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MaximsNewsNetwork: 05 August 2013: International Monetary Fund: IMF: Washington, DC - The "three-arrows" of Abenomics—the slew of measures named after the Japanese prime minister Shinzo Abe—provides a unique opportunity to exit deflation and revive growth, says the IMF's top economist on Japan, Jerry Schiff. Abenomics is aimed at reviving the sluggish economy, ending long-standing deflation and reducing public debt, through more aggressive monetary easing from the Bank of Japan (BoJ), more flexible fiscal policies, and structural reforms to boost Japan's competitiveness.

The BoJ has taken the lead in ending deflation with its monetary policy, and there are encouraging signs that the short-term outlook is improving. Schiff stresses the need to launch the second and third arrows of Abenomics—by developing credible medium-term fiscal and growth plans—to secure a sustained recovery and to bring down public debt.

Reviving growth and ending deflation would be beneficial not only for Japan but also for the rest of the world.

"I think the world is watching Japan very closely right now, and they are anxious to see if they can succeed and exiting from almost two decades of deflation and low growth. I think the bottom line for the rest of the world is if Abenomics is implemented successfully, and growth strategy and strategy for fiscal adjustment are carried out together with monetary policy that has already been announced, then we will see a much faster growing Japan and much more dynamic Japan. That will be certainly good for the rest of the world," Schiff says.

Japan's growth is estimated to reach 2 percent in 2013 and inflation to gradually increase to 0.7 percent by the end of the year.
On the fiscal side, IMF estimates that to bring the public debt-to-GDP ratio on a downward path a fiscal consolidation of 11 percent over the next decade is needed. Implementing the planned increase of the consumption tax rate from 5 to 10 percent by 2015 is a necessary first step in this direction.

"Of course, nobody likes to pay more tax than they have to, but the truth is that Japan has major fiscal problems. Public debt has been rising as a share of GDP and by some measures now higher than any other advanced economies. Because so much fiscal adjustment is needed over the next decade, we think that Japan will need to implement series of measures both on the revenue and spending sides. We think that consumption tax has the center role to play."

Why consumption tax? Schiff explains "Because the consumption tax is quite efficient to raising revenue and much more pro-growth than other tax measures." "And it's important to remember that even after that increases, Japan's consumption taxes rate will be quite low by advanced economy standards. There are some distributional issues, but we think those can be addressed to cash transfers to poor households," he added.

"So we think that consumption tax needs to be a central element of the fiscal adjustment plan of the government, and we urge them to go ahead of the hike as originally intended."

IMF economists recommend that structural reforms should also include measures to reduce Japan's excessive labor market duality. Being asked what the government can do to increase youth employment, Schiff says raising growth is the fundamental remedy for create more jobs.

"Youth unemployment is more than twice of the national average. I think one thing that Japan's government can do to ensure the youth employment prospects improve is to ensure that the economy growing rapidly on a sustained basis. Of course, this is just what Abenomics is aimed at. And, we are already seeing some evidence that employers are starting to respond to improved economic prospects. For example, the number of vacancies compared to the number of job applicants has been rising over the last few months. We'd like to see further progress in this area," he says.

Schiff added, "Another important issue for youth is the fact that many of them are non-regular jobs that have weaker protections, low wages and much poorer prospects for career advancement. We think that there are a lot of things the government can do to reduce the duality of the labor market, including job matching and job training. We hope that these can become a part of the government's growth strategy."

INTERNATIONAL MONETARY FUND: IMF

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