The New York Times In America

December 2, 2003

Economic Report Urges Japan on Reforms


Filed at 9:13 a.m. ET

TOKYO (AP) -- Despite some signs of economic recovery, Japan must speed up a broad range of reforms to encourage foreign investment and remove barriers to new businesses to keep growth going, the Organization for Economic Cooperation and Development said Tuesday.

The annual report also blamed deflation, or the continuing fall in prices, which has ailed the nation for several years. A persistent fall in prices tends to deaden economic activity by eroding profits and paychecks while increasing the weight of debts.

The report also recommended a more flexible labor market by emphasizing training to develop skills, reducing the protection for workers to keep their jobs and decreasing seniority-based wages. Free trade agreements and opening up the market, especially in farming, would also help, according to the report from the Paris-based, 30-member group of mostly wealthy nations, including Japan.

After a decade of poor growth, Japan's economy has been recovering lately through its exports, especially to China, and a rebound on the Tokyo stock market, the report said. But Japan needs to do more, it said.

``Despite these positive signs, there is still considerable uncertainty regarding Japan's economic outlook,'' the report said. ``Achieving a robust, sustained expansion will depend on overcoming serious structural problems, which still limit Japan's growth potential and weaken demand.''

The Bank of Japan has kept interest rates at zero to help revive the economy, but bank lending remains weak, as commercial banks struggle to reduce bad debts, the report said. Japan must also strengthen competition in protected sectors, which would lower prices and promote innovation, it said.

It recommends that electricity and natural gas systems be liberalized in the way Japan's telecommunications sectors has been freed up.

Japan continues to be dominated by small stores offering high quality at high prices, and there is room for growth in large-scale stores, according to the OECD report.

It urged Japan to curb public spending as public debt balloons to 150 percent of the nation's gross domestic product and the population rapidly ages.

The report recommends expanding trade, boosting direct investment and removing outdated regulations. It commends the government's recent creation of special regulation-free zones as accelerating change.

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