Remarks by Angel Gurría
15 April 2015
(As prepared for delivery)
Dear Ambassador Kodama, ladies and gentlemen,
It is a great pleasure to be back in Tokyo to present the OECD’s 2015 Economic Survey of Japan. When I launched the last survey two years ago, the three arrows of Abenomics – bold monetary policy, flexible fiscal policy and a reform-driven growth strategy – were still in their infancy.
When I came back in April 2014, we were already seeing its early successes as monetary stimulus was beginning to bear fruit. The government had just taken the tough but necessary step of increasing the consumption tax to 8%, which had the expected short-term impact of slowing GDP in the second half of the year. Growth is now returning, however, and workers are starting to feel the benefits as wages increase.
Only a few weeks ago, it was announced that wages in 2,000 large firms increased by an average of 2.3% during the spring wage round. With inflation close to zero, this means significant gains in households’ disposable incomes. In combination with the fall in oil prices, this should allow GDP growth to accelerate from about 1% this year to 1.5% in 2016. This is all good news, but there is no room for complacency.
Globally, a robust recovery from the financial crisis has yet to take hold and trade growth has yet to reach cruising speed. Domestically, Japan needs to raise productivity to spur growth, to ensure better living standards and to make the government debt burden sustainable. These are the overarching messages of our Economic Survey; let me share with you some of its key elements.
Boosting productivity is key to unlocking stronger growth. This is particularly salient for Japan, which must contend with an aged society and a shrinking working-age population. Ambitious structural reform – the third arrow of Abenomics – remains crucial if real GDP growth is to move towards the government’s target of 2% during the coming decade.
Since 1990, labour productivity in Japan has been stuck at less than three quarters, when compared to the average of the top half of OECD countries. This highlights both the scale of the challenge and the scope for improvement. Indeed, such a large gap is surprising in a country with so much innovation potential and such rich human capital.
To provide a few examples, Japan consistently ranks near the top in the OECD’s PISA test of 15-year-old students; the share of university graduates is one of the highest in the OECD; as is the share of Research & Development spending.
At the same time, there is a need to ensure a favourable environment for young and start-up firms as the bedrock of a dynamic private sector. OECD analysis shows that firms less than five years old accounted for less than a fifth of total non-financial business employment, but they generated half of all new jobs in the OECD over the decade to 2011. In Japan, however, the firm birth rate is so low that three-quarters of small firms are more than ten years old, compared to less than half in most OECD countries.
Japan also needs to stimulate entrepreneurship and increase the return on innovation investment. In a welcome move, Japan’s Economic Revitalisation Strategy targets raising the business start-up and closure rates from the 4.5% average over the 2004-09 period to the 10% rate recorded in the United States. The government should now focus on improving framework conditions to encourage start-ups and promote the spread of innovative ideas.
Among others, reform priorities should include: upgrading corporate governance, promoting labour market flexibility and mobility, improving the entrepreneurial climate, and revitalising venture capital investment to promote firm creation and innovation.
Japan continues to face the challenge of an ageing workforce. By 2050, the working-age population is projected to fall by nearly 40%, making it crucial to maximise its potential. In this respect, measures to boost productivity should be accompanied by policies to slow the decline in the labour force.
For example, the female labour participation rate is still 20% below that of men, one of the biggest gender gaps in the OECD. The gender pay gap at median earnings is 27%, the third highest in the OECD, and only 2.1% of listed company board members are women, the second lowest in the OECD. Helping more women have careers can be a ‘triple-win’: stronger growth, less inequality, and a more manageable government debt burden.
Prime Minister Abe’s “womenomics” initiative, which aims to have women occupying 30% of leadership positions by 2020, is an important step, as are concrete ‘third arrow’ measures like increasing the number of childcare places by 2018.
Narrowing gender inequality also depends on breaking down labour market dualism. While men make up 70% of regular workers, women account for 70% of non-regular workers. And non-regular workers are being paid only about 60% as much per hour as regular workers! Better targeting of public social spending would help tackle inequality and promote social inclusion. This can be achieved, for instance, by introducing an earned income tax credit for low paid workers.
Last but not least, Japan’s future prospects also depend on ensuring fiscal sustainability over the long term. Gross government debt reached 226% of GDP in 2014, the highest ever recorded in the OECD. With a budget deficit of around 8% of GDP, the debt ratio is set to rise further into uncharted territory.
Stronger growth alone won’t be enough. A detailed and credible fiscal plan is essential to maintain market confidence and to achieve a primary surplus by fiscal year 2020. The OECD Economic Survey sets out a number of recommendations for controlling public social spending in the context of an ageing population, such as raising the pension eligibility age, shortening hospital stays and increasing the use of generic drugs.
Additional tax revenue will also be needed, however. The hike in the consumption tax to 10%, which was postponed until 2017, should be implemented as planned. Even at 10%, the rate will remain about half the OECD average! Further revenues could come from raising the consumption tax closer to the OECD average, as well as broadening the personal and corporate income tax bases and increasing environmental taxes.
Ambassador Kodama, ladies and gentlemen,
Last year, we celebrated the 50th anniversary of Japan's entry into the OECD. During the past half-century, the OECD has been privileged to work closely with Japan to promote a "stronger, cleaner and fairer economy".
We now look forward to strengthening our fruitful relationship – notably in support of Japan’s G7 Presidency in 2016 – as we work together to design, develop and deliver ‘better policies for better lives’.