The outlook for Japan's economy is the brightest in a long time but the government now has a big challenge cutting its debt mountain without derailing the recovery, the OECD head said yesterday.
"It's a much more optimistic picture, frankly, than I've seen for a long time," said Donald Johnston, the outgoing head of the Organization for Economic Cooperation and Development.
Japan's debt is the highest among industrialized nations after its government spent trillions of yen on emergency stimulus packages to try to haul the economy out of its deflationary doldrums following the asset bubble burst.
Momentum
Confidence is growing that the world's second-largest economy is finally on a solid recovery path after its decade-long slump, as reflected by the central bank's decision last week to scrap its five-year ultra-loose monetary policy.
"Everybody's very heartened. We've had now 50 months of expansion," Johnston said on the sidelines of an OECD seminar in Tokyo.
"The question is to make sure that expansion is sustained but at the same time we have to emphasize there's a public debt to GDP ratio of 160 percent," Johnston said.
He said the challenge facing the Japanese government now was, "How do you bring about fiscal consolidation without essentially endangering what everybody hopes will be a long-term and sustained recovery?"
"Of course as economic growth increases, that ratio of debt to GDP automatically falls," Johnston said.
Many private-sector economists believe that the government will soon have to raise the consumption tax to top up the public coffers although Prime Minister Junichiro Koizumi has ruled out a hike in the politically sensitive levy, which is now at 5 percent, before 2008.
Tax dilemma
Johnston said that a hike in indirect taxes could be risky.
"Back in 1997 there were the beginnings of a recovery and then the consumption tax was increased and the recovery stopped. So it's finding that balance which is what the government is struggling with," he said.
Johnston met with Japan's Economic and Fiscal Policy Minister Kaoru Yosano late on Monday and urged Tokyo to step up its efforts regarding fiscal reform while interest rates are still at low levels, according to Japanese officials.
The OECD, which groups the world's most developed countries, has previously urged the Bank of Japan to delay raising interest rates to give the economy more room to recover.
In its most recent global economic outlook released in November, the Paris-based grouping forecast 2 percent economic growth in Japan at least until next year.
Johnston, a Canadian who has headed the OECD for a decade, will soon retire and be replaced on June 1 by former Mexican finance minister Jose Angel Gurria.
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