The OECD on Wednesday raised its projections for Japan’s economic growth thanks to a pickup in business and consumer sentiment brought on by the yen’s slide and resulting jump in exports.
But the OECD also urged Japan to map out a credible fiscal rehabilitation plan soon, warning that the lack of such a plan will erode the credibility of government bonds and trigger a spike in long-term interest rates, which could weigh on the economy ahead.
The Paris-based club of 34 economically advanced nations said in its biannual report that the Japanese economy will expand 1.6 percent this year, upgraded from its November forecast of 0.7 percent in terms of inflation-adjusted gross domestic product growth.
The economy will grow 1.4 percent in 2014, up from an earlier projected 0.8 percent increase, the OECD said.
The organization added that consumer prices are likely to turn positive and rise to 1.8 percent, meaning it believes that nearly two decades of deflation can come to an end next year.
“Japan has rebounded strongly from its 2012 recession, led by fiscal and monetary policy stimulus,” the OECD said, welcoming the government’s massive spending and the Bank of Japan’s drastic monetary easing aimed at attaining its 2 percent inflation target, which has pushed down the yen.
The economy is expected to grow at close to 1.5 percent in both 2013 and 2014, “supported by a pickup in export growth due to the weaker yen and the recovery of world trade,” despite the waning effects of large-scale public works projects, it said.
“Longer-term growth prospects will depend on the new growth strategy,” one of the “three arrows” of Prime Minister Shinzo Abe’s economic policies, dubbed “Abenomics,” along with aggressive monetary easing and flexible fiscal spending, the OECD said.
The growth strategy, which the Abe administration aims to endorse on June 14, “should include bold regulatory reform measures to help boost potential growth,” the organization said.
The OECD, however, said Japan’s precarious fiscal health, the worst among developed countries, may thwart future economic growth.
“Any decision to delay fiscal consolidation could increase the risk of a run-up in long-term interest rates, with risks for the financial sector, fiscal sustainability and growth,” the organization said.
“With gross public debt at around 220 percent of GDP in 2012, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by fiscal 2020 is essential to maintain confidence in Japan’s fiscal situation,” it added.
The OECD called on Japan to double the 5 percent consumption tax in two stages by 2015 as scheduled to put its fiscal house in order, while some analysts have become skeptical about whether the Abe administration, which has put emphasis on growth, will really raise the tax.
The government aims to cut a primary balance deficit to 3.2 percent of GDP by fiscal 2015, or half the level of fiscal 2010, and turn the balance into a surplus by fiscal 2020.