TOKYO (Reuters) - The OECD slashed on Wednesday its forecast for Japan’s gross domestic product for a second time this year due to a devastating earthquake in March and called on the Bank of Japan to maintain its ultra-easy policy as deflationary pressure is likely to persist.
Japan’s economy will contract 0.9 percent this year rather than grow 0.8 percent as forecast last month because of the extensive loss of output from the March 11 disaster, the Organisation for Economic Cooperation and Development said in a report.
Japan’s negative output gap, which occurs when supply is in excess of demand, is likely to remain large after industrial production fully recovers in 2012 and place downward pressure on prices, the OECD said.
Household spending this year is likely to be subdued as sentiment remains weak, the OECD said. Rising commodity prices could push up overall prices temporarily this year, but core prices would show that deflation will remain a problem, the OECD said.
“The immediate impact has been to reduce output, although this is likely to be reversed by a strong recovery in the second half of 2011 led by reconstruction efforts,” the OECD said, referring to the natural disaster.
“Deflationary pressures are likely to continue through 2012, with unemployment remaining above its pre-2008 crisis level.”
Japan is facing its worst crisis since World War Two after the 9.0 magnitude earthquake and giant tsunami battered its northeast coast, leaving around 24,000 dead or missing and triggering meltdowns at a nuclear power plant.
The OECD expects Japan’s economy to grow 2.2 percent in 2012 as money is spent to replace or rebuild destroyed homes and factories. The forecast is slightly lower than previous 2.3 percent forecast made on April 21.
The unemployment rate, seen at 4.8 percent this year will ease to 4.6 percent in 2012, the OECD said.
The Paris-based think-tank reiterated that Tokyo should avoid financing the rebuilding with new borrowing and continue efforts to stabilize public finances.
“With public debt exceeding 200% of GDP, it is important to finance reconstruction spending by shifting expenditures and increasing revenues,” it said.
“A detailed and credible fiscal consolidation program, including tax increases and spending cuts large enough to achieve the government’s target of stabilizing the public debt ratio by 2020, is a priority.
The OECD didn’t provide a specific forecast for the output gap. In the fourth quarter of last year the output gap was minus 3.8 percent, according to Japan’s Cabinet Office.
Japan’s consumer prices excluding both food and energy will fall 0.3 percent this year and decline by the same amount next year, the OECD forecast.
Days after the quake the Bank of Japan doubled to 10 trillion yen a program under which it buys assets ranging from government bonds to private debt, as a pre-emptive step against possible damage to economic activity.
The BOJ also buys 21.6 trillion yen in long-term government bonds from the market each year. The central bank also keeps its benchmark interest rate between zero and 0.1 percent.
The BOJ, which left policy unchanged this month, next meets on June 13-14.
Reporting by Stanley White; Editing by Tomasz Janowski