Roundup: OECD presses Japan to implement major structural reforms amid rising debt, lower living standards

The Organization for Economic Cooperation and Development (OECD) said Wednesday that Japan must implement major structural reforms quickly in order to revive its sluggish economy and chart a credible recovery path, as well as be wary of the downside risks and limitations of the central bank's huge monetary stimulus efforts.

In the latest OECD Economic Survey of Japan, the report said that Prime Minister Shinzo Abe's economic policies dubbed" Abenomics"have only been partially successful, with the first two arrows of massive monetary expansion and fiscal stimulus showing some signs of promise, in stark contrast to the third structural reform arrow, which, the OECD said, is in need of imminent implementation.

Speaking to reporters in Tokyo after presenting the report, OECD Secretary-General Angel Gurria said that the Bank of Japan's (BOJ) aggressive quantitative and qualitative easing measures have succeeded in creating an accommodative environment for lending and this had helped underpin the economy, but the bank alone was limited in what it can actually achieve for the economy through Quantitative and Qualitative Easing (QQE) alone. "The first arrow is working, but there are limits and I would suggest that no additional monetary easing from the BOJ is necessary for the time being. Structural reforms are not in the hands of central banks,"the head of the Paris-based club of 34 wealthy nations said at the Japan National Press Club.

He added that the BOJ's monetary easing policies should continue until it achieves its 2 percent inflation target and stated that "Two decades of sluggish growth and persistent deflation have reduced Japanese living standards below the OECD average."

Highlighting the fact that Abe's third arrow had either failed to fire correctly, or had, indeed, missed its target, the OECD impressed upon Japan the urgent need for structural reforms that would have an immediate and lasting effect on the economy and improve the lives of the Japanese people.

The organization suggested that Japan should redouble its efforts to focus on eradicating trade barriers that are preventing certain sectors and the broader economy from benefiting from the reciprocal benefits that come from FTAs, for example, and urged Japan to do more to boost the productivity of the labor market and make all out effort to encourage more women to join and stay as regular employees in Japan's workforce.

"Ambitious action is needed to raise productivity and boost Japan's long-term growth potential, including by increasing women' s role in the labor market and stimulating innovation, to ensure higher living standards while ensuring the public debt burden remains sustainable," said Gurria.

"The third arrow of Abenomics is its most crucial component, without which the unprecedented monetary expansion and the fiscal effort will not succeed in putting Japan on a path to faster growth and fiscal sustainability," the organization said.

The report said that Japan's economic growth restarted late in 2014, but was severely impacted by the government hiking the consumption tax by 3 points to 8 percent in April that year and the use of monetary expansion and flexible fiscal policies would only be effective if they are used in conjunction with the " rigorous implementation of Abenomics' crucial third arrow," according to Gurria.

He added that Japan should increase its sales tax to 10 percent in April 2017 as the government has planned, and hike it again beyond 2017 if necessary, despite an inevitable public backlash. Gurria said that to counter the downside effects of a second or possibly third tax hike, the government must cut unnecessary spending by bringing about wholesale reforms to the medical and pension systems here.

He said that only by creating new revenue in this way and by curbing unnecessary spending by reforming archaic government systems, would the future generations not inherit the mounting debt of this country, which is the highest in the industrialized world.

The OECD said it now expects the Japanese economy to grow 1 percent in 2015 and 1.4 percent in 2016, with the nation's rapidly aging society and costs of social welfare counteracting the potential growth and severely inhibiting Japan's potential growth rate. "The rapidly aging population pushed down Japan's potential growth rate to around 0.75 percent, and gross government debt, driven by rising social spending, stands at 226 percent of its GDP, the highest ever recorded in an OECD country,"the organization stated, adding that"Without a credible plan to curb its huge public debt, Japan may face a bond market sell-off that could hit banks with huge bond holdings."

The organization also encouraged the government to improve the climate to encourage entrepreneurs to invest in new businesses and technological ventures as well as attract more investment to their fields, and in doing so, redirect funds from non-profitable small and mid-sized firms and squeeze them out of the market through more progressive and economically beneficial competition.

On the weak yen, Gurria encouraged exporters to ramp up their business activities and take advantage of the increased competitiveness and profit outlooks overseas right away, as when the economy rebounds the yen will, once again, rise.

"Fundamental structural reforms are urgently needed to be stepped up to raise output growth, which is essential for fiscal consolidation and improved living standards," the organization reiterated. Endi