• Kyodo

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The economy may suffer a serious setback due to the March 11 earthquake and tsunami, the Organization for Economic Cooperation and Development warned Wednesday, forecasting negative growth in the world’s third-largest economy for this year.

The OECD, the Paris-based club of wealthy nations, said the government should finance reconstruction work by “shifting expenditures and increasing revenues,” while urging it to decide on “large enough” tax hikes in order to achieve its fiscal consolidation goals.

The country’s economy is expected to suffer a 0.9 percent contraction in 2011, the OECD said in its outlook report on the world economy, downgrading its April forecast of a 0.8 percent expansion. For 2012, it said the economy would expand 2.2 percent in real gross domestic product terms, lower than the earlier estimated 2.3 percent growth.

The disaster has significantly slowed the country’s industrial output, disrupting the nationwide supply chain of manufactured products. It also sparked fears of electricity supply shortages after nuclear and thermal power stations were damaged.

The report said there will be a recovery from a sharp fall in output in the second half of 2011 along with a possible strong rebound as a result of reconstruction efforts. But it also said “deflationary pressures are likely to continue through 2012, with unemployment remaining above” the levels seen before the global financial crisis began in 2008.

Last week, the Cabinet Office said in a preliminary report that real GDP shrank an annualized 3.7 percent in the first quarter of 2011.

With its gross public-sector debt approaching 200 percent of GDP, the country should “finance reconstruction spending by shifting expenditures and increasing revenues,” the OECD said.

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