TOKYO (AFP) – The International Monetary Fund on Wednesday lowered its 2011 growth forecast for Japan and called on the world's third largest economy to adopt "more ambitious" measures to tackle its huge debt.
The IMF cut its growth forecast for Japan in 2011 to minus 0.7 percent from the plus 1.4 percent it had predicted in April after the country was hit by its biggest recorded earthquake and a devastating tsunami.
However, the fund said it expected Japan to stage a rebound after the summer and upped its 2012 GDP growth forecast to 2.9 percent from an earlier estimate of 2.1 percent.
"Japan's economy continues to face headwinds from the earthquake but should start to recover strongly in the second half of the year," the IMF said in a statement.
"The initial shock of the disaster was severe, but swift and decisive action by the government and the Bank of Japan helped to limit its impact on the economy," it said.
In the aftermath of the earthquake, the government passed an emergency budget and the BoJ injected a record amount of cash into the banking system, and set up a lending scheme for banks in disaster-hit areas.
The impact of the earthquake, tsunami and a subsequent nuclear emergency at the crippled Fukushima Daiichi nuclear plant plunged Japan into its worst crisis since World War II, with nearly 24,000 people dead or missing.
The economy slipped into a technical recession, after many of Japan's biggest firms faced massive production disruption amid power shortages and broken supply chains.
Analysts have meanwhile warned that the costs of reconstruction threaten to further pressure a public debt that, at around 200 percent of GDP, is the industrialised world's highest.
The IMF said given Japan's fiscal pressures it could finance reconstruction work with various tax measures and needed to implement a more aggressive plan to lower its debt to maintain global investor confidence.
"Japan needs a more ambitious medium-term strategy for bringing down public debt to maintain confidence in public finances," the IMF said, adding that this could be helped by increasing the five percent consumption tax.
"Given the limited scope for cutting expenditures, the fiscal adjustment strategy should rely on comprehensive tax reforms centered on a gradual increase in the consumption tax."
The fund said comprehensive fiscal and structural reforms in Japan "would also benefit the rest of the world" in terms of better stability in government bond markets and helping reduce global interest rates.
Ratings agencies have warned that reconstruction costs from the March 11 disasters had raised pressure on the public purse.
Japan, the world's third largest economy, has one of the planet's lowest birth rates and highest life expectancies.
Its population of 127 million started shrinking several years ago, reducing the labour pool and decreasing the affordability of welfare obligations.
Political wrangling has also increased doubts over the government's ability to formulate policy to address the situation.
