Japan debt risks rise to triple GDP without change, IMF says

[TOKYO] Japan's debt is unsustainable and could climb to almost three times the size of its economy by 2030 unless the government does more to cut its budget, the International Monetary Fund said.

The government should consider rules to curb spending, limits on extra budgets and independent assessments of its projections, the IMF said. Reliance on optimistic economic assumptions risks harming confidence in its plan to put the budget into surplus, excluding interest payments, by 2020, according to a report released on Thursday in Washington.

"Doubts about long-term fiscal sustainability could lead to a jump in the sovereign risk premium, forcing abrupt further fiscal adjustment with adverse feedback to the financial system and the real economy," the IMF said.

"Japan's extremely high financing needs point to vulnerabilities to changes in market perceptions." The Bank of Japan should stand ready to increase monetary stimulus further and provide stronger guidance to markets, the IMF said, projecting inflation won't reach the BOJ's target in the medium term. Japan's exchange rate, adjusted for its trade and inflation, is moderately weaker than is consistent with its fundamentals, the IMF said.

The yield on Japan's benchmark 10-year government bond was at 0.41 per cent at 9.23 am on Friday in Tokyo, the second lowest in the world for that maturity. The yen was little changed against the dollar at 123.97, and down 12 per cent since the BOJ expanded easing last October.

Prime Minister Shinzo Abe's fiscal consolidation plan will only temporarily stabilize public debt at about 250 per cent of gross domestic product before it accelerates again under current policies, to around 290 per cent of GDP by 2030, the IMF said. To cut its obligations over the long term, the government needs to reduce its structural primary balance by 4.5 per cent of GDP, it said.

While debt risks "have been contained," as a lot of debt is held domestically, "we cannot assume this will continue," Kalpana Kochhar, IMF mission chief for Japan, said on a conference call with reporters.

Mr Abe, who is balancing policies to revive the economy from two decades of stagnation and rein in the world's heaviest debt burden, aims to cap spending growth over the next three fiscal years at 1.6 trillion yen (S$17.6 billion), excluding interest payments and grants to local governments. The budget shortfall will still be 1 per cent of GDP in the fiscal year starting in April 2020, even under the government's optimistic scenario of real economic growth of more than 2 per cent, Cabinet Office forecasts showed this week.

Japan's increasing reliance on economic growth to cut its debt burden exposes the nation to greater risks, according to Fitch Ratings, which in April cut its rating on Japan to the same level as Israel and Malta.

Abenomics - the plan Abe introduced to revive growth when he took office in 2012 - needs to be "reloaded so that policy shortcomings do not become a drag on growth and inflation," the IMF said.

"In addition to swift implementation of already announced reforms, further high impact structural reforms are urgently needed to lift growth, facilitate fiscal consolidation, and unburden monetary policy," the IMF said in its report.

The IMF projected Japan's inflation will pick up gradually to 1.5 per cent over the medium term, below the country's target of 2 per cent.

The yen has depreciated by about 25 per cent against the dollar since Governor Haruhiko Kuroda introduced unprecedented easing in April 2013.

Weakening of the yen has been beneficial given the stage of the economic cycle and the need to address low inflation, the IMF said.

BLOOMBERG