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September 25, 2017

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Sales tax hike dents Japanese economic recovery

TOKYO--Japan's nascent economic recovery stumbled in April with data Friday showing last month's sales tax rise punctured household spending, as the IMF called on Tokyo to press on with reforms aimed at ending decades of stagnation.

The 13.3 percent dive in spending, which followed a similar dip in retail sales, came as separate figures showed inflation surging and factory output slipping. The news will give the Bank of Japan a headache as it looks to kick-start growth and fend off deflation but keep price rises under control.

While the bank's monetary easing program unveiled last year has had an impressive impact on the Japanese economy, BOJ policymakers have come under pressure in recent months to extend it as growth shows signs of leveling off.

Governor Haruhiko Kuroda has repeatedly said he is ready to expand the stimulus if necessary but the bank has so far held off any such move, saying it would assess the impact of the sales tax rise.

The loose monetary policy is part of a three-pronged drive by Prime Minister Shinzo Abe to defeat years of deflation and reinvigorate the economy. Abe has also embarked on a huge spending drive while he also plans a series of structural reforms.

But critics have derided the BOJ's moves as a risky money-printing exercise and there is increasing skepticism over its target to reach a steady 2.0-percent inflation rate by next year.

The data Friday showed inflation surged to 3.2 percent from a year ago, the fastest pace in nearly a quarter of a century and well up from the 1.3 percent in March. Prices rose 1.5 percent excluding the tax rise.

However, the International Monetary Fund urged Tokyo to stick to its guns, saying in its annual review of Japan's economy on Friday: "The current aggressive pace of monetary easing may need to be maintained for an extended period."

Household Spending Sees Sharp Fall

The "BOJ should act quickly if actual or expected inflation stagnates or growth disappoints," it added.

It also called on the government to launch deeper economic reforms — including free-trade deals and more flexible labor markets — to protect the recovery.

Abe has made some changes, including a bid to deregulate the energy sector. But it was unclear if he would make good on a wider overhaul that was sure put him on a collision course with the agricultural sector and other politically powerful groups.

"The sustainability of the recovery over the medium term is at risk," the IMF report said, adding that "more forceful reforms are needed."

Public sentiment could also emerge as a major sticking point to change with household budgets squeezed by higher prices.

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