Japan to keep fiscal, monetary support for economy

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 on Friday.

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"It is appropriate that monetary policy accommodation is not withdrawn prematurely," the organisation added.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, the OECD said in the survey. Japan's debt has grown to more than twice the size of its gross domestic product (GDP), OECD Secretary-General Mathias Cormann said.