In an update to its forecasts, the Organisation for Economic Co-operation and Development threw its weight behind calls from Japan’s own Government, including yesterday from Junichiro Koizumi, the Prime Minister, for the country’s central bank to tread warily in ending its ultra-loose monetary policy aimed at defeating deflation.

Amid mounting speculation that the Bank of Japan could move this week to scrap its “quantitative easing” strategy of flooding Japan’s banking system with surplus funds, the OECD urged it to preserve the zero interest rate that forms the second prong of its present policy.

“Japan may be at long last exiting deflation, but only very gradually so, despite vigorous growth, which argues for keeping the policy interest rate at zero over the near term,” Jean-Philippe Cotis, the OECD’s chief economist, said.

Boosted by strong growth in Asia, the OECD said that Japan was now enjoying a broad-based recovery, but M Cotis emphasised that “our feeling is that (Japan) should wait a little longer before starting to raise short-term interest rates”.

M Cotis also urged that, after last week’s controversial increase, the European Central Bank should now stay its hand unless clear evidence of rising inflationary pressures emerged. “Further out, removal of monetary accommodation should be based on unambiguous signs that slack is shrinking and that underlying inflation pressures are mounting,” he said.

The OECD sees eurozone growth rebounding in the first and second quarters of this year to a pace of 0.6 per cent, twice that in the final quarter of last year, although it noted that official data remained distinctly weaker than recent, upbeat survey evidence of activity.

Growth is also expected to have accelerated strongly in the United States in the first quarter, to 1.1 per cent, after a lacklustre end to last year, when it was just 0.4 per cent. Britain’s growth is projected to have slowed in the present quarter, to 0.5 per cent, from 0.6 per cent in the previous quarter. M Cotis also highlighted risks that factors helping to sustain growth in the Group of Seven leading economies, such as rising house prices, could falter.

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