Monetary and financial issues

Economic Survey of Japan 2009: Overcoming the global crisis: the need for a new growth model


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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Japan published on 30 September 2009.





Faced with a free fall in production from September 2008…

The export-led expansion that began in 2002 ran out of steam in late 2007 in the context of slowing world trade. Output began to contract from the second quarter of 2008, even before the global financial crisis intensified in September. Although Japan was not at the epicentre of the crisis, its export-dependent economy was vulnerable to the collapse in world trade, which resulted in its most severe recession of the post-war era. Exports and industrial production each fell by around a third in volume terms between September 2008 and February 2009, leading to a rise in unemployment to unprecedented levels by mid-2009 and to a decline in wages. Financial market conditions deteriorated as credit conditions tightened and the capitalisation of the Tokyo Stock Exchange fell by half. By March 2009, the confidence of large manufacturing firms had plummeted to its lowest level since 1975, causing a major retrenchment in their investment plans. Headline inflation has turned negative and by mid-2009 prices were down around 2% year-on-year. Output is projected to drop by around 6% in 2009, following a 0.7% decline in 2008.


Japanese exports declined sharply in the wake of the 2008 crisis

Year-on-year growth rates in per cent

Source: Ministry of Finance, Trade Statistics.


…the authorities implemented a wide range of financial, monetary and fiscal policies…

The authorities responded quickly to the crisis. In the financial sector, policies are aimed at sustaining credit flows and stabilising markets. The government revived a scheme to inject public capital in depository institutions, encouraged lending to small and medium-sized enterprises (SMEs), took steps to stabilise the stock market and launched a programme to provide emergency loans to firms. Additional support was provided by the Bank of Japan, which launched a major scheme to facilitate corporate financing, increased purchases of government bonds and started buying commercial paper and corporate bonds. Both the central bank and the government resumed purchases of equities from banks to support their capital base. In addition, the Bank lowered the policy interest rate from 0.5% to 0.1% by the end of 2008. These measures have improved credit conditions and have flattened the yield curve. On the fiscal front, the government has launched four crisis-driven stimulus plans since August 2008, amounting to 4.7% of 2008 GDP, above the average of 3.9% for OECD countries adopting stimulus programmes. Increased spending, at 4.2% of GDP, accounted for the bulk of the stimulus in Japan. As a result of the stimulus and the severe recession, the government budget deficit is projected to reach 10% in 2010.


…that have helped to lay the foundation for a gradual upturn in the second half of 2009

The first green shoots of recovery appeared in the second quarter of 2009 with gains in exports and industrial production, while financial conditions improved, reflecting a rebound in the stock market. Output is projected to continue increasing in the second half of 2009, thanks primarily to fiscal stimulus. However, the pace of recovery is likely to be restrained by subdued export growth, as world trade picks up only gradually and the appreciation of the yen over the past year reduces Japan’s market share. Consequently, output growth is projected to remain below 1% during 2010, resulting in entrenched deflation and a continued rise in the unemployment rate. While a stronger pick-up in world trade could lead to a faster rebound in Japan, there are a number of downside risks, particularly from the deteriorating labour market and possible negative second-round effects from the financial sector. In addition, Japan’s huge public debt makes it vulnerable to a rise in long-term interest rates.


A sustained and robust expansion depends on economic reforms…

As the impact of the stimulus packages wanes and the focus shifts to fiscal consolidation, sustaining growth will depend increasingly on private domestic demand. The 2002 07 expansion, the longest in Japan’s post-war history, was driven primarily by the export-oriented manufacturing sector and failed to spark strong domestic demand growth. The result was an unbalanced upturn that exacerbated gaps between sectors, regions and small and large firms. Creating a new growth model depends on reforms to boost domestic demand. The previous government’s Medium to Long-term Fiscal Policy and an Economic and Fiscal Policy Outlook for the Next Ten Years recognised the importance of “pursuing economic growth through reform in the medium to long-term”. It is important to implement reforms promptly, given that their benefits often take considerable time to materialise. Indeed, OECD experience shows that key reforms are most often implemented during deep recessions. Reform, focusing on the labour market and the non-manufacturing sector, should be a top priority for the new government.


