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May 19, 2010    

Japan’s debt needs to be cut warns IMF

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by Kay Murchie
Japan’s debt needs to be cut warns IMF

The strength of the recovery in the world’s second largest economy should lead it to start reducing its massive debt from 2011, according to the International Monetary Fund (IMF).

The IMF is urging Japan to increase consumption tax, while containing its growth in spending, in order to deal with its debt which currently stands at nearly 230% of GDP - the highest of any industrialised nation.

On an annual visit to Japan, the IMF’s John Lipsky, said: “With global scrutiny of public finances increasing, the need for early and credible fiscal adjustment has become critical.

“In our view, fiscal adjustment should start in 2011/12, beginning with a gradual increase in the consumption tax, to take advantage of cyclical recovery,” added the Fund.

The IMF’s warning comes as Greece is battling with its own debt crisis and this has resulted in the euro falling and global stock markets plummeting. Fears continue to grow about mounting levels of Government debt in many economies.

In other news today, an official index has revealed that Japanese consumer confidence rose for the fourth month in a row last month to reach a level of 42, compared with 40.9 in March and the highest level since October 2007.

Meanwhile, the latest GDP figures for Japan are due tomorrow. Analysts expect the economy to have expanded at an annualised 5.4% in the first months of this year.

Japan was one of the first major economies to emerge from recession - in the second quarter of last year.

However, deflation remains a problem for the economy. Japanese core consumer prices fell 1.2% in March from a year earlier – representing the 13th consecutive monthly decline that the economy has been in deflation.

Deflation (where prices fall rather than increase) can be a serious threat to an economy because it deters consumers and businesses from spending in expectation of falling prices.

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