The economic expansion–the longest in Japan’s post-war history–continues despite some deceleration in the pace of growth since early 2007. A further tightening of the labour market is projected to reverse the decline in wages, helping to sustain output growth of some 1.5-2% in 2008-09 and pushing inflation into positive territory.
The Bank of Japan should not raise the short-term policy interest rate further until inflation is firmly positive and the risk of renewed deflation becomes negligible. It is essential to achieve the target of a primary budget surplus by fiscal year 2011 as a first step in reducing the public debt to GDP ratio. This requires spending cuts and a comprehensive tax reform. Structural reforms are needed to boost productivity, particularly in the service sector, which would help maintain living standards by offsetting the accelerated fall in the working-age population.
No. 264/265, December/January 2008
• OECD Economic Outlook No. 82, December 2007
• Visit www.oecd.org/japan
• All OECD Observer articles on Japan