The Japanese government and central bank must combine reforms with more radical monetary policy to prod the nation out of recession and onto a path of genuine growth, the OECD said yesterday.
The risks were great, but a hesitant approach could undermine confidence and deepen recessionary forces, said the Paris-based Organization for Economic Cooperation and Development (OECD) in its annual report on the world's second largest economy.
"After a decade of lost opportunities, it is now urgent for Japan to move ahead with fundamentally reforming its economic structure and institutional framework while making intelligent use of the limited set of macroeconomic policy instruments now available to support economic activity," it said.
The Bank of Japan should play a key role in offsetting a nationwide price slide, which is crippling corporate profits and further pressuring banks.
"With the economy weakening and a major program of structural reforms and fiscal consolidation expected to get underway, the central bank can and must ease monetary policy further," the report said.
As banks struggle to reduce non-performing loans to safe levels within three years as part of the government's reform strategy, the central bank should further boost its target, the OECD said.
The bank would usually fund such a move by increasing government bond purchases, but this could create more harm than good by driving up bond prices.
"From this perspective, it would be preferable to broaden the range of asset purchases by the central bank to include foreign assets," the OECD suggested.
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