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A Bank of Japan (BOJ) Policy Board member on Thursday said the government needs to continue to promote sustainable fiscal structures including the government's planned sales tax-hike, if Japan is to maintain market trust and rein in its tattered finances.
"Japan's fiscal condition is in a severe state. If trust in the country's finances is lost, we may see a rise in long-term interest rates inconsistent with economic and price moves," Yoshihisa Morimoto said in a speech to business leaders in Morioka, northeastern Japan.
He added that the government needed to go ahead with its planned sales tax hike to help deal with its mounting debt crisis, currently at twice the size of the nation's economy and the largest in the industrialized world.
Morimoto said that he stood by the government's intentions to halve the ratio of the primary balance deficit to the nation's gross domestic product by fiscal 2015 from the fiscal 2010 level, and urged the government to continue to promote sustainable fiscal measures to help achieve their target.
In terms of the wider global economic situation, he said the situation remains tenuous as market players continue to shift funds out of emerging economies and into safe havens.
"Market participants are withdrawing funds from emerging and resource-rich nations on expectations of tapering of the U.S. Federal Reserve's quantitative easing and may continue to do so," Morimoto said, highlighting the uncertainty of the market affects of a sudden outflow of capital.
"The global economic recovery remains fragile, so there's huge uncertainty on how a sharp outflow of funds could affect financial markets and global growth," he said, indicating the withdrawal of funds from emerging and resource-rich economies could continue indefinitely.
Japan's central bank is counting on an uptick in global economic growth to counter the likely downturn in domestic demand if the tax is increased as planned from April next year.
Morimoto maintained that the economy here would get a boost prior to the tax hike on increased, last-minute, domestic demand, but demand would wane after the hike, although he said that, "a virtuous cycle of production, income and spending would be maintained and actual growth will basically keep surpassing potential growth levels."
Some leading economists are opposed to this view however and believe the sales tax hike would derail Japan's economic recovery as consumption would slump, but the BOJ's official stance runs contrary to this.
The central bank last month raised its assessment to say the economy was "starting to recover moderately," and Morimoto said that he believed exports, manufacturing and capital expenditure would continue to increase moderately.
