Bank of Japan QE needed, but structural reforms also important

Tue Apr 23, 2013 12:19pm EDT
 
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By Stanley White

TOKYO (Reuters) - The Bank of Japan should stick with its expanded quantitative easing to achieve its inflation target, but this may not be enough to foster sustainable economic growth unless it is coupled with structural reforms, the OECD said on Tuesday.

Japan's government should stay with its plan to double the sales tax to 10 percent, compile a detailed plan to return to primary budget surplus in 2020 and boost revenue from other taxes, the Organisation for Economic Cooperation and Development said.

The size of fiscal consolidation needed means Japan does face the risk of a spike in interest rates that would hurt the financial system due to its large exposure to Japanese government bonds, the Paris-based think tank said.

"The new quantitative and qualitative monetary easing should be implemented to meet the new 2 percent price stability target, although this may not be enough," the OECD said in its economic survey of Japan.

"Pushing ahead with structural reform on a broad front is equally imperative to achieve sustained growth."

The BOJ earlier this month committed to open-ended asset buying to nearly double the monetary base to 270 trillion yen ($2.72 trillion) by the end of 2014 to end 15 years of deflation and achieve its 2 percent inflation target in two years.

At a news conference, OECD officials said they were uncertain when Japan would meet its inflation target but that they were willing to give the BOJ some leeway as long as prices are approaching the target.

"We don't know how quickly it will take for inflation to come back," said Randall Jones, a senior economist at the OECD.   Continued...

 
Bank of Japan Governor Haruhiko Kuroda speaks during a group interview at the BOJ headquarters in Tokyo April 10, 2013. REUTERS/Toru Hanai