The OECD has welcomed Prime Minister Shinzo Abe’s economic policies aimed at dragging the economy out of a more than decade-long deflationary recession.
In its interim report on the outlook for the Group of Seven economies, released Thursday, the Organization for Economic Cooperation and Development also said it now expects Japan’s economy to grow an annualized 3.2 percent in the first quarter of this year, a sharp upward revision from its November forecast of a 1.5 percent rise.
“The prospect of more aggressive easing, with the Bank of Japan’s adoption of a 2 percent inflation target, has resulted in a 20 percent depreciation of the yen in real effective terms and a surge in equity prices,” the Paris-based club of rich nations said in the report.
“These have boosted the near-term growth and inflation outlook. This shift in stance and the effects of its announcement are welcome,” it said.
The OECD added that more drastic monetary easing is necessary for the central bank to achieve the inflation goal it set in January, calling on the BOJ to boost its purchase of financial assets, including corporate bonds and long-term government bonds.
The OECD forecast that the combined Group of Seven industrialized economies, which excludes China, will grow by 2.4 percent in the first quarter of 2013 on an annualized basis and by 1.8 percent in the second.
Forecasts remain very uncertain however, the OECD noted, with new-found buoyancy on financial markets yet to feed through to the wider economy. Accordingly, the need for monetary stimulus from central banks remains “a key instrument for supporting demand,” even though results could be insufficient and despite the potential dangers.
An expansionary monetary policy “should remain in place for now and in some case be pursued further,” the OECD said.
The organization said that although downside risks to growth eased last year after the U.S. took action in the face its so-called fiscal cliff and the European Central Bank pledged support for troubled eurozone economies, “real activity has yet to reflect fully the improvement” seen on the financial markets — “especially in the euro area.”
“This highlights the risk of asset prices getting out of line with fundamentals, especially as regards to corporate securities,” the report said.
The OECD issues an interim economic outlook for the G-7 every six months, between biannual economic outlooks for all of its 34 member nations.