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The OECD urged Japan on Wednesday to scale back its spending and work out a “credible” fiscal reform plan, while predicting the nation’s economy will remain on a recovery track through 2011 on the back of solid exports.

In its latest economic outlook for 2010 and 2011, the Organization for Economic Cooperation and Development also called on the Bank of Japan to continue to keep interest rates at the present razor-thin level of 0.1 percent and implement effective quantitative monetary policy measures as deflation is expected to continue.

The Paris-based OECD expects real gross domestic product in Japan to grow at an annualized pace of 3.0 percent in 2010 and 2.0 percent in 2011 driven by solid exports, mainly to China, although the pace of export growth is expected to become moderate as the yen’s recent appreciation could erode overseas earnings.

The OECD warned that without credible measures for fiscal reforms, Japan’s public debt to GDP ratio, which has already hit the highest ever recorded by the OECD, could swell to as high as 205 percent during the reporting period through 2011.

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