IMF warns Japan against cutting consumption tax, saying it would heighten fiscal risks

Financial News correspondent Seo Hye-jin in Tokyo reported that the International Monetary Fund (IMF) on the 17th local time warned that the consumption tax cuts being pursued by Sanae Takaichi’s Japanese cabinet should be avoided because they could increase fiscal risks. The IMF also urged that measures to address high inflation be designed as temporary and targeted only at vulnerable groups.
According to reports on the 18th by Nihon Keizai Shimbun (Nikkei), Mainichi Shimbun and others, the IMF made these comments in a statement issued after it completed its annual economic review of Japan on the 17th.
In the second cabinet being launched that day, Prime Minister Takaichi is set to begin full-scale consideration of expansionary fiscal measures such as reducing the consumption tax on food to zero for two years and introducing a benefit-type tax credit that combines income tax deductions with cash payments. If the consumption tax cuts are implemented, annual tax revenues are expected to fall by around 5 trillion yen.
The IMF recommended that "consumption tax cuts should be avoided, as they could heighten fiscal risks." However, it added that if the cuts are narrowly targeted and implemented only for a limited period, they "would help contain fiscal costs."
On the proposed benefit-type tax credit, the IMF offered a positive assessment, saying that "if appropriately designed, it can provide more precisely targeted support to Japan’s most vulnerable households."
Regarding Japan’s fiscal position, the IMF noted that "the ratio of public debt to gross domestic product (GDP) is declining thanks to nominal growth rates exceeding interest rates." At the same time, it pointed out that "Japan’s overall debt remains at a high level and is expected to rise as spending pressures increase."
It also mentioned the need to phase out energy subsidies and similar support measures.
The IMF further warned that supplementary budgets "should be limited to responding to unexpected shocks." It stressed that efforts to maintain fiscal discipline "also help avoid abrupt volatility in the government bond market."
On Japan’s central bank, the Bank of Japan (BOJ), the IMF said it is "appropriately unwinding monetary easing" and indicated that further interest rate hikes will be necessary.
The IMF noted that "although the BOJ has raised its policy rate to 0.75 percent, the real interest rate adjusted for inflation remains negative, so financial conditions are still accommodative." It went on to say that the BOJ "should continue unwinding its easing measures so that by 2027 the policy rate reaches a neutral level that neither overheats nor cools the economy."
Rahul Anand, who oversees the IMF’s review of Japan, said at a press conference that he expects the BOJ to raise rates twice in 2026 and once in 2027, bringing the policy rate to 1.5 percent. The BOJ previously raised its policy rate from 0.5 percent to 0.75 percent in December last year, the highest level in 30 years since 1995.
Markets expect the BOJ to move ahead with another rate hike by its monetary policy meeting in April. The central bank is scheduled to hold its next policy meeting on March 18–19 and to reassess its growth and inflation outlook at the April 27–28 meeting.


sjmary@fnnews.com Seo Hye-jin Reporter