OECD suggests Japan hikes sales tax to 15 pct to achieve fiscal sustainability, cites growing debt-GDP ratio

Secretary-General of the Organization for Economic Cooperation and Development (OECD) Angel Gurria on Wednesday recommended that Japan go ahead with a planned tax hike in April next year unless there is a major economic shock.

Following a meeting with Japanese Prime Minister Shinzo Abe, the OECD chief said that based on Japan's substantial public debt, the highest in the industrialized world at more than double the size of its economy, and low sales tax rate in comparison with other developed countries, the sales tax here should be raised.

Gurria said he suggested to Abe and other senior officials here that Japan raise its consumption tax rate to 10 percent as per an already delayed schedule in April next year and, thereafter, continue to raise the rate annually by increments of around one percent until the rate reaches 15 percent or more, higher than the government's original planned hike.

The Mexican economist and diplomat said that this should be implemented unless there was some kind of global economic crisis, such as the 2008 global financial crisis triggered by the collapse of investment bank Lehman Brothers, or a sizable natural disaster.

"Japan could raise its consumption tax rate at least 15 percent in the future because 10 percent is not enough," Gurria told reporters after the meeting, adding that he believes it is an "intergenerational issue about the future generations when you have debt to GDP of 230 percent."

Gurria also noted that other OECD member states' average VAT stands at 20 percent and that there was, based on this, room for Japan to up its levy beyond 10 percent to achieve fiscal sustainability, but in a manner that avoids disrupting the nation's consumption patterns.

Abe has recently been gauging the opinions of senior, leading economists regarding the tax hike issue, and ahead of a Group of Seven summit scheduled to be held in Japan in May. The Japanese leader said Wednesday that he wants to discuss with other global leaders at the summit how Japan can contribute toward robust global economic growth and sustainability.

The summit, to be held in Mie Prefecture, central Japan, from May 26 to 27, will aim in part to coordinate global policy on economic growth and traverse ways in which financial markets can be stabilized following recent volatility.

But Gurria's suggestions run contrary to other renown economists, including Paul Krugman who won the Nobel Memorial Prize in Economic Sciences and Joseph Stiglitz, another leading economist who also told Abe that increasing the nation's consumption tax as planned in April 2017 would drive the world's third-largest economy in the wrong direction.

Speaking after a seminar on global economic and financial issues last month, Stiglitz told reporters that against a backdrop of weaker-than-expected worldwide economic conditions, "A consumption tax increase now is going in the wrong direction."

The 73-year-old who received the 2001 Nobel Memorial Prize in Economic Sciences, went on to say that the current course of the global economy was unforeseen, and as such Japan's economic policy should be adaptable.

"A few years ago, no one would have anticipated that the global economy would be as weak as it is today. When economic circumstances change, you have to adapt your policy to the new economic circumstance," Stiglitz told Abe after the seminar.

Abe has maintained that raising the sales tax here to 10 percent from the current 8 percent could be delayed if the hike could lead to falling tax revenues and economic activity. Finance Minister Taro Aso, meanwhile, has said that the final decision will be made based on the potential impact on the economy. Endit