IMF says Japan should avoid adding debt as budget pressure grows
Japanese exporters, particularly automakers, have so far absorbed much of the tariff costs, helping to shield US consumers
[TOKYO] Japan should avoid taking on more debt to boost its economy, a senior International Monetary Fund (IMF) official warned, as concerns over higher spending triggered by political instability put pressure on long-term bond yields.
“We would understand that the government would want to support some parts of the economy, but a VAT cut, for example, is not targeted,” Nada Choueiri, the IMF’s deputy director for the Asia-Pacific region, said in an interview on Wednesday (Oct 15) in Washington, where the Fund is holding its annual meetings. She said any measures should be “temporary and targeted”, using funds already allocated in the budget and not adding to the deficit.
Japan’s 30-year government bonds have been trading around 3.2 per cent, almost a full percentage point above where they started the year, as markets grow wary about additional public spending with Japan’s political system in turmoil.
The recent collapse of a 26-year-old coalition headed by the Liberal Democratic Party means that new LDP leader Sanae Takaichi faces significant challenges in securing the premiership. Regardless of who gets the top job, a sizeable supplementary budget is likely, with some opposition parties advocating for costly sales-tax cuts.
Japan’s public debt is the highest among developed nations as a share of its economy, with total debt projected at 230 per cent of GDP this year, according to the IMF.
Despite the market jitters, Choueiri said that the political upheaval has not had a significant impact on Japan’s economy so far. She said that wage growth, business sentiment and corporate profits are helping sustain the country’s resilience, and backed the Bank of Japan’s current accommodative stance.
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The central bank has kept its benchmark interest rate at 0.5 per cent since early this year. The IMF expects rates to average 0.6 per cent in the first quarter of 2026, and reach 1.5 per cent by 2028.
In its latest World Economic Outlook published this week, the IMF raised Japan’s growth forecast for this year to 1.1 per cent from 0.7 per cent, and nudged the outlook for 2026 up slightly to 0.6 per cent. The revision reflects solid consumer spending and investment, and reduced uncertainty following a trade agreement between Japan and the US, Choueiri said.
In late July, the countries settled on a 15 per cent tariff for Japanese exports to the US. The IMF sees that tax as lowering Japan’s growth by 0.3 percentage point in 2025 and 0.2 point in 2026, but its more downbeat GDP forecast earlier this year had reflected concern that duties might be even bigger.
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Japanese exporters, particularly automakers, have so far absorbed much of the tariff costs, helping to shield US consumers. Export prices for the country’s passenger cars to North America have dropped more than 20 per cent, according to the IMF report.
Choueiri said that the Fund’s projections suggest that “by the end of next year, there is a full pass-through of the tariff to the US consumer”. BLOOMBERG
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