Japan's government needs to implement structural reforms to boost the potential growth rate or it may be forced to launch more fiscal stimulus to meet the Bank of Japan's 2 percent inflation goal, the International Monetary Fund said.
Failure to include credible structural reforms in Prime Minister Shinzo Abe's economic policies, known as "Abenomics," would slow economic growth in Japan as well as in Asia, the IMF warned in an update to its World Economic Outlook.
The IMF welcomed Japan's plan to raise its sales tax to pay for welfare costs but said the government's decision to offset the blow with stimulus spending means it is under pressure to compile a fiscal discipline plan as soon as possible.
"Structural reforms will be critical to open up the additional policy space that may be needed to bring inflation up to the 2 percent target, "the IMF said in its report.
Abe's government will finalise a 5 trillion yen stimulus package in December. The measures will include tax breaks for companies and home owners, but the government has yet to decide how it will spend most of the money.
The IMF acknowledged that stimulus spending is likely to have a short-term benefit and that the economy could grow more than it forecast in 2014.
Japan's economy will grow 2.0 percent this year and then slow to 1.2 percent in 2014 due to the sales tax hike, the IMF said.
Those forecasts were little changed from July, when the IMF said Japan's GDP will expand 2.1 percent this year and 1.1 percent next year.
Source: Reuters
