Japan must raise the sales tax and reform the welfare system if it wants to show it is committed to a fiscal reform, the International Monetary Fund (IMF) warned.
After its annual review of Japan’s economy, the IMF said in a statement that “passage of legislation to double the rate to 10 percent in stages by 2015 is crucial to prove a commitment to fiscal reform and sustain investor confidence.”
Rating agencies and foreign investors are looking at the progress made by Japan on the tax hike plan as a test of Tokyo’s ability to tackle its huge public debt. Currently, the debt is double compared to the size of the $5 trillion economy, and one of the highest in the developed world.
The IMF added in its statement that the yen is moderately overvalued, and that it could continue to strengthen due to Europe’s public debt crisis. New measures should be taken by the government and the Bank of Japan to reduce the public debt and ease the pressure of the strong yen over the economy, it added.