OECD backs Japan deflation fight, says must cut debt

The Organisation for Economic Co-operation and Development on Tuesday backed Japan's bid to end years of deflation, but called on Tokyo to step up efforts to shrink its huge debt pile, AFP reports. In an annual country report, the 34-member OECD described the new government's bid to reverse falling prices with huge stimulus measures as "most encouraging". Deflation has dragged on growth in the world's third-largest economy for at least 15 years with successive administrations unable to conquer the problem. But critics say the policies of Prime Minister Shinzo Abe and his hand-picked Bank of Japan team could inflate the country's massive public debt, which at more than twice the size of the economy is the worst in the industrialised world. "Ending 15 years of deflation is a priority," the report said, adding that "the new government's resolve to revitalise the economy through a three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy, is most encouraging". But "stopping and reversing the rise in the debt-to-GDP ratio is crucial", it added. Since sweeping landslide national elections in December, Abe has pushed controversial big-spending, easy-money policies -- dubbed "Abenomics" -- that have fuelled optimism in an economy that has struggled for two decades. Despite warnings from some economists that the policies could fail, investors have cheered the moves, sending Tokyo's benchmark Nikkei 225 soaring as the easing helps push down the value of the yen. A weaker currency tends to help Japan's exporters and, in turn, lifts their shares. But the yen's rapid weakening in recent months has stoked criticism from abroad that Tokyo was engineering a currency devaluation to lift its economy at the expense of rival nations. The OECD appeared to dismiss those fears Tuesday, saying that the Bank of Japan's "aggressive monetary easing will boost growth and inflation, in part through a weaker yen, although Japan is not targeting the exchange rate". The comments come days after finance chiefs of the G20, following a meeting in Washington, gave a cautious endorsement of Japan's huge monetary stimulus programme, agreeing it was necessary to boost the country's stagnant economy. Also Tuesday, the OECD reiterated its calls on Japan to adopt deep reforms alongside its new economy-boosting efforts, including controlling social security costs as a rapidly ageing population strains the public purse. "Controlling expenditures, particularly for social security in the face of rapid population ageing, is key," the report said. "Substantial tax increases will be needed as well, although this will also have a negative impact on growth," it said. The previous administration in Tokyo passed legislation to double Japan's sales tax to 10 percent by 2015. The OECD also said Japan must work on its labour force mix, including bringing more women into the workforce -- an area where Japan lags behind many developed economies. "Boosting labour force participation and productivity are essential. With the working-age population projected to fall by 40 percent by 2050, measures are needed to make the most of Japan's human resources, including women, older persons and youth," the report said.