Japan's economic recovery remains on track and is projected to grow 2.4 percent this year and 2.1 percent in 2008, the Organization for Economic Cooperation and Development said Thursday.
The OECD indicated in its semiannual economic outlook that Japan will stamp out deflation in 2008 and forecasted that its gross domestic product deflator, a key gauge of prices, will rise 0.2 percent in 2008, turning around from the 0.4 percent fall recorded this year.
The OECD urged the Bank of Japan not to raise the target for short-term interest rates from 0.5 percent "until inflation is firmly positive and the risk of renewed deflation becomes negligible," the report said.
The OECD expects the Japanese economy, which is in the midst of its longest uninterrupted growth since the end of the war, to grow at an annual pace above 2 percent through 2008, about 0.5 percentage point higher than its estimated potential growth rate, led by brisk exports and corporate capital spending.
The estimated growth rates, measured in terms of real GDP, were higher than the 2.0 percent expansion the OECD projected both for 2007 and 2008 in its previous outlook in November.
In the latest report, the Paris-based body was more optimistic about the Japanese economy, saying business investment "is projected to continue growing at a faster pace than output" and private consumption "may only gradually strengthen."
Exports are growing steadily, helped by a weak, yen the report said, stating that the yen's effective exchange rate in the first quarter of the year was 19 percent lower than its average rate in 2000.
"The further tightening of the labor market is projected to boost wage gains during 2007-2008, leading to faster growth in private consumption and pushing inflation into positive territory," it said.