2006 OECD Economic Surveys: Japan 2006

image of OECD Economic Surveys: Japan 2006

This 2006 edition of OECD's periodic survey of Japan's economy opens with an assessment of recent economic performance and the economic outlook. It then moves on to analyse key challenges faced by Japan including ending deflation an sustaining soundness in the banking sector, fiscal consolidation, income inquality and social spending, upgrading the innovation system, and improving the environment for inflow of direct investment and workers.

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Ensuring a Definitive end to Deflation and Sustaining the Soundness of the Banking Sector

With the end of quantitative easing, the Bank of Japan has introduced a new monetary policy framework that includes an understanding of price stability as 0 to 2% inflation. Given remaining deflationary pressures, the Bank should be cautious in raising short-term interest rates and should increase the lower bound of the inflation zone to reduce the risk of deflation in the future. It is also important to avoid a rapid run-up in long-term interest rates in order to help sustain the economic expansion. Maintaining the soundness of the banking sector is also essential. While the major banks have achieved significant progress, the regional banks have lagged behind. Scaling back the role of public financial institutions would be beneficial for the entire banking sector. In addition, following through on the privatisation of Japan Post is essential to shift the flow of funds from the public to the private sector.

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