TOKYO, April 23 The Bank of Japan should stick
with its expanded quantitative easing to achieve its inflation
target, but this may not be enough to foster sustainable
economic growth unless it is coupled with structural reforms,
the OECD said on Tuesday.
Japan's government should stick with its plan to double the
sales tax to 10 percent, compile a detailed plan to return to
primary budget surplus in 2020 and boost revenue from other
taxes, the Organisation for Economic Cooperation and Development
The size of fiscal consolidation needed means Japan does
face the risk of a spike in interest rates that would hurt the
financial system due to its large exposure to Japanese
government bonds, the Paris-based think tank said.
"The new quantitative and qualitative monetary easing should
be implemented to meet the new 2 percent price stability target,
although this may not be enough," the OECD said in its economic
survey of Japan.
"Pushing ahead with structural reform on a broad front is
equally imperative to achieve sustained growth."
The BOJ earlier this month committed to open-ended asset
buying to nearly double the monetary base to 270 trillion yen
($2.72 trillion) by the end of 2014 to end 15 years of deflation
and achieve its 2 percent inflation target in two years.
Haruhiko Kuroda, the BOJ's new governor, has dubbed the
policy quantitative and qualitative easing, because the BOJ is
greatly increasing the size of asset purchases and changing the
composition by focusing on longer-term government debt.
Japan's consumer prices are still showing small annual
declines, and many private-sector economists doubt the BOJ can
meet its price target by 2015.
The OECD forecast that Japan's core-core consumer prices,
which exclude fresh food and energy, will rise around 0.5
percent in the fourth quarter of 2014 from the same period a
It is important for Japan to end deflation because this
lowers nominal gross domestic product (GDP), which worsens
Japan's debt-to-GDP ratio, the OECD said. Japan's debt burden is
already the worst among major economies at more than twice the
size of its $5 trillion economy.
In order to repair public finances, the government should
not use multiple tax rates when raising the sales tax, the OECD
said. Some lawmakers have argued that the government should
exempt food and other items from sales tax hikes.
Should doubts about fiscal discipline emerge, Japan's
financial sector would be vulnerable as government debt accounts
for about a fifth of all bank assets, the OECD said.
The OECD did turn more positive on Japan's growth prospects
due to expectations for higher private consumption and an
increase in capital expenditure as exports recover.
Prime Minister Shinzo Abe's stimulus spending and a decline
in the yen also led the OECD to upgrade its forecasts.
Japan's economy will expand 1.4 percent both this year and
in 2014, the OECD said. That is higher than its previous
forecasts of 0.7 percent growth and 0.8 percent growth,
Labour market reforms to increase female workers and improve
productivity are also needed to help Japan's economy grow faster
and help end deflation, the OECD said.
Abe's government will announce an economic growth strategy
in June, and investors will look for signs of how far the
government will push its structural reform agenda.
Rating agency Standard & Poor's said on Tuesday it saw more
than a one-third chance that it would downgrade Japan's
sovereign ratings because of uncertainty about whether the
government's push to revive growth and end deflation will
"The continuing prospect of a downgrade arises from risks
associated with recent government initiatives and uncertainty of
their success," S&P said in a report.
"Japanese Prime Minister Shinzo Abe's plan to lift Japan out
of deflation and spur economic expansion - known as 'Abenomics'
- has three pillars: bold monetary easing, fiscal efforts to
spur growth, and a strategy to induce private sector
investment," it said.
"Of the three engines that Mr. Abe foresees reinvigorating
the nation's economy, so far only one, monetary easing, has
kicked into full gear. The others remain idle."
S&P has an AA- long-term rating on Japan's sovereign debt.