OECD Forecasts 1.5-2% Growth for Japan, Reserves Hit Another Record

OECD Projects 1.5-2.0 Pct Growth for Japan; Urges Tax Reforms, Cut in Public Debt.

Japan's economy will grow at a pace of 1.5-2.0 percent over the next two years, although the nation faces challenges to sustainable expansion, a Paris-based think tank said Monday.

The Organization for Economic Cooperation and Development said in its annual economic survey of Japan that the nation's expansion has been largely driven by business investment and strong export to other Asian countries. "Growth is projected to continue at a 1.5 to 2 percent rate over the next two years," it said.

But the world's No. 2 economy faces challenges, "most notably persistent deflation, a large and growing public debt and widening disparities between different segments of the economy," the OECD survey said.

The OECD kept unchanged its projection that Japan's gross domestic product will grow by 1.6 percent in 2008 and by 1.8 percent in 2009. The OECD estimates Japan's potential annual growth rate at 1.5 percent over the next five years. The survey urged Japan's central bank to avoid further interest rate hikes until the nation is out of deflation.

The OECD said the Japanese government should reduce public debt by cutting spending and introducing measures to raise revenue. It noted that Japan's government debt reached 180 percent of GDP last year.

The survey also urged Japan's government to reform the nation's tax system to ensure growth and to improve its fiscal health. There is significant scope for broadening the tax base, the OECD said, noting that only a third of companies pay taxes and more than half of wage income is exempt from taxes. Broadening the base could help push down the corporate tax rate, currently at 40 percent, to a level closer to the OECD average of 29 percent, the survey said.

The OECD also said a hike in the consumption tax rate from its current level of 5 percent is "required" and would likely only cause limited economic damage.

Foreign Reserves Rise to Record US$1.02 Trillion

Japan's foreign reserves rose in March to a record US$1.016 trillion (euro650 billion), boosted by the euro's appreciation and interest earned on foreign bonds, the Finance Ministry said Monday.

The reserves -- the world's second-largest foreign-exchange stockpile -- include convertible foreign currencies, gold and International Monetary Fund special drawing rights. Their value rose US$7.61 billion (euro4.84 billion) in March from a month earlier, data from the ministry showed, registering the tenth straight month of increase.

The further increase in Japan's reserves, which topped US$1 trillion for the first time in February, may bring more debate over whether they should be invested more actively for better returns or should continue to be kept mostly in U.S. Treasury bonds and dollar deposits.

Some ruling-party politicians are in favor of investing interest income from the reserves in a wider range of assets to get higher returns, which they say could aid Japan's fiscal rehabilitation. The Finance Ministry, which virtually controls the reserves, is opposed to the idea, saying the reserves aren't suited for risky investments.

In March, rises in the euro-dollar exchange rate hoisted the dollar-value of European bonds held in the reserves, the ministry said. Another boost came from interest paid on dollar deposits, U.S. and European bonds and other assets.