OECD urges Japan to stick to fiscal discipline even in crisis

TOKYO, April 21 Kyodo -
The Organization for Economic Cooperation and Development on Thursday said Japan should keep pursuing its fiscal restoration goals despite the huge government spending required for reconstruction following the March 11 earthquake and tsunami.
The Paris-based club of rich nations also said in its survey report that Tokyo may have to raise the consumption tax rate to 20 percent from the current 5 percent if it is to stably reduce the country's debt ratio, while stressing the Bank of Japan should consider purchasing more government bonds in the event of a deterioration of the economic outlook.
''The priority for Japan is to address the humanitarian and reconstruction needs, along with the nuclear situation,'' the OECD said. But as the country suffers swelling social security costs and growing public-sector debt, it is ''important to finance reconstruction spending by shifting expenditures and by short-term increases in revenues.''
''Over the medium term, fiscal consolidation remains a priority,'' it also said.
The quake, which struck northeastern Japan, not only damaged manufacturing facilities but also destroyed roads, ports and other infrastructure while disrupting the supply chains of industrial goods. The business environment deteriorated further on electricity supply shortages, due chiefly to the prolonged crisis at the Fukushima Daiichi nuclear power plant.
It is ''still too early to assess the overall impact,'' the report said, while adding, ''The immediate impact of the disaster will be to reduce economic activity, with the extent and length of the decline depending, in part, on how quickly the supply of electricity is restored.''
The OECD expressed concerns that the huge cost of reconstruction after the quake could derail Prime Minister Naoto Kan's attempt to restore Japan's fiscal health, the worst among major developed countries, with gross public-sector debt approaching 200 percent of gross domestic product.
The government has set a key fiscal rehabilitation goal of achieving a primary balance surplus in the year starting April 2020, meaning it can forgo new bond issuance in financing its expenditures, except for debt-servicing costs.
To that end, Japan would have to raise the 5 percent sales tax rate ''by 5 to 9 percentage points,'' the OECD said. In order to realize a 3 percent primary surplus of GDP -- a level that it says helps stabilize the nation's debt ratio -- the government would have to sanction ''another 6 percentage-point hike.''
While many Japanese lawmakers are reluctant to openly talk about the possible tax hike, due to fear of a voter backlash, the OECD said, ''The consumption tax should be the major source of additional revenue, given that its impact on economic growth is less negative than direct taxes on household and corporate income.''
A government panel chaired by Kan is scheduled to present a package of welfare and tax reform plans in June and is highly likely to propose a consumption tax hike.
The OECD's report underlined that the negative impact of Japan's huge debt has been mitigated by long-term interest rates remaining ''very low,'' calling for efforts to prevent any hike in the borrowing costs not only from the government but also from the BOJ.
Following the earthquake, the central bank has tried to ease tensions in the financial system, injecting a record amount of liquidity into money markets, doubling its asset purchase fund to 10 trillion yen to mainly support corporate financing and deciding on an emergency loan program to encourage lenders in disaster-hit areas to channel money to local firms.
The OECD hailed such moves, but called on the BOJ to do more when the outlook deteriorates by focusing on reducing long-term interest rates ''through expanded purchases of government bonds.''
It urged the bank to be ''cautious in buying high-risk private assets,'' referring to the purchases of corporate debt and other financial products riskier than government bonds under BOJ Governor Masaaki Shirakawa's benchmark policy of the asset purchase program, as such an approach could boost inflation expectations and hence lead to higher long-term rates.