• Kyodo

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The OECD club of rich nations on Tuesday lowered its projections for Japan’s economic growth, citing waning government spending on reconstruction following the March 2011 disasters and the world economic downturn.

The OECD said in its semiannual report that Japan’s economy would expand 1.6 percent this year, downgraded from its May forecast of 2.0 percent in terms of inflation-adjusted gross domestic product growth.

The report by the Paris-based organization says the economy would grow 0.7 percent in 2013, halved from the earlier projected 1.5 percent increase. For 2014, it said Japan’s real GDP would gain 0.8 percent.

The economic recovery from last year’s catastrophic quake and tsunami has “stalled, reflecting the slowdown in world trade and weaker domestic demand,” the OECD said, adding that reconstruction outlays are waning and planned tax hikes are stunting private consumption.

Slower growth in the world economy pared Japan’s exports and added to the woes of major industries already under pressure from the stronger yen. This in turn weakened output, business investment and private consumption, the preliminary report says.

The OECD suggested at the same time that the government should raise more taxes to improve its fiscal health and that it is important for the Bank of Japan to keep its monetary easing policy in place to back growth until its inflation goal of 1 percent is achieved.

Government spending on reconstruction of the Tohoku region — ¥17 trillion through next March — is “exacerbating the current fiscal predicament,” with the budget deficit projected to remain the highest among major developed countries and public debt pushed “further into uncharted territory,” it said.

The Diet has approved Prime Minister Yoshihiko Noda’s plan to raise the consumption tax to 8 percent from the current 5 percent in April 2014 and to 10 percent in October 2015, conditional on an improvement in the economic situation, to cover swelling social security costs at a time when the population is aging.

The OECD said the tax increases are expected to help the government attain one of its fiscal discipline goals — halving the primary budget deficit for central and local governments, excluding reconstruction outlays, in fiscal 2015, which ends in March 2016.

But it also said the government needs to implement “additional measures” to meet another goal of reaching a primary surplus in fiscal 2020, which means the government can forgo new bond issuance in financing its expenditures except for debt-servicing costs.

“The large increase in the consumption tax rate is welcome, but is just a first step to restore fiscal sustainability,” the OECD report says.

The report also urges the BOJ to do more to fight chronic deflation. It says the bank “should maintain its virtually zero interest rate policy and continue increasing quantitative measures until inflation is firmly positive at its target rate of 1 percent.”

Randall Jones, a senior OECD economist, meanwhile supported the higher inflation goal being sought by the Liberal Democratic Party.

“We would think that the 2 percent target for inflation would be a reasonable approach,” Jones told a televised news conference, referring to one of the election pledges by the LDP, which is headed by former Prime Minister Shinzo Abe.

The 2 percent target is higher than the price stability goal set by the BOJ, which has said it will pursue powerful monetary easing to achieve 1 percent for the time being in terms of the year-on-year rate of increase in the consumer price index.

While Abe’s monetary policy has stirred heated debate in the run-up to the Lower House election, Jones said the 2 percent target is in line with that of the euro area and many other economies.

The biannual OECD report says the U.S. economy is expected to continue its recovery, expanding 2.2 percent this year, 2.0 percent next year and 2.8 percent in 2014. But the report warns of fiscal challenges facing the world’s biggest economy.

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