Japan should raise sales taxes again next year despite wobbles in the economy caused by the first rise, and the central bank should cushion the blow with more easy money, the OECD said Monday.
The Bank of Japan must do more "beyond 2015" to support the world's number three economy, said Rintaro Tamaki, deputy secretary general of the Organisation for Economic Co-operation and Development (OECD).
"Japan's public debt has surged in the past few years, in a way that makes it comparable to Greece's," Tamaki told reporters in Tokyo.
"Japan should not only implement the planned sales tax hike in October 2015, but also show its people what will come next, explaining the schedule and direction of further tax hikes" to allay fears about the sustainability of the country's finances, he said.
Prime Minister Shinzo Abe raised a sales taxes from five percent to eight in April as part of structural reform efforts, and has laid out plans for a second increase to 10 percent a year from now.
But government figures show the economy contracted 1.8 percent quarter-on-quarter in the three months to June -- or 7.1 percent on an annualised basis -- its steepest quarterly drop since the 2011 quake and tsunami disaster.
The numbers were the latest in a series of worrying signs that the tax rise had hit the economy harder than expected.
Wages are still not showing the growth Abe had been looking for, while prices have risen, due in part to the tax rise and the plunging value of the yen, which has pushed up the cost of imported goods.
Abe has declared himself "neutral" on a further tax jump and said he would be watching the economic data carefully.
His economy minister Akira Amari told the Financial Times in an interview the rise to 10 percent was "necessary".
The OECD's Tamaki said Japan's burgeoning debt held the "risk of rising interest rates due to the unpopularity of government bonds".
"More crucially, the fact is that people's worries over the state of the national finances -- the core of a sovereign nation -- have an enormous negative impact on economy and society," Tamaki said.
Japan's gross public debt as a percentage of GDP is the worst among rich nations, at around 230 percent, due in no small part to snowballing medical and social security costs in the rapidly ageing society.
The OECD supports the programme of fiscal reforms dubbed "Abenomics", Tamaki said, but thinks the Bank of Japan must come to the table.
"The OECD doesn't recommend a huge fiscal stimulus to buffer shocks from a sales tax hike... rather, it's a question of monetary policy in 2015 and beyond, and I hope the Bank will show its commitment soon," he said.
In April 2013 the BoJ unleashed a multi-billion dollar asset-purchasing stimulus -- similar to the Federal Reserve's quantitative easing -- vowing no let-up in the battle against falling prices that have plagued the economy for decades.