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Greece's Deepening Fiscal Woes Are Lesson for Japan, IMF's Shinohara Says

Greece’s deepening financial crisis serves as a lesson for Japan, which needs to devise a “credible” fiscal plan to curtail the world’s largest public debt, an International Monetary Fund official said.

“I don’t think the threat of a spillover from Greece will impact Japan for the moment,” Naoyuki Shinohara, deputy managing director at the International Monetary Fund, said in an interview in Washington yesterday. “Yet, it’s important for the government to show a credible fiscal framework in the medium term. Greece shouldn’t be regarded as a fire on the other side of the river.”

Japan’s finances have come under scrutiny since January, when Standard and Poor’s cut the outlook of the nation’s AA rating to “negative.” Prime Minister Yukio Hatoyama’s government will unveil a fiscal plan in June to address a debt burden the Organization for Economic Cooperation and Development estimates is approaching 200 percent of gross domestic product.

Greece’s fiscal crisis dominated the meetings of finance ministers and central bankers from around the world in Washington. Officials from the Group of 20 pledged plans to withdraw economic stimulus as the global recovery strengthens and Greece’s attempt to avert default highlights the risks posed by mounting government debt.

Hatoyama is considering targeting a budget surplus by 2020 among options for the fiscal plan, a government official familiar with the matter said last week. Finance Minister Naoto Kan is drafting fiscal discipline legislation as tax revenue has been hobbled by deflation and four recessions in the past two decades.

‘Concrete as Possible’

“It’s necessary for the government to make the medium-term fiscal roadmap as concrete as possible,” said Shinohara, a former top currency official at Japan’s Ministry of Finance. He said deflation makes it difficult to unwind fiscal stimulus, underscoring the need for a debt plan.

Japan’s creditworthiness is under pressure as the government’s debt burden swells and households save less, Fitch Ratings analyst Andrew Colquhoun said on April 23.

Shinohara also said the government’s fiscal framework should include a plan to bolster tax receipts.

“The government can’t avoid some kind of revenue reform,” he said. Otherwise, “things probably won’t go well.”

Shinohara also said China should allow its currency to become more flexible.

Increase Flexibility

“A greater flexibility of the yuan will enhance domestic purchasing power and increase the degree of the flexibility in monetary policy when in an inflationary phase,” Shinohara said. “In that sense, it’s desirable and it’s in the interest of China.”

China has come under pressure to revalue its currency and fuel domestic consumption to help correct global trade imbalances. While the G-20 statement made no specific comment on exchange rates, U.S. Treasury Secretary Timothy F. Geithner maintained pressure on China to let its yuan appreciate.

Chinese Premier Wen Jiabao’s government has kept the Chinese currency at about 6.83 against the dollar since July 2008, after allowing it to rise 21 percent in the previous three years.

Shinohara also said China has little need to raise interest rates because the nation isn’t “in a situation where inflationary pressure is increasing.”

To contact the reporter on this story: Keiko Ujikane in Washington kujikane@bloomberg.net

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