Greek-style Austerity Measures

IMF Calls for Gradual Rise in Japan Sales Tax

May 19, 2010

* IMF: Japan should gradually increase consumption tax
* Country should start fiscal reform in 2011
* Japan recovery gaining momentum, deflation to end late 2011

Reuters - Japan should start fiscal consolidation next year, including gradually raising the country's sales tax, taking advantage of solid growth now, the IMF said on Wednesday.

The recommendation by the International Monetary Fund contradicts Prime Minister Yukio Hatoyama's pledge not to raise the sales tax rate at least until the next lower house election, which does not need to be held until 2013.

"With global scrutiny of public finances increasing, the need for early and credible fiscal adjustment has become critical," the IMF said after its annual review of Japan's economy and economic policies.

"In our view, fiscal adjustment should start in 2011/12, beginning with a gradual increase in the consumption tax, to take advantage of cyclical recovery," the IMF said.

Japan's outstanding debt as a ratio of gross domestic product is the highest among industrial nations.

Investors are on edge over countries with large debt burdens after a crisis of confidence in Greece's fiscal policy roiled financial markets and prompted the European Union to roll out a $1 trillion rescue package to defend the falling euro.

Some market players think Japan could become the next target of markets, although many market players think the country can muddle through at least in the near future because of huge domestic savings.

"Our assessment is that there's limited risk of any kind of sovereign debt event (in Japan). But no matter how small the risk is, it must be a bit higher as a result of recent events. That suggests a need for early action. The fact that the economy is showing strength now shows it is a propitious time to begin adjustment," an official at the IMF said.

The IMF said the Japanese recovery is gaining momentum and that prices in the country will start rising in late 2011.

GDP data due on Thursday is expected to show the economy grew an annualised 5.4 percent in the first months of this year.

The IMF also said the BOJ's easing steps have helped stabilise financial markets and support the economy.

But it added the BOJ could consider additional easing measures such as extending the maturity of the central bank's fund-supplying operations.

Europe Facing Strikes Over Austerity Packages

Spain's parliament has passed a €15bn (£12.7bn) austerity package by just one vote, leaving the Socialist government nakedly exposed to popular fury.

May 27, 2010

London Telegraph - Its glaring lack of political solidarity is the latest sign of rising resistance to deflation policies across the eurozone.

Prime minister Jose Luis Zapatero had to rely on the abstention of Catalan nationalists to push through public sector wage cuts of 5pc this year and a freeze in 2011.

The 1930s-style pay squeeze was effectively imposed upon Spain by Brussels as a quid pro quo for the EU's €750bn "shield" for eurozone debtors. It is a bitter climb-down for a workers party that vowed to resist salary cuts. Public sector unions have called a strike on June 8 to protest an act of "ultimate aggression" against the people.

The conservatives voted against the measures, prompting a fiery rebuke from finance minister Elena Salgado.

"Unpatriotic, irresponsible, and hardly very European: one day they will pay for this," she said.

The measures include cancellation of the €2,500 "baby cheque" and lower pension benefits. Mr Zapatero hopes to cut the deficit by an extra 1.6pc over GDP over two years, though unemployment is already 20pc. The deficit will fall from 11.2pc in 2009 to 6pc this year.

Raj Badiani from IHS Global Insight said cuts may not be enough. The government is relying on growth projections that are "far too optimistic" to do the heavy lifting of the deficit reduction.

In Italy, the main CGIL trade union is launching two sets of strike in June to protest "unjust and unsustainable" cuts announced on Tuesday night, claiming that axe falls squarely on ordinary workers.

"Those who earn over €500,000 won't have to put up a single cent," it said.

Premier Silvio Berlusconi said the sovereign bond scare sweeping the eurozone had forced Italy to build up a security buffer.

"This crisis has been provoked by speculation and is like no other. These sacrifices are necessary to save the euro," he said.

The €24bn austerity package (1.6pc of GDP) over two years aims to cut the bloated bureaucracy, chiefly by reducing grants to regional governments.

"Italy's spending is out of control: this irresponsible system worked as long as we could devalue the currency," said Mr Berlusconi. "