The recommendation by the International Monetary Fund (IMF) 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 (£692bn) 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.