The International Monetary Fund on Oct. 4 urged Japan to come up with a "reinvigorated and credible" version of the Abenomics policy, warning that the planned rise in consumption tax in 2019 could undermine Japan's economic growth.
There has to be a "fresh look" at Abenomics, said Christine Lagarde, IMF's managing director. "The basic principles, in our view, are still valid but need to be broadened, sustained and accelerated."
While the IMF expects inflation to rise over the medium term, it will still likely remain below the Bank of Japan's 2% target. Fiscal policies have yet to put public debt on a sustainable path, and household incomes remain stagnant, the IMF said in its report following its annual mission to Japan.
Japan's aging and shrinking population could exacerbate these challenges, as the demographic changes will depress growth and productivity. "Our assessment is that the population and the size of the economy will actually shrink by 25% over the next 40 years," said Lagarde.
Japan's fiscal policy, in the short run, should protect growth. The IMF said the higher consumption tax should be accompanied by mitigating measures to protect near-term reflation and growth momentum.
The fiscal stance should remain neutral, at least for the next two years but beyond that the tax increase should be followed by further small, gradual increases. Lagarde said Japan should implement an eventual increase in consumption tax to at least 15%.
On the monetary front, the fund agrees with the BOJ's stance on continued monetary accommodation to achieve its 2% inflation target.