…particularly in the labour market…

The rise in the share of non-regular workers, from 20% in 1990 to 34% in 2008, has put downward pressure on wages and private consumption, as they are paid substantially less than regular workers. The increasing proportion also has negative implications for long-term productivity as firms invest less in training non-regular workers. Equity problems are a concern as well, given that the difference in productivity between regular and non-regular workers is much smaller than the wage gap. In short, the dualistic labour market traps a large proportion of the labour force, especially youth, in low-paying jobs with little employment security and limited access to training. Moreover, non-regular workers receive only limited coverage from the social insurance system. Reversing dualism requires addressing the factors that encourage firms to hire non-regular workers, notably the savings in labour costs, in part due to lower social insurance contributions, and enhanced employment flexibility. A comprehensive approach is necessary, including increasing the coverage of non-regular workers by social security insurance schemes, reducing employment protection for regular workers and upgrading training programmes to enhance the job prospects of non-regular workers. At the same time, it is important to raise female labour force participation by reducing or eliminating aspects of the tax and social security system that discourage full-time work by women, providing more attractive job opportunities and encouraging flexible working arrangements, including by expanding the availability and quality of child care. Such changes would make for a better “work-life balance” and could help end the downward trend in the fertility rate.


The share of non-regular workers has risen sharply in recent years(1)

1. Data are for February for each year through 2001 and for the first quarter in 2002 and onward.

Source: Ministry of Internal Affairs and Communications, Labour Force Survey.


…and the non-manufacturing sector…

During the export-led expansion beginning in 2002, labour productivity growth accelerated to more than 7% per year in manufacturing while remaining below 2% in services. As services account for 70% of value-added and employment in Japan, boosting productivity in this sector is essential to sustain output growth and narrow the gap with the top OECD performers. The weak productivity performance in services highlights the importance of strengthening competition through a number of policies:

  • Competition policy should be further upgraded by reducing exemptions to the Anti-Monopoly Act, increasing administrative fines and phasing out the special treatment of SMEs, which play a dominant role in services.
  • Regulatory reform should be accelerated, focusing on reducing entry barriers, as international comparisons indicate that starting a business in Japan is relatively complicated, costly and time-consuming. In addition, the reforms introduced in the special zones should be expanded nationwide.
  • International competition should be enhanced by reducing barriers to service imports and encouraging inward foreign direct investment (FDI). Increasing inflows requires removing barriers to FDI and product market regulations that discourage potential foreign investors.

In addition, competition in key service industries, such as retail, energy, transport and business services, needs to be strengthened through wide-ranging reforms. In particular, an independent sectoral regulator should be established for both the electricity and gas sectors and more consumers should be allowed to choose their supplier. Finally, reform of agricultural policies would bring significant benefits to consumers as the high level of assistance to farmers boosts the average price received by agricultural producers to a level nearly twice as high as the world price. Market price supports, which distort trade and production decisions, should be replaced.


Government support to the agricultural sector in Japan is about double the OECD average

Trends in the percentage producer support estimate(1)

1. The PSE is an indicator of the value of monetary transfers to agriculture resulting from agricultural policies. It is presented as a share of the total value of production at domestic producer prices.

Source: OECD (2008), OECD Agricultural Policies 2008: At A Glance, Paris, OECD.


The policy interest rate should be kept near zero

In addition to promoting financial market stability and facilitating corporate financing, the Bank of Japan should support economic growth by keeping the policy interest rate close to zero, given entrenched deflation and downside risks to economic activity, while taking into account the risk of financial imbalances in the medium term. Once deflation has been overcome, the central bank’s Policy Board should revise the understanding of price stability as inflation between 0 and 2% by increasing the lower end of the range to ensure an adequate buffer against renewed deflation. The course of monetary policy will need to take into account the pace of economic growth and the evolution of inflation, which will depend in part on progress in fiscal consolidation.


How to obtain this publication


The complete edition of the Economic Survey of Japan is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.  To see the Japanese version, click here.


Additional information

For further information please contact the Japan Desk at the OECD Economics Department at

The OECD Secretariat's report was prepared by Randall Jones, Byungseo Yoo and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.




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