TOKYO, Mar 14 (AFP): The outlook for Japan's economy is the brightest for a long time but the government now has a big challenge cutting its debt mountain without derailing the recovery, the OECD head said Tuesday.
"It's a much more optimistic picture, frankly, than I've seen for a long time," said Donald Johnston, the outgoing secretary general of the Organisation for Economic Cooperation and Development.
Japan's debt is the highest among industrialised nations after its government spent trillions of yen on emergency stimulus packages to try to haul the economy out of its deflationary doldrums after an asset bubble burst.
Jeffrey Owens, director of the OECD centre for tax policy and administration, told reporters that Japan should raise its politically sensitive sales tax to eight per cent from the current five per cent to increase government revenues.
Confidence is growing that the world's second-largest economy is finally on a solid recovery path after its decade-long slump, as reflected by the central bank's decision last week to scrap its five-year ultra-loose monetary policy.
"Everybody's very heartened. We've had now 50 months of expansion," said Johnston.
"The question is to make sure that expansion is sustained but at the same time we have to emphasise there's a public debt to GDP (gross domestic product) ratio of 160 per cent," he told newsmen on the sidelines of an OECD seminar here.
The challenge facing the Japanese government now was, "How do you bring about fiscal consolidation without essentially endangering what everybody hopes will be a long term and sustained recovery?
"Of course as economic growth increases, that ratio of debt to GDP automatically falls," Johnston said.
Many private-sector economists believe that the government will soon have to raise the consumption tax to top up the public coffers although Prime Minister Junichiro Koizumi has ruled out a hike before 2008.
Johnston said that a hike in the sales tax, while needed, was not without its risks.