks”, and that broad-based measures to counter the cost-of-living pressures could further weaken Japan’s fiscal position.

Japan’s public debt, the highest among major economies, is projected to increase over the long term, the IMF said, in spite of progress in post-pandemic fiscal consolidation driven by spending restraint and improved tax collection.

Beyond fiscal issues, the Washington-based lender noted that risks to Japan’s economic outlook are “tilted to the downside”.

Domestically, it said, the primary concern remained subdued consumption if real wage growth fails to turn positive. 

(Xinhua/NAN)