November 21, 2018 / 10:17 AM / 6 months ago

OECD urges Japan to keep easy monetary policy, proceed with tax hike

TOKYO (Reuters) - Japan must maintain its ultra-loose monetary policy and proceed with gradual hikes in the consumption tax, including a scheduled increase next year, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday.

FILE PHOTO: A Japanese flag flutters on the Bank of Japan building in Tokyo, Japan, March 15, 2016. REUTERS/Toru Hanai/File Photo

The country’s ageing population also requires labor market reforms such as abolishing the mandatory retirement age and promoting female employment, the OECD said in a twice-yearly Economic Outlook Report.

“Japan’s unprecedentedly high level of public debt is a key risk,” the OECD said, urging the government to come up with a “detailed and concrete” fiscal consolidation plan.

“A loss of confidence in Japan’s fiscal sustainability could destabilize the financial sector and the real economy, with large negative spillovers to the world economy,” the report said.

Prime Minister Shinzo Abe has pledged to go ahead, in October 2019, with a twice-delayed increase in Japan’s sales tax rate to 10 percent from 8 percent.

The government is planning to compile a package of measures, including tax breaks on cars and housing, to mitigate the pain from the higher levy.

The OECD said the impact of the higher consumption tax will be temporary and partially offset by the planned fiscal measures.

“The 2019 consumption tax hike should be followed by increases that raise (the tax rate) towards the 19 percent OECD average,” the report said.

Japan’s economic growth is projected to remain around 1 percent in 2018-2019, the OECD said. After a temporary slowdown from the tax hike, the economy will resume growth in early 2020 due to additional government spending, it said.

Sustained economic growth and higher oil prices should boost inflation to 1.5 percent in 2020, excluding the impact of the sales tax hike, the report said.

The OECD said its projection assumes the BOJ will keep monetary policy ultra-loose through 2020.

“Monetary policy needs to remain expansionary until the (central bank’s) 2 percent inflation target is achieved,” the organization said.

Reporting by Leika Kihara; Editing by Richard Borsuk

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