OECD urges Japan to keep fiscal, monetary support
Japan must maintain its expansive fiscal policy until its economic recovery from the pandemic is on track and not dial back its ultra-loose monetary policy too soon, the Organisation for Economic Cooperation and Development (OECD) said yesterday.
The coronavirus pandemic hit the economy hard, and its recovery has been relatively modest but growth is on course to regain momentum, the OECD said in its Japan economic survey, which it published for the first time since April 2019.
If the Bank of Japan's (BOJ) monetary policy were to succeed in bringing inflation to its 2 per cent target, it would likely lead to higher interest rates and therefore trigger a need for fiscal consolidation, the OECD said in its survey.
"Inflation should gradually pick up as the economy begins to emerge from the pandemic and spare capacity shrinks," it said, adding that supply disruptions and rising prices elsewhere in the world could pass through to lift domestic inflation.
"It is appropriate that monetary policy accommodation is not withdrawn prematurely," the organisation added.
Fiscal policy should continue to support the economy in the near term, even as public debt as a share of gross domestic product has risen to unprecedented levels by historical and comparative standards, the OECD said in the survey.
"Only once the recovery is secure should fiscal consolidation efforts resume in order to ensure long-run sustainability," it said.
Interest payments on public debt have been kept low in part due to the BOJ'S monetary and yield curve control policies, which have helped enable the government to borrow without risking higher or volatile interest rates, the survey said.
Japan unveiled a record $490 billion spending package last month as it seeks to speed up its economic recovery, going against a global trend towards reversing crisis-mode stimulus measures.
In its survey, the OECD said downward pressure on interest rates and a large share of domestic financing have allowed the government to run budget deficits, despite its relatively modest recovery.
The world's third-largest economy shrank an annualised 3.0 per cent in the third quarter due to weak consumption and a hit from the supply shortages, but is forecast to bounce back in the current quarter.
Japan's Q3 GDP Slump
Japan's economy likely contracted at a faster-than-expected pace in the July-september quarter, a Reuters poll showed on Friday, as capital spending stalled among companies hit by supply constraints.
The world's third-largest economy likely shrank an annualised 3.1 per cent in the third quarter, the poll of 19 economists showed, a slightly bigger slump than the 3.0 per cent contraction in the government's preliminary estimate released last month.
Separate data is expected to show household spending posted an annual drop for the third straight month in October, though the fall was smaller than in the previous two months, a sign that consumer sentiment had improved as COVID-19 cases remained low.
While pressures on domestic consumption are easing, next week's data suggests it may take time for Japan's economy to rebound even as policymakers have kept monetary policy loose and fiscal policy expansionary to help the pandemic recovery.
Economists expected the gross domestic product (GDP) revision to show capital expenditure shrank 3.9 per cent in July-september, a slightly bigger contraction than the 3.8 per cent drop previously forecast by the government. Finance ministry data this week showed a slowdown in business spending due to supply chain woes.
Economists at SMBC Nikko Securities said Japan's economy continued to suffer a double whammy from the Delta variant and the auto industry's supply problems in the third quarter.
"As the auto sector's supply constraints ease, Japan's economy is expected to clearly re-accelerate its growth in October-december," they said, while flagging the new Omicron variant could pose a downside risk to the outlook.
Household spending in October likely fell 0.6 per cent from a year earlier, less than a 1.9 per cent drop in September, the poll showed, as gradual easing of COVID-19 curbs helped consumers to spend more.
The government will release the revised third-quarter GDP data on December 8 at 8:50 am local time (December 7 at 23.50 GMT), and announce household spending data on December 7 at 8:30 am (December 6 at 23.30 GMT).
Separate data due on December 10 at 8:50 am (December 9 at 23.50 GMT) is expected to show wholesale inflation accelerated further to a new 40-year high. The corporate goods price index likely gained 8.5 per cent in November from a year earlier, after rising 8 per cent in October.