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Economic growth is projected to reach 1.0% in 2017 before slowing to 0.8% in 2018, boosting headline inflation to 1¼ per cent by the end of 2018. With three supplementary budgets in 2016, fiscal consolidation is pausing, helping Japan to cope with the impact of the yen appreciation. Private consumption is projected to continue rising in the context of labour shortages and the historically high level of corporate profits.
The Bank of Japan should maintain monetary easing, as intended, until inflation is stable above the 2% target, while taking account of costs and risks in terms of possible financial distortions. Structural reforms are essential to boost productivity and bring more people, especially women, into employment. This would enhance social cohesion, and reduce Japan's high relative poverty rate. Faster growth is critical to stopping and reversing the run-up in public debt, which is projected to reach 240% of GDP by 2018.
To sustain confidence in Japan’s public finances, the implementation of a more detailed and credible consolidation plan, including a path of gradual increases in the consumption tax rate, is essential. Such a plan should also slow the rise in public social spending, which accounts for more than half of government expenditures. Investment in areas such as education and training is needed to boost Japan's growth potential. Limiting the negative impact of higher taxes on growth requires relying primarily on the consumption tax for increased revenue, accompanied by an earned income tax credit to promote employment and social cohesion.
Economic Survey of Japan (survey page)