Japan needs immediate deficit cut to fix fiscal path, IMF warns
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Japan already has the largest public debt burden among developed nations.
PHOTO: BLOOMBERG
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TOKYO - Japan must act immediately to improve its fiscal health as the risks of natural disasters mount and social security costs continue to increase, according to the International Monetary Fund’s (IMF) mission chief for the nation.
“There is limited space today in Japan to address shocks,” warned Dr Nada Choueiri, the IMF’s Japan mission chief, in an interview in Tokyo on Feb 6. “Japan needs to plan today for where to find the space to accommodate” fiscal spending needs without increasing its deficits, she added.
The IMF’s warning comes as Japan ramps up spending to address a broad spectrum of needs, ranging from bolstering national defence to efforts to raise the birth rate.
That is happening just as its financing costs are inching higher as a result of the Bank of Japan’s (BOJ) rate hikes over the last year. Japan already has the largest public debt burden among developed nations.
In a report released on Feb 7, the IMF said there is “a significant risk” that the nation’s deficit will widen further, given the political demands on Prime Minister Shigeru Ishiba’s minority government. It projected a slight widening of Japan’s primary deficit to 2.2 per cent of gross domestic product in 2025, compared with 2.1 per cent in 2024.
“A small deterioration, but still it’s the wrong direction,” Dr Choueiri said. “The deficit needs to be on a downward sloping path into the medium term to ensure that the fiscal accounts remain sustainable.”
The nation’s debt servicing costs are projected to jump 25 per cent by fiscal year 2028 from the coming year, assuming an annual economic growth rate of 3 per cent and inflation at 2 per cent, according to a Finance Ministry estimate in January. The IMF forecast the size of Japan’s public debt will be 232.7 per cent of GDP in 2025, according to the report.
“The government needs to prepare today for the increase on yields, because you don’t want negative surprises four or five years down the road,” Dr Choueiri said, while noting the gradual pace of rate hikes mitigates immediate risks.
Meanwhile, the ruling minority government’s weakened position has emboldened opposition parties to push for more spending across multiple policy fronts. That includes ongoing Diet debates involving raising the ceiling on tax-free income.
PM Ishiba’s government has passed an extra budget worth 13.9 trillion yen (S$123.4 billion) to fund the country’s latest economic stimulus package, and the Cabinet has approved a record 115.5 trillion yen initial budget for the fiscal year starting in April.
On monetary policy, Dr Choueiri expressed support for the BOJ’s approach to normalising interest rates gradually, emphasising the importance of flexibility and data dependency. The IMF continues to expect interest rates to rise gradually towards the neutral rate of around 1.5 per cent by the end of 2027, she said.
The BOJ conducted its third rate hike since March 2024 in January, raising the policy rate to 0.5 per cent, the highest level since 2008.
Governor Kazuo Ueda indicated during a post-decision press conference that further increases are likely, stating the bank is still some distance from the neutral rate.
In the report, the IMF said that after three decades of near-zero inflation, there are signs the economy can converge to a new equilibrium in a sustainable manner.
Dr Choueiri said she is increasingly confident that Japan will achieve stable inflation in the medium term, citing recent signs of strengthening inflation expectations, consumption growth and demand-driven price pressures.
“These are green shoots that maintain our confidence that we are on the right path towards sustainable 2 per cent inflation.”
Still, the mission chief warned that the BOJ should remain cautious and flexible on the size and timing of rate increases, given factors including uncertainties in the global economy.
A key concern is the wave of tariff -related announcements
“We’ll continue to observe and pay attention to these announcements,” said Dr Choueiri. “Because Japan is highly integrated in the world economy, we need to be watchful for how any announcement will impact its economy.” BLOOMBERG
