OECD in fresh warning on Japan debt The Organisation for Economic Co-operation and Development has warned Japan that taming its vast debt remains the country's "paramount policy challenge," as prime minister Shinzo Abe goes all out to reflate the sluggish economy via aggressive fiscal and monetary stimulus. In its annual survey of Japan, presented in Tokyo on Tuesday, the OECD noted that government debt has risen faster than the economy has grown for more than 20 years, "almost without interruption." The report said that while a number of factors have kept interest rates subdued until now - including low expectations for growth, ample household financial assets and the home bias of domestic investors - this "deflationary equilibrium . . . will not last forever." "A significant rise in the long term interest rate would compound Japan's fiscal predicament and hurt the economy and the financial institutions holding government bonds," the OECD said. The warning comes amid concerted efforts by policy makers to overcome the state of deflation that has sapped spirits for most of the past 15 years. Mr Abe, riding high in the polls with near-record approval ratings, has already pushed through a big fiscal stimulus package and has leaned on the central bank's new governor, Haruhiko Kuroda, to increase the pace and scale of monetary easing in pursuit of a higher inflation target. The OECD described Mr Abe's three-pronged strategy - which will also include specific measures to lift Japan's growth potential - as "most encouraging," suggesting that the Paris-based club of the world's richest economies has fallen in with the Group of 20 nations and the International Monetary Fund in endorsing Japan's basic stance in seeking to end deflation. Tokyo had drawn criticism from some quarters for appearing to target a lower exchange rate in the weeks after December's election. Since then, however, Mr Abe and his senior officials have been at pains to argue that a weaker yen is a mere byproduct of efforts to stimulate domestic demand, and not an end in itself. However, the OECD raised concerns over the Y10.3tn of extra government spending announced by Mr Abe in January, which is weighted towards public works. Such spending often provides "only a temporary boost to growth," it said, while increasing government debt. It also lamented the government's scrapping of a Y44tn ceiling on new bond issuance, adopted last year as a token of commitment to restraining Japan's debts, which are expected to top 240 per cent of GDP - the highest ratio in the world, on a gross basis - by 2014. The tone of the OECD's warnings is similar to that of the International Monetary Fund, which last weekend urged Japan to form a credible medium-term fiscal consolidation plan to contain the negative effects of easing on capital flows and exchange rates. Mr Abe has asked members of his fiscal policy council to propose an outline for next year's budget by June, asking them to include "a basic direction toward fiscal health." The government says it wants to reduce Japan's primary deficit, which excludes debt payments, to 3.2 per cent of nominal gross domestic product by the fiscal year ending in March 2016. Reaching that goal will be a stretch, even with planned consumption tax hikes in April 2014 and October 2015. The government estimates that the primary deficit will grow to 6.9 per cent in the current fiscal year, thanks in large part to the extra stimulus. The OECD is urging other measures to boost revenue, such as applying environment-related levies or broadening personal and corporate income tax bases. Fiscal consolidation needs to be the ""fourth arrow" of Abenomics," said Tetsuya Kubo, newly appointed president of SMBC Nikko Securities, the investment banking arm of Japan's third largest financial group by assets. In the current fiscal year the Japanese government expects to spend Y215 for every Y100 it collects in tax, according to a general budget published in January.