Japan should as much as quadruple its sales tax rate to deal with a crushing deficit that's bound to grow as it spends on reconstruction from last month's earthquake and tsunami, the OECD said Thursday.
Economists for the association of wealthy, industrialized nations said in a report that Japan's public debt of more than twice its gross domestic product leaves it little choice but to gradually raise its sales tax, now 5 per cent, to as high as 20 per cent.
"Japan has not so much room to cut spending because it has a small government," Randall Jones, the OECD's head economist for Japan and Korea, said at a press conference. "Most of the consolidation will have to be from the revenue side."
Tax increase proposals have proven vastly unpopular in the past.
Prime Minister Naoto Kan's suggestion that sales taxes be raised to as high as 10 per cent just before July's parliamentary elections contributed to the ruling Democratic Party's loss of control of Japan's upper house.
The Organization for Economic Cooperation and Development suggested in the report that "the Japanese people's sense of solidarity" following the March 11 disaster may make an increase more palatable.
The extensive damage from the March 11 disasters across seven prefectures resulted in direct losses of between 16 trillion yen ($198 billion) and 25 trillion yen ($309 billion), according to Japan's Cabinet Office, making it the world's most expensive natural disaster on record.
OECD Secretary-General Angel Gurria said the disaster, while unquestionably a tragedy, might have the upside of forcing Japan to confront its fiscal problems earlier than they otherwise would have.
"Right now, there is the opportunity to plant the seeds of a better tomorrow," he said. "Perhaps this can precipitate some decisions that were longstanding, that probably should have been taken before."
Gurria said the disasters would have a limited economic impact, as its negative short-term impact on output is followed by a rebound once reconstruction spending kicks in.
In addition to the tax hike, the OECD recommended changes to Japan's education system aimed at helping students from poor families and suggested measures to boost the status of so-called non-regular workers, who receive lower pay and enjoy less job security.
The economists said the country should also increase women's participation in the work force as a partial remedy to the deceasing number of working age taxpayers who must support the growing population of elderly retirees.
Another suggestion was for Japan to access additional markets by increasing its participation in regional free trade agreements.
The suggested corporate tax decrease, meanwhile, would make it cheaper and easier for Japanese companies to increase employment, the economists said.
Gurria said the economic growth that these reforms would create is vital to Japan's ability to finance disaster-area reconstruction while cutting debt.