Japan must avoid issuing debt to fund fresh spending, IMF says

By Leika Kihara

TOKYO (Reuters) - Japan must fund any additional spending plans within its budget rather than issuing more debt, the International Monetary Fund said on Friday, urging the government to get its fiscal house in order as the central bank starts to raise interest rates.

"Given the fact that monetary policy normalisation is happening, it puts the onus on the fiscal side to actually embark on consolidation, which is, in my opinion, long overdue," Krishna Srinivasan, director of the IMF's Asia Pacific Department, told Reuters in an interview.

Japanese Prime Minister Shigeru Ishiba has pledged to compile another large-scale spending package to cushion the blow to households from rising cost of living. He has not commented yet on how the spending will be funded.

"Any kind of support you're providing should be a lot more targeted, and any kind of new initiative should be financed within the budget," Srinivasan said.

"You should not be increasing more debt to provide for any new initiative."

On monetary policy, Srinivasan said the Bank of Japan should raise interest rates in a "gradual" and "data-dependent" way as there were both upside and downside risks to inflation.

(Reporting by Leika Kihara; Editing by Tom Hogue)