Japan needs a large structural reforms program to reinforce potential growth to cope with its a rapidly ageing population, the Organisation for Economic Cooperation and Development (OECD) said on Tuesday in its biannual economic outlook.

"A number of indicators suggest that the (Japanese) economy has finally completed the post-bubble adjustment, allowing output to grow at a rate of around two percent in 2006-07," the 30-member OECD said.

The Paris-based organization also congratulated Japan on its adoption of the law bill on postal privatization reforms.

The growth forecast is largely in line with the Bank of Japan (BOJ)'s projection which sees the world's second largest economy growing by 2.2 percent in the fiscal year to March 2006 and 1.8 percent the following year.

The OECD also warned the BOJ not to abandon too rapidly the ultra-accommodating monetary policy that it has applied since 2001 to fight deflation.

A hasty change in monetary policy might trigger a hike in interest rates and push Japan's economy back to a slump, it said.

"The necessary conditions set by the Bank of Japan for ending the quantitative easing policy ... could be met in early 2006," OECD said.

"Given the risk that the end of the quantitative easing policy could be accompanied by a sharp rise in long-term interest rates, the change in monetary policy should be pursued more cautiously," it said.

The OECD urged the country to accelerate its budgetary stabilization rhythm, warning that if there was a cut in public investments or rise in public expenses triggered by population ageing, the finance situation would be negatively affected.

It also warned Japan that a higher yen against the dollar and a surge in oil prices might block its economic recovery.

"There are a number of risks to a sustained expansion, including the possibility of a significant appreciation of the yen and other external factors such as a slowdown of exports due to the impact of higher oil prices on major trading partners," it said.

Source: Xinhua