WASHINGTON -- Japan's real gross domestic product could take a 25% hit in the next four decades as the nation grapples with a rapidly shrinking population, the International Monetary Fund said in its annual country report published Monday.
The IMF projected Japan's real economic growth at 0.7% for 2020 and 0.5% for 2021 -- in contrast with the 1.4% forecast for fiscal 2020 by the Japanese government. The fund also did not see inflation meeting the Bank of Japan's 2% target, instead projecting a rate of 1.1% in 2020 and 1.2% in 2021.
Japan's shrinking and aging population was named as a major long-term risk for the country. Under current policies, Japan's GDP in 40 years would be 25% lower than if it kept growing at the rate achieved from 2012 to 2017.
The IMF recommended that Japan commit to closing pay gaps between regular and irregular workers, as well as help train irregular workers. It also encouraged alternative sources of financing for small and midsized enterprises, which current rely on public assistance.
Comprehensive reforms could offset 60% of the demographic-driven slowdown in growth, the IMF said.
Regarding Japan's goal of achieving a primary surplus in 2025, the IMF said fiscal consolidation plans should be based on "realistic growth assumptions." Tokyo assumes a real growth rate of 2%. Meanwhile, the IMF places Japan's potential growth rate around 0.5%, and expects debt to top 250% of GDP in 2030.
The IMF warned that Japan will need further fiscal reforms. The fund called on Japan to raise the consumption tax rate to 15% by 2030, increase taxes on capital gains and enact a new asset tax on the wealthy. It also urged Tokyo to reduce spending, such as through wider use of generic drugs.
Japan trails in boosting productivity, particularly in its service sector, despite investments in artificial intelligence and other technology to streamline labor. The IMF thinks that fiscal stimulus is necessary in the short term to boost demand, and Japan faces a difficult balance between promoting growth and reforming its finances.