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(Bloomberg) — 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 mission chief for the nation.
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“There is limited space today in Japan to address shocks,” warned Nada Choueiri, the IMF’s Japan mission chief in an interview in Tokyo on Thursday. “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 defense to efforts to raise the birthrate. That’s happening just as its financing costs are inching higher as a result of the Bank of Japan’s rate hikes over the last year. Japan already has the largest public debt burden among developed nations.
In its Article IV report released Friday, 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% of gross domestic product in 2025, compared with 2.1% last year.
“A small deterioration, but still it’s the wrong direction,” 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% by fiscal year 2028 from the coming year, assuming an annual economic growth rate of 3% and inflation at 2%, according to a finance ministry estimate last month. The IMF forecast the size of Japan’s public debt will be 232.7% of gross domestic product this year, according to the report Friday.
“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,” Choueiri said, while noting that the gradual pace of rate hikes mitigates immediate risks.
Meantime, 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.
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