Japan’s economy may face a slowdown if inflation goes up without wage expansion, the Organization for Economic Cooperation and Development warned Tuesday, cutting its projections for the country’s economic growth in 2014.
The Paris-based club of 34 advanced nations said in its biannual report that the world’s third-biggest economy would expand 1.2 percent this year, downgraded from its November forecast of 1.5 percent in terms of inflation-adjusted gross domestic product growth.
The OECD, meanwhile, urged Prime Minister Shinzo Abe’s government to promote structural reforms and raise Japan’s consumption tax rate to 10 percent next year as scheduled to attain its goal of restoring the country’s precarious fiscal health.
“While the recent pick-up in inflation is encouraging, it could undermine the recovery unless it is accompanied by a matching rise in wages,” the OECD said, expressing concern over the potential negative impact of a sharp increase in consumer prices, as the Bank of Japan is implementing aggressive monetary easing to haul the country out of deflation.
In Japan, fears are lingering that wages are unlikely to grow at a pace that can help prevent a downturn in consumer spending and investment following price rises, including the effects of the 3-percentage-point consumption tax hike to 8 percent from April 1.
Tokyo’s consumer prices, seen as indicating nationwide price moves down the road, climbed 2.7 percent in April from a year earlier, the biggest increase in 22 years.
As for fiscal rehabilitation, the organization said, “A detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by fiscal 2020 remains a top priority to sustain confidence in Japan’s public finances.”
“The consumption tax rate should be hiked further to 10 percent by 2015, as planned,” in an attempt to cover swelling social security costs amid Japan’s graying population, it added.
To keep budget austerity from choking the economy, the OECD called on Japan to carry out “bold structural reforms,” saying they would help maintain confidence in the “Abenomics” policy mix entailing drastic monetary easing, massive fiscal spending and an economic growth strategy.
The OECD said Japan’s economy is projected to edge up 1.2 percent in real terms in 2015.
Abe’s government has pledged to halve the ratio of the primary balance deficit to GDP by fiscal 2015 from the level in fiscal 2010 and turn the balance into a surplus by fiscal 2020. A deficit in the balance means the country cannot finance government spending other than debt-servicing costs without issuing new bonds.
Japan’s fiscal health is the worst among major industrialized economies, with public debt equivalent to more than 200 percent of GDP. Central government debt topped ¥1,000 trillion last year for the first time ever.
The OECD said the global economy will grow by 3.4 percent this year, down from its forecast of 3.6 percent growth last November.
The OECD cut China’s growth forecast this year to 7.4 percent from 8.2 percent in November.
On the U.S. economy, the biannual report said it is forecast to continue its recovery, expanding 2.6 percent this year and 3.5 percent in 2015.
Real GDP in the eurozone is expected to contract 0.4 percent in 2013, hurt by the aftermath of Europe’s sovereign debt crisis, but it is likely to grow 1.2 percent in 2014 and 1.7 percent in 2015, the report showed.
“Global growth and trade are projected to strengthen at a moderate pace through 2014 and 2015,” the OECD said.
But there are downside risks to the world economy, such as China’s possible economic slowdown, market volatility in some emerging economies stemming from the tapering of U.S. Federal Reserve’s large-scale stimulus program and geopolitical tensions from Ukraine, it added.