International | Jul 21 2006
By Chris Shaw
Following last week’s 0.25% increase in official interest rates that marked the end of the zero interest rate policy (ZIRP) it had run for several years, the market remains uncertain as to when (or if) the Bank of Japan (BOJ) will move again on rates.
Coming out on the side of a conservative approach to further changes in rates is the Organisation for Economic Cooperation and Development (OECD), which in its annual report on the Japanese economy suggested deflation remains a threat and should guide future policy action.
The OECD’s view is by maintaining relaxed monetary conditions it will encourage continued gains in inflation, suggesting a target inflation rate of about 1% needs to be achieved before rates should be lifted again.
The organisation’s report suggests the government’s main priority should be improving the overall health of the economy, with a particular focus being the level of government debt. It estimates debt currently stands at about 170% of GDP, with higher taxes and lower government spending seen as the most likely initiatives to bring this level down.
But as the OECD notes, raising taxes via an increase in the consumption tax at the same time as lifting interest rates would create more of a burden for individuals and corporations, so the focus should be on improving the debt situation as quickly as possible while maintaining relatively low interest rates.
