Sales tax hike is 'obvious' choice for Japan debt woes - IMF

By Leika Kihara

WASHINGTON (Reuters) - Raising the sales tax is a "very obvious" choice for Japan to get its fiscal house in order, a senior IMF official said on Friday, shrugging off proposals by the country's opposition parties to freeze a hike scheduled for 2019.

Odd Per Brekk, the International Monetary Fund's mission chief for Japan, also said he saw no need for the Bank of Japan to begin communicating a future exit strategy from its ultra-easy monetary policy anytime soon.

"We think communication that focuses on maintaining monetary accommodation and achieving the 2 percent (inflation) target is the right approach and should remain the approach," Brekk, who is also deputy director of the IMF's Asia and Pacific Department, told Reuters in an interview.

Japan's sales tax hike has emerged as a key issue ahead of an Oct. 22 general election called by Prime Minister Shinzo Abe.

Abe has pledged to proceed with the move to raise the sales tax to 10 percent in 2019, from the current 8 percent, but said he wants to use the revenue more for education and childcare spending than paying down debt.

Opposition parties have called for freezing the hike, arguing it would harm Japan's fragile economic recovery.

Brekk said he had some concerns the hike could cool the economy, and called instead for a smaller, gradual hike in several stages.

But he stressed that raising the tax rate was essential and the best way to rein in Japan's huge public debt, which, at twice the size of its economy, is the biggest among advanced nations.

"When you look around for revenue sources, this is a very obvious choice for Japan," he said.

"The government can also look around for other areas for taxation. But clearly, any strategy for fiscal adjustment needs to feature an increase in the consumption tax."

TATTERED FINANCES

Abe's administration abandoned a promise to balance the budget - excluding debt service and new bond sales - by March 2021, as efforts to fix Japan's tattered finances stalled.

The government plans to review its fiscal framework around the middle of next year, though it is uncertain whether it will set a new time frame for achieving the balanced-budget target.

Given the huge size of Japan's public debt, the upcoming fiscal review becomes "particularly important," Brekk said.

"The focus should be on formulating a credible medium-term fiscal framework" that includes specific measures and a new time frame for hitting the balanced-budget target, he said.

Referring to Japan's monetary policy, Brekk said there was no problem with the BOJ lagging behind its U.S. and European counterparts in dialling back stimulus given Japan's subdued inflation.

He countered the view held by some analysts that delaying an exit from ultra-easy policy could leave the BOJ with fewer tools to fight another recession than other central banks.

"You can still fine-tune the yield curve in the event of an adverse development," he said. "If you also establish a credible medium-term fiscal framework, that will also give you short-term fiscal space so you can also use that."

Under a yield-curve control policy adopted last year, the BOJ now guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

(Reporting by Leika Kihara; Editing by Paul Simao)