By Leika Kihara

TOKYO, Reuters – Japan was urged by the International Monetary Fund on Friday to reduce emergency pandemic assistance and increase taxes on capital and property income after the recovery process from coronavirus-induced depression is complete.

According to the IMF, while the authorities need to continue supporting the most affected households by the COVID-19 crises, they should also reduce the number of pandemic-relief programs as the economy recovers.

Following a review of the economy known as Article 4, the IMF declared that: “Looking forward, considering the high uncertainty surrounding the pandemic,” fiscal policy needed to be flexible and nimble, adapting the size and composition of support to respond economic and epidemiological developments.

It said that Japan’s economy recovery will likely strengthen in the coming year. However, the risk balance is tilted towards the downside.

Japan stated that after the recovery process is complete, Japan should resume its efforts to reduce its enormous debt. This includes cutting off ballooning medical expenses for a rapidly aging population.

According to the IMF, there are two options: raise the consumption tax from 10% and increase capital income and property taxes.

Odd Per Brekk (deputy director, IMF’s Asia and Pacific Department), stated that “in the past there was a lot focus on consumption tax.”

He said that a broader array of revenue and government spending measures is required, which could include a consumption tax increase.

The IMF asked the Bank of Japan regarding monetary policy to continue its huge stimulus program and be ready to reduce interest rates in the event of weak inflation momentum.

According to its latest World Economic Outlook, Japan’s economy will grow by 3.3% in 2012, compared to last year’s 1.6%. The boost provided by government stimulus and the easing of global supply constraints was a key factor.

Prices will continue to rise due to rising import costs and strong domestic demand. However, inflation will stay below the BOJ’s 2% target for the medium term according the IMF.

Ranil Salgado (IMF’s Japan mission chief) said that Japan was at risk from U.S. Federal Reserve’s anticipated policy tightening.

Salgado indicated that “you’ll probably see larger interest rate differentials among the U.S.A. and Japan which could cause downward pressure for the yen.”

He added that market volatility may have an opposite effect, pushing the yen up if investors keep the currency in reserve to hedge against risks. “These are risks. Something to monitor.”