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Paris - Japan must develop a "credible" plan to scale back stimulus spending and cut its massive public debt, the OECD said on Wednesday, as scrutiny of the country's fiscal situation increases.
"We're very concerned about the level of debt and the level of deficit" in Japan, said Randall Jones, a senior economist at the Organisation for Economic Cooperation and Development who watches Japan's and South Korea's economies.
The OECD said in its latest Economic Outlook released on Wednesday that Japan's export-driven recovery from its deepest post-war recession was progressing but persistent deflation and a stagnant employment picture posed risks to growth.
The organisation predicted a 3% expansion for Japan's economy in 2010, raising its 1.8% November forecast. However, growth would ease to 2% in 2011 as the effects of stimulus measures diminish.
But given "Japan's very high public debt, the government should scale back expenditure increases in FY 2011 and develop a credible and detailed medium-term fiscal consolidation programme, including tax reform" it said.
Decades of heavy stimulus spending and falling tax revenue have given Japan a public debt mountain bigger than any other industrialised nation, which the OECD warned would hit 205% of gross domestic product in the next year.
With public debt "already the highest ever recorded in the OECD area," the organisation also forecast Japan's net debt to hit 122% of GDP making it "the highest among OECD countries after Greece."
The OECD's call for fiscal rehab follows similar comments from the International Monetary Fund last week as fears of eurozone debt contagion have drawn more attention to Japan's dormant fiscal pressures.
Agencies Fitch and Standard & Poor's said they may cut their rating on Japanese government bonds, illustrating what the OECD calls Japan's heightened "vulnerability" to higher borrowing costs, raising pressure on Tokyo.
With around 95% of the debt held by domestic investors, Japan has enjoyed low interest on its borrowing as private sector savings have kept the nation afloat since its stock market crash of 1990.
Officials say Japan's situation is unlike that of Greece because of its large corporate and household savings. But as the population ages, analysts say savings may decline, reducing inflows into the government bond market.
The OECD warned that while stimulus has helped spark recovery, Japan's budget deficit has widened from 3% of GDP in 2007 to a yawning 9% in 2009 through to 2011 with government spending pledges pushing debt higher. Soaring welfare costs for a greying population and deflation also continue to burden Japan, as falling consumer prices encourage consumers to defer purchases in the hope of further price drops.
With unemployment to stay above 4.5% and remain high even in late 2011, inflation is set to stay "in negative territory," the OECD said.
Its forecast of a 0.4% drop in core consumer prices in calendar 2011 contrasts with the Bank of Japan's prediction of a 0.1% rise.
It urged the central bank to maintain its ultra low key rate of 0.1%.
Nevertheless, the OECD pointed to improving business confidence and expanding corporate investment.
"The recovery from the global crisis remains on track, thanks to a strong rebound in exports and fiscal stimulus that has supported household income in the face of falling employment and wages," the Paris-based grouping said.
But it warned of the threat to exports, which drive Japan's tentative recovery, formed by the yen's recent strength.
China accounts for a quarter of Japan's exports and is storming out of the global financial crisis, the OECD said, with growth to exceed 11% this year before slowing to just under 10% in 2011.
China will likely need to carry out "some increase" in interest rates and "ideally" adopt a more flexible exchange rate regime that would allow the yuan to appreciate, to keep overheating at bay, it said.
- AFP
