Corporate gaps to slow Japan's economy: OECD

The Organization for Economic Cooperation and Development has downgraded its Japan economic growth forecasts due to gaps between large and small companies, according to its semiannual report, released Thursday.

Although projecting "a more balanced growth pattern" for Japan in the near future, with less dependence on exports, the OECD said in its Economic Outlook report that the economy will expand 1.9 percent this year and 1.6 percent in 2008, downgrading its previous growth forecasts in May of 2.4 percent this year and 2.1 percent in 2008.

The Paris-based OECD, which also urged the Bank of Japan not to raise interest rates until inflation is firmly on track, said the estimated growth rate, measured by real gross domestic product, reach 1.8 percent in 2009.

But it points to "uneven growth . . . reflected an increasing polarization between a strong manufacturing sector, which has benefited from buoyant export growth, and a relatively weak nonmanufacturing sector with low capital expenditure."

Noting weak productivity in the nonmanufacturing sector, which accounts for 90 percent of small and midsize firms, the OECD said this explains "the widening gap in business confidence and investment" between large and smaller firms.

The OECD warned that subdued wage levels in small and medium-size enterprise sectors could lead to lower growth in income and private consumption.

This negative trend might be accelerated by the record-low housing starts observed since a legal revision to the building code earlier this year triggered stricter, and consequently more lengthy, structural integrity checks on new buildings.

As for the global economic outlook, the OECD called for cautiousness in the face of the credit crisis due to the subprime mortgage problems in the U.S., cooling housing markets, and higher oil and other commodity prices.

The U.S. economy will expand 2.2 percent this year, slightly higher than May's forecast of 2.1 percent, and 2.0 percent in 2008, down from 2.5 percent.

For 2009, the OECD forecast 2.2 percent growth for the U.S. The euro zone is projected to grow 2.6 percent this year and 1.9 percent in 2008.