Japan should more than double the consumption tax rate to as high as 26 percent to ensure its fiscal sustainability, the Organization for Economic Cooperation and Development said Monday.
In its biennial report, the OECD said Japan faces the intertwined challenges of a rapidly graying population and large government debt, which require a "comprehensive fiscal consolidation plan, including specific spending cuts and tax increases."
Japan's fiscal health has remained the worst among advanced economies, with public debt equivalent to 236 percent of gross domestic product last year, according to the Finance Ministry.
Prime Minister Shinzo Abe has promised to achieve fiscal consolidation by bringing the primary balance -- tax revenue minus expenses other than debt-servicing costs -- into the black by the target year of fiscal 2025.
Due to weaker-than-expected growth, the OECD Economic Surveys of Japan estimated that a sustained primary surplus of 5 percent to 8 percent of gross domestic product would be essential to reduce the ratio to 150 percent by 2060.
The Japanese government plans to raise the consumption tax rate from 8 percent to 10 percent on Oct. 1 to boost revenue.
But the Paris-based club of 36 mostly wealthy nations noted the current 8 percent is one of the lowest among its members and Japan should rely primarily on the tax as it is a "relatively stable revenue source, is less harmful for growth and improves intergenerational equity."
"Achieving a sufficient primary surplus through the consumption tax alone would require raising the rate to between 20 percent and 26 percent, above the 19 percent OECD average," the report said.
Abe has pushed back a plan to raise the consumption tax twice after the previous hike from 5 percent to 8 percent in 2014 hurt the economy by denting consumer spending.
OECD Secretary General Angel Gurria told a news conference in Tokyo the planned hike is "essential" and needs to be followed by gradual increases.
"But don't do dramatic changes, you can just go 1 (percentage point) every year, every year, slowly, and this can gradually over time improve the fiscal situation," Gurria said.
It also recommended Japan lessen obstacles to employment as the labor force will shrink by one-fourth by 2050, suggesting the need to abolish Japanese companies' traditional mandatory retirement age of 60 and further removing barriers to women.
The OECD welcomed Japan's new visa system which started this month to help bring in more foreign workers in business sectors struggling with a labor crunch, calling it "a major step in this direction."
It reiterated its view that the Bank of Japan should maintain monetary easing until achieving its inflation target of 2 percent.