• Kyodo

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The OECD has downgraded its projections for Japan’s economic growth in 2014 and 2015, acknowledging that the country has slipped back into recession in the wake of the April 1 consumption tax hike.

The international economic organization said in a report released Tuesday that the world’s third-largest economy is expected to expand 0.4 percent this year and 0.8 percent next year. It also cut its September forecasts of 0.9 percent and 1.1 percent in terms of inflation-adjusted gross domestic product growth.

The report came after government data showed earlier this month that the economy shrank by an annualized real 1.6 percent in the three months through September, contracting for the second straight quarter, after plunging 7.3 percent in the April-June period.

In the hopes of shoring up the economy, which has faltered in the wake of the consumption tax increase to 8 percent in April, Prime Minister Shinzo Abe decided Nov. 18 to put off a further tax hike to 10 percent, scheduled for October 2015, until April 2017.

Despite the delay in the additional tax increase, the OECD expects the economy to only expand by 1 percent in 2016 — tying with Italy for the smallest growth projection among the 34 advanced economies of the Paris-based club.

“In Japan, activity has declined after the April consumption tax increase, with soft private domestic demand offsetting stronger public investment and improved export growth,” the OECD said, adding that “Japan has fallen into a technical recession.”

The economy is set to recover in 2015 and 2016 on the back of an improvement in the job market, the Bank of Japan’s aggressive monetary easing and rising exports triggered by the weaker yen, the organization predicted.

The OECD, however, added that sluggish wage growth and a global economic slowdown pose potential downside risks to the economy.

On the fiscal policy front, the postponement of the consumption tax hike will “make it challenging” for the Abe administration to achieve its goal of turning the primary balance — annual tax and nontax revenues minus outlays other than debt-servicing costs — into a surplus by fiscal 2020, the OECD said.

“Bold structural reforms to boost competitiveness and potential growth are a priority, as stronger growth is needed to address the fiscal situation,” it said.

Randall Jones, head of the OECD’s Japan and Korea desk, said the organization agreed with Abe’s decision to put off the consumption tax increase, predicting that if it had been carried out as previously planned, the economy would grow only 0.5 percent next year.

Abe has to work hard to bolster the economy to “facilitate” the tax hike 2½ years later, Jones said at a press briefing in Tokyo before the release of the report.

Japan’s fiscal health is the worst among major industrialized economies with public debt equivalent to over 200 percent of GDP.

As for monetary policy, the OECD in its latest report welcomed the BOJ’s decision in late October to implement additional easing, predicting that it would pave the way for the central bank to attain its 2 percent inflation target.

“The expanded easing will help to prevent any rise in long-term interest rates and boost inflation,” the OECD said.

The OECD said consumer prices in Japan are likely to rise 2.9 percent in 2014, 1.8 percent in 2015, and 1.6 percent in 2016, including the effects of the April 1 consumption tax hike.

Regarding the U.S. economy, the report said it is forecast to continue its recovery, growing 2.2 percent this year, 3.1 percent next year and 3.0 percent in 2016.

China’s economy is projected to expand 7.3 percent, 7.1 percent and 6.9 percent, respectively, in the three years through 2016, the OECD said.

Real GDP in the eurozone is estimated to grow 0.8 percent in 2014, 1.1 percent in 2015 and 1.7 percent in 2016, the organization said.

The OECD said the euro area has been facing “the risk of deflation,” urging the European Central Bank to ease its monetary policies further.

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