Tokyo - Japan needs to implement reforms to maintain its position as a leader of the world economy, the secretary general of the Organization of Economic Cooperation and Development (OECD) said Monday.

"Japan is still in the first class in any area, ... very resistent" to current global financial turmoil, Angel Gurria said on a visit to Tokyo.

But to remain the world's second-largest economy, Japan needs to implement tax reforms, enhance productivity of its services sector and improve its labour market, Gurria said on one of the OECD's 30 members.

In its economic survey of Japan, the international organization made up of democracies and free-market economies recommended that Japan continue with efficient reduction of public spending and increase tax revenues.

"Although it is not favourable for economic growth to increase tax revenues, Japan needs to implement tax reform," said Randall Jones, head of the OECD's Japan and Korea desk.

Japan has the lowest consumption tax (5 per cent) but the highest corporate tax burden (40 per cent) of the OECD countries. More than half its wage earners are exempt from paying taxes.

While the trend among OECD countries is to lower corporate taxes, Jones said Japan should introduce a system to lower the rate and broaden the base to cover more businesses. Currently, only a third of Japanese companies are subjected to corporate taxes.

The OECD report came on the same day that Standard and Poor's Ratings Services said fast-growing China could overtake Japan as the largest economy in the Asia-Pacific region and second-largest globally within the next five years.

In other recommendations for Japan, the OECD said it should enhance productivity in the services sector by promoting competition.

Japan should accelerate regulatory reforms so that more firms can enter the market while it should increase international openness to trade, it added. The share of foreign-affiliated companies in the services industry in Japan is the lowest among OECD nations, the survey found.

To push competition, it is important for Japan to remove barriers to encourage inflows of foreign direct investment, and the state of Japan's labour market has also been the focus of OECD concerns, Gurria said.

As the nation's ageing accelerates and the population of non-regular workers increases to more than a third of the labour force, Japan needs to improve employment prospects for young contingent workers and encourage female participation in the labour market, the OECD said.

The number of women who held regular employment positions fell 1.33 million over 10 years to 10.39 million in 2007, taking up 46.5 per cent of all regular employees.

Although wage disparities shrank, women receive 63.5 per cent of men's wages and young, non-regular workers received an average of 40 per cent of regular workers' pay, according to the Health, Labour and Welfare Ministry.

"Without active migration, Japan needs to get more people [women and younger people] to work," Gurria said, adding that other OECD nations saw immediate rises in productivity when they arranged services for women on the job, such as childcare facilities.

Japanese women still face a shortage of employment-related services and are often forced to choose between child rearing and their careers.

The Japanese government decided last year to allocate up to 2.44 trillion yen (24 billion dollars) for such services to counter the nation's declining birth rate. (dpa)