OECD Maintains Japan`s GDP Growth Forecast; Rate Hike Unwarranted Until Inflation Turns Positive
Monday, April 07, 2008 6:46:38 AM - Monday, The Organization For Economic Co-operation and Development maintained its Japanese growth outlook for 2008 and stated that a hike in key interest rate would not be warranted until inflation is firmly positive.A report from the Organization For Economic Co-operation and Development, or OECD, revealed that the Japanese economy is expected to expand 1.6% in this year, in line with December forecast. The organization said the economy would continue to register 1.5%-2% growth over the next two years.
The expansion has been largely due to buoyant business investment and robust export growth, especially to other Asian nations. Manufacturing sector benefited from strong export growth, but the non-manufacturing sector that is dependent on domestic market lagged behind in terms of profitability, confidence and wage growth.
The Japanese economy faces challenges to sustained growth, notably from persistent deflation, rising public debt and widening difference in various segments of the economy. Further, uncertainties in the global economy along with uneven growth pattern in Japan pose risks to continued growth.
OECD said that the Bank of Japan, or BoJ, appropriately held the key interest rate since early 2007. The report stated, “Further hikes would not be warranted until inflation is firmly positive and the risk of renewed deflation is negligible.”
The BoJ`s outlook of 0.4% rise in consumer prices in the financial year 2008 is not sufficient to justify interest rate hikes for the time being, the report added. OECD expects consumer prices, excluding food and energy to fall 0.1% in 2008, but rise 0.3% in 2009.
The fiscal deficit fell to nearly 4% of GDP in 2007 from 8.2% in 2002. On a primary budget basis, the deficit eased at an annual pace of about 0.5% of GDP between 2002 and 2007.
However, government debt continued to grow, reaching around 180% of GDP in 2007 despite a fall in the budget deficit. This is the record high in the OECD area. As Japan is vulnerable to long term interest rate rise from its low level of nearly 1.5%, further progress in fiscal consolidation is urgent. To reduce the government debt ratio in the 2010s, it is crucial to attain primary surplus target of central and local governments.
