IMF warns Japan it needs to act now to improve fiscal health

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.

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"There is limited space today in Japan to address shocks," warned Dr Nada Choueiri, 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 the fiscal accounts remain sustainable."