WASHINGTON: A senior International Monetary Fund official has warned that the spread of a new coronavirus poses an emerging downside risk to Japan's economy.
The spread of the virus originating in China's Wuhan "would likely affect Japan's tourism and retail activities through a decline in tourist arrivals and spending from China and elsewhere," said Paul Cashin, the IMF's Japan mission chief.
"We continue to monitor the situation closely," he said, referring to the possibility that the outbreak could cause negative effects through bilateral trade and investment channels.
Cashin was in charge of the IMF's 2019 article IV consultation to review the Japanese economy. A staff report on the outcome of the review was released Monday.
In the report, the IMF called for "gradual increases in the consumption tax rate and cuts to age-related expenditures to reduce debt sustainability risks."
According to the fund's projection, Japan's fiscal deficit would shrink by the equivalent of 2.5 pct of gross domestic product if the consumption tax is raised to 15 pct from the current 10 pct by 2030.
The margin of deficit reduction will expand to up to 6.0 pct of GDP if the tax hike is combined with other policy measures including health and elderly care reforms, the report said.
The IMF projects Japan's economy will grow 0.7 pct in 2020, weaker than 1.0 pct estimated for 2019.
In the short term, Japan should extend measures to ease the negative impact of the consumption tax hike to 10 pct from 8 pct last October, as private consumption is expected to weaken after the Tokyo Olympics and Paralympics in summer, the report said.
The IMF also expressed concern that Japanese financial institutions are boosting investments in riskier assets to jack up profitability eroded due to the Bank of Japan's superlow interest rate policy.
Japanese financial authorities should urge the institutions to boost capital and encourage consolidation among regional banks, the IMF said.