The Organization for Economic Cooperation and Development (OECD) released a report Tuesday on Japan suggesting that despite a return to growth, deflation remains a big problem.

The OECD says the two percent growth Japan registered last year is largely the result of increasing exports, particularly to China. This rate of growth - the most in several years - has not been enough to reverse the longer-term downward trend in Japanese living standards.

The price level in Japan has been falling for several years and OECD economist Randall Jones says experts still don't understand what causes deflation and what needs to be done to reverse it. The OECD worries that deflationary pressures remain strong and that Japan is still trapped in a spiral of falling prices.

Mr. Jones, speaking from Paris via videoconference, advised Japanese policy makers to speed up the deregulation of the economy and not worry that this could accentuate price declines.

"I don't go along with people who say let's put off deregulatory reform until we're out of deflation because it will drive us deeper into the hole," he said. "I think it is a positive thing because it adds to efficiency and income gains for households."

Deregulation theoretically boosts competition and thus leads to lower prices for services.

Ed Lincoln, a Japan specialist at the Council On Foreign Relations, agrees that Japan's recovery is fragile and that the Japanese economy is still caught in a deflationary trap. Mr. Lincoln sees no reversal in the trend of declining land prices.

"You can argue that if the economy ends up on an upswing for a long period of time, then we expect land prices to bottom out and turn back up," he said. "On the other hand, I could make an argument based on demographics and structural change of industry that argue for land prices not to go up."

The OECD argues that an expansionary monetary policy has prevented a financial crisis that would be triggered by insolvent banks.

Japan, the world's second largest economy, has been stagnant for most of the past decade. Despite falling prices and declining living standards, Japan continues to be an export success story and the country is still accumulating huge volumes of foreign currency.