The Organisation for Economic Co-operation and Development (OECD) yesterday backed Japan’s bid to end years of deflation, but called on Tokyo to step up efforts to shrink its huge debt pile.
In an annual country report, the 34-member OECD described the new government’s bid to reverse falling prices with huge stimulus measures as “most encouraging.”
Deflation has dragged on growth in the world’s third-largest economy for at least 15 years with successive administrations unable to conquer the problem. However, critics say the policies of Japanese Prime Minister Shinzo Abe and his hand-picked Bank of Japan team could inflate the country’s massive public debt, which at more than twice the size of the economy is the worst in the industrialized world.
“Ending 15 years of deflation is a priority,” the report said, adding that “the new government’s resolve to revitalize the economy through a three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy, is most encouraging.”
However, “stopping and reversing the rise in the debt-to-GDP ratio is crucial,” it added.
Abe’s big-spending, easy-money policies — dubbed “Abenomics” — have fueled optimism in an economy that has struggled for two decades. However, the yen’s rapid weakening in recent months has stoked criticism from abroad that Tokyo was engineering a currency devaluation to lift its economy at the expense of rival nations.
The OECD appeared to dismiss those fears yesterday, saying that the Bank of Japan’s “aggressive monetary easing will boost growth and inflation, in part through a weaker yen, although Japan is not targeting the exchange rate.”
The comments come days after G20 finance ministers, following a meeting in Washington, gave a cautious endorsement of Japan’s huge monetary stimulus program, agreeing it was necessary to boost the country’s stagnant economy.
Also yesterday, the OECD reiterated its calls on Japan to adopt deep reforms alongside its new economy-boosting efforts, including controlling social security costs as a rapidly aging population strains the public purse.
“Controlling expenditures, particularly for social security in the face of rapid population aging, is key,” the report said.
“Substantial tax increases will be needed as well, although this will also have a negative impact on growth,” it said.
The previous administration in Tokyo passed legislation to double Japan’s sales tax to 10 percent by 2015.
The OECD also said Japan must work on its labor force mix, including bringing more women into the workforce.