Remarks by Angel Gurría, OECD Secretary-General, delivered at a lunch with Keidanren
Tokyo, 24 April 2013
(As prepared for delivery)
Dear friends, dear Mr. Saito:
Being with Keidanren is one of the highlights of my visit to Japan. I appreciate exchanging views with you and learn about the issues that interest you. Today, I am please to confirm a feeling of optimism and dynamism in Japan. Japan is indeed emerging from a difficult five-year period, marked by two major shocks -- the 2008 global financial crisis and the tragic 2011 Great East Japan Earthquake -- and three recessions. We admire the courage and resolve of the Japanese people in face of such adversity.
Japan now appears poised for economic expansion.
I presented yesterday our new 2013 Economic Survey of Japan. We project real GDP growth of about 1½ per cent annually in 2013 and 2014. This is expected to bring an end to deflation, after 15 years of falling prices.
Prime Minister Abe deserves much credit for the new spirit of optimism in Japan, based on the “three arrows” that he is launching to revitalise Japan and exit deflation. The first arrow, a bold monetary policy, has been launched with the Bank of Japan’s new “quantitative and qualitative monetary easing” announced a few weeks ago. Bringing a definitive end to deflation is a top priority. The second arrow, flexible fiscal policy, was reflected in the January fiscal package amounting to 2% of GDP.
However, the scope for fiscal stimulus is rapidly disappearing. Japan's public debt is soaring to around 220% of GDP in 2012 , the highest ever seen in an OECD country. The focus from 2013 onward has to shift to fiscal consolidation. This will allow achieving the government's goal of a primary budget surplus by 2020. But large-scale fiscal consolidation will put downward pressure on economic activity in the coming years, in turn exacerbating the difficulty of achieving fiscal sustainability.
How to overcome this vicious cycle?
The key to overcoming this vicious circle is the third arrow of Abenomics; a new growth strategy. We are hoping to see a bold reform strategy in the new plan for growth to be announced by mid-2013. Last evening, I had the opportunity to address the Council of Industrial Competitiveness and refer to them to the fact that labour productivity per hour of input was 25% lower in Japan than in the upper half of OECD countries. Thus, there is a large scope for productivity gains, and we know where to start. Let me share with you our advise in four key areas:
Enhancing Japan's value creation in global value chains.
First, it is essential to enhance Japan’s participation in global value chains. A country’s success in selling to the world depends on its openness to the global economy and its readiness to buy from the world. Imports are essential to ensure domestic firms’ access to world-class inputs, thus to allow them to improve productivity and compete successfully. Industries with a higher share of imported intermediate goods do achieve higher productivity on average.
It is therefore crucial for Japan to reduce non-tariff trade barriers and improve the climate for inflows of foreign direct investment. Japan also needs to liberalise controls on immigration to allow more foreign students and high skilled workers into the country. At present, Japan’s participation in free trade agreements is relatively limited. Such agreements cover less than 20% of its trade, well below some other OECD countries. In this regard, we welcome Japan’s recent decision to participate in discussions concerning the Trans-Pacific Partnership and to launch negotiations for a Japan-EU free trade agreement.
Productivity also depends on services, which account for almost 20% of Japan’s total exports and for around 30% of the value-added of Japan’s exports in manufacturing industries . This means that nearly half of the value-added in Japan’s gross exports originates in the service sector. However, its productivity growth has been disappointing in recent years compared to manufacturing, reflecting weaker competition. Accelerating productivity gains in services is thus essential to raise Japan’s growth potential. It could be achieved by eliminating entry barriers, accelerating regulatory reform, upgrading competition policy and reducing barriers to trade and inflows of FDI. An ambitious roadmap is essential now.
Restructuring agriculture and promoting Japan’s integration in the world economy.
Second, agriculture is one of the major Japanese international trade issues, despite the fact that it has long been a declining sector. It is also a source of quite distortive support measures, among the highest of all OECD countries. On average more than half of farm revenue is artificially generated by support policy, compared to the OECD average of 20%. More than 80% of it is provided through border measures and domestic price policies, the most distorting type of assistance.
The situation is compounded by the fact that the population working in the agricultural sector has had a rapid ageing process and is now reaching a critical stage. The average age of farmers has risen to 66, and 56% of rice farmers are over the age of 70. In the absence of fundamental reform, the agricultural sector will continue to wither, trapped in a cycle of low productivity, low earnings and dependence on subsidies and import protection.
Current policies impede farmers’ responses to market signals and hinder structural adjustment. Reform should focus on providing a more open and competitive environment, encouraging farmers to produce high-quality and high-value products.
The reform effort should begin on rice, the most heavily supported commodity, by phasing out the rice production quota system. However, low agricultural productivity in Japan is also a result of small-scale farming with an average farm size of two hectares , compared to 55 in France. It is essential, therefore, to remove all policies impeