OECD to Japan: Don't increase interest rates

By SHINICHI TERADA　Staff writer

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The Bank of Japan should avoid raising interest rates until the specter of deflation has vanished, the Organization for Economic Cooperation and Development said Monday.

"Further hikes would not be warranted until inflation is firmly positive and the risk of renewed deflation is negligible, hence avoiding the risk of derailing the expansion," the Paris-based OECD said in a report on the Japanese economy.

The 2008 OECD Economic Survey of Japan comes at a time when the economic outlook is clouded by growing concerns about global growth triggered by the U.S. subprime housing loan crisis.

The central bank has maintained its key interest rate at 0.5 percent, the lowest among industrialized countries, since it doubled the rate in February 2007.

Core consumer prices, excluding volatile fresh food, rose 1.0 percent in February from a year earlier, the sharpest rise in a decade as companies passed on higher oil prices and rising materials costs to consumers through a series of price hikes. Core consumer prices are widely seen as a measure of inflation.

"Waiting until inflation is significantly above zero would support the expansion and reduce the risk that a negative shock could push Japan back into deflation," the OECD said.

It predicted that the economy will grow 1.6 percent this year, keeping its forecast unchanged from December. Japan expanded 2.1 percent last year, the OECD said.

The economy will expand 1.8 percent in 2009, supported by strong corporate investment and exports, the OECD forecast.

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The Japan Times: Tuesday, April 8, 2008

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