OECD warns Japan not to end stimulus steps too soon

The Organisation for Economic Co-operation and Development urged Japan Wednesday to keep up its emergency stimulus measures to avoid stopping a tentative economic recovery in its tracks. The Bank of Japan needs to maintain its policy of super-cheap credit and the government should make fighting the recession a priority, ahead of tackling the soaring national debt, the Paris-based think-tank said.
The world's second largest economy will shrink by 6.0 percent in 2009, the OECD said, predicting a "mild recovery" after the worst slump in decades. "We are starting to see some green shoots," OECD economist Randall Jones told a news conference here. "We think that in the second half of 2009 there will be positive growth in Japan."
It was the third time in three months that the OECD has changed its forecast for the Japanese economy. On September 3 it had upgraded its 2009 outlook to a contraction of 5.6 percent, from a June projection of a 6.8 percent fall. In 2010 the Japanese economy will grow by 0.9 percent, according to the OECD, which groups 30 leading industrialised economies.
It lauded Japan's stimulus efforts but warned the authorities not to take away the punch bowl too soon, saying that with deflation "entrenched", the central bank should keep the policy interest rate close to zero. "It is important not to withdraw stimulus too quickly, because there are still many risks in the global economy," said Jones. "The fiscal situation is a concern, but the first priority has to be to get out of this recession."
The stimulus measures are expected to push Japan's national budget deficit up to about 10 percent of gross domestic product in 2010, and public debt to 200 percent of GDP, it said. Japan's crawled out of a year-long recession in the second quarter of 2009, but unemployment is at a record high and consumer prices are falling at an unprecedented pace amid weak domestic demand.
Japan was stuck in such a deflationary spiral for years after its economic bubble burst in the early 1990s and consumer spending has never fully recovered to become a major driver of economic growth. "We are very concerned about deflation being a drag on economic growth," said Jones. "We do not think there is a big risk of a deflationary spiral, but still it is a concern".