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OECD: End nears for Japan's deflationary spiral

By Katie Hunt, for CNN
updated 7:07 AM EDT, Wed May 29, 2013
A shopping street in the Japanese city of Osaka on February 6, 2013.
A shopping street in the Japanese city of Osaka on February 6, 2013.
STORY HIGHLIGHTS
  • OECD says consumer prices in Japan will begin rising later this year
  • Economy has suffered a 14-year downward drift in prices
  • Reforms launched by new leader Shinzo Abe are boosting economy
  • OECD warns that high debt levels pose an "exceptional challenge"

Hong Kong (CNN) -- Japan's robust economic recovery this year could put an end to a deflationary spiral that has sapped growth for some 14 years, says the Organisation for Economic Cooperation and Development (OECD).

In its annual economic outlook, the OECD projects Japanese consumer prices will begin rising modestly by the end of this year, with the inflation rate reaching 2.4% by the end of 2014.

"Aggressive monetary easing could see deflation give way to moderately positive underlying inflation in Japan," the report said.

In recession as recently as last year, Japan's economy grew at an annual rate of 3.5% in the first three months of 2013, much quicker than the 2.7% expected by analysts.

Why is the Nikkei having issues?
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The brighter economic outlook stems largely from reform efforts launched by Prime Minister Shinzo Abe -- a set of policies dubbed "Abenomics."

READ: Japan: Is Abenomics working?

As part of a three-pillar strategy announced in January, Japan has ramped up government spending and the country's central bank is injecting money into the economy on a massive scale.

It hopes to bring the inflation rate to 2% and put to an end to a downward drift in consumer prices that has persisted for 14 years, undermining business and consumer confidence in the world's third largest economy.

The moves have led to a rally in the Nikkei stock index and a slide in the yen that has made corporate Japan more competitive overseas.

Also promised are structural reforms such as increasing the participation of women in the workforce.

READ: Can 'womenomics' save Japan?

"Reflecting a determined policy approach, the economic outlook has changed markedly in Japan in recent months," the report said.

However, the OECD warned that Japan's economic recovery was "surrounded by uncertainty" given the country's high debt levels, which amount to more than 200% of gross domestic product (GDP).

"In Japan, the key risk is that the unsustainable fiscal position will eventually affect financial markets and provoke a crisis of confidence," the report said.

"Bringing the debt ratio back to safe levels from its current highs will be exceptionally challenging."

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