Tokyo: The International Monetary Fund in a statement issued on Friday suggested that the Bank of Japan should exit from its massive monetary easing and gradually raise policy interest rates.

In the statement, at the conclusion of a screening by its mission to Japan, the IMF also proposed that the Asian nation should consider raising its consumption tax rate, stressing the need to rebuild Japan’s fiscal condition, which is one of the worst among the developed economies.

“Upside risks to inflation have materialized in the past year” in Japan, the IMF observed.

The international organization said that the Japanese central bank should end its monetary easing measures, which include its yield curve control scheme, as such measures have “already successfully met” their objective.

The BOJ needs to be “gradually raising short-term policy rates,” it added.

In order to ensure a smooth transition in its monetary policy, the BOJ should implement policy rate increases at “a gradual and cautious” pace and timing, the IMF said.

On fiscal policies, the IMF urged Japan to raise its consumption tax rate and boost financial income taxation, as well as continue to revise its medium-term fiscal policies.

“The budget process should be reformed to ensure that expansionary supplementary budgets are limited to unexpected large economic shocks,” the IMF said.

The fixed-amount cuts of income and residential taxes, set to be introduced in June, will only have “a limited impact,” given their untargeted and temporary nature, the IMF said.

Warning that Japan’s subsidies to clamp down on rising gasoline, electricity and gas costs, extended until the end of April, may “hamper decarbonization initiatives,” the IMF said the subsidies “should be replaced with targeted transfers to vulnerable households.”

JIJI Press