The OECD, which sharply downgraded Japan's short-term economic outlook in a new report yesterday, believes a planned overhaul of the troubled banking system can help pull the country out of recession.
But the bank reform plan recently adopted in parliament is not enough in itself and needs to be accompanied by structural change and fiscal stimulus, according to Mr Yutaka Imai, one of the report's authors.
"The basic story hasn't changed. Japan is in a difficult situation. But we can draw some comfort from the legislation on bank restructuring and re-capitalisation," he said. "That should at least prevent any further worsening of the underlying situation. The problem is we're a little worried about what the underlying situation really is." One crucial, and often overlooked, aspect in this regard was a plan to get Japanese firms to meet international accounting standards, Mr Imai said.
Mr Imai was commenting on a report in which the Paris-based Organisation for Economic Co-operation and Development (OECD) said it now expected Japan's economy to shrink 2.6 per cent in 1998 and, at best, to register marginal growth of 0.2 per cent in 1999.
The OECD, which as recently as April was saying it expected an economic contraction limited to 0.3 per cent this year, could further fine tune its predictions in the coming weeks, he said.
The OECD's update brings its forecasts into line with those of the International Monetary Fund, which slashed its forecast for Japan at the end of September. Mr Imai said the OECD was sticking to its triple prescription of a bold and effective banking overhaul as well as structural reform and further fiscal - and possibly monetary - stimulus to boost sagging demand.
"We recommend a three-pronged approach. The bank reform is a necessary condition but not sufficient. We ask for continuation of expansionary monetary and fiscal policy," he said.
Mr Imai acknowledged that official interest rates were already low - a discount rate of 0.5 per cent and overnight call money rate at 0.25 per cent - but said even the minimal room left for monetary easing to stimulate the economy should not be ignored.
The OECD report says the central bank should, if necessary, "show willingness to help finance extra public spending by purchasing ample amounts of government securities and make any limited interest-rate cuts that remain at its disposal".
"That leaves the last lever of structural reform. We've been working on this since the early 1980s and recommending there be a high priority on those measures which could lead to an immediate boost in activity," Mr Imai said.
"These measures are about restrictions on entry into any particular market or activity," he said.
