Japan must raise its sales tax to at least 20 percent by the time the Olympics come to Tokyo in 2020 to avert a “disaster” in its bond market, according to the head of a panel advising the world’s biggest pension fund.
The consumption levy, due to increase in April for the first time since 1997, will need to quadruple from current levels to handle Japan’s increasing welfare costs and rein in the nation’s debt, said Takatoshi Ito, who leads an investment panel for the 121 trillion yen ($1.23 trillion) Government Pension Investment Fund. He said funds like GPIF are at risk of being too dependent on Japanese government bonds, where 10-year yields of 0.670 percent are the lowest globally.
Prime Minister Shinzo Abe is expected to decide next month if Japan’s economy can weather an increase in the tax to 8 percent in April. Current rates of 5 percent are a fifth of the value-added taxes imposed in Nordic countries like Sweden, and need to be raised to prevent the implosion of a debt burden that’s more than double the size of Japan’s economy, Ito said.
“There is a narrow path to escape from the disaster,” Ito, the dean of Tokyo University’s Graduate School of Public Policy, said in an interview yesterday. “The good news is that there is a big fiscal space to increase taxes.”
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