JAPAN is poised for an economic expansion, but long-term growth prospects remain contingent on additional efforts to revitalise the economy and reduce unsustainable levels of public debt, according to the OECD’s latest Economic Survey of Japan.

The new Survey, presented in Tokyo by OECD Secretary-General Angel Gurría, forecasts the Japanese economy will grow by about 1.5% annually in 2013 and 2014. The report hails Prime Minister Shinzo Abe’s three-pronged strategy -- bold monetary policy, flexible fiscal policy and a growth strategy -- to end 15 years of deflation and relaunch economic growth.

"Abenomics has changed the mood in Japan, bolstering confidence for private sector firms and households alike,” Mr Gurría said. “The coming expansion will be driven by exports, and should increase business investment and employment and bring an end to deflation. While we are encouraged by these developments, it remains critically important for Japan to address extremely high and still rising levels of government debt and other challenges posed by its ageing population,” Mr Gurría said.

The Survey points out that Japan’s gross public debt reached 220% of GDP in 2012 - the highest level ever recorded in the OECD area – while the budget deficit is hovering around 10% of GDP. With the debt ratio moving further into uncharted territory, the report underlines the urgent need to restore fiscal sustainability. “The sustainability of public finances is a major concern, but I hope that the medium-term fiscal plan that the government has promised to present later this year will help improve the situation,” Mr Gurría said.

The plan should include spending cuts and tax increases large enough to bring the budget back into primary surplus by 2020 and stabilise the public debt ratio. A detailed and credible package is essential to maintain market confidence in Japan's fiscal situation, mitigating the risk of a run-up in long-term interest rates, the OECD said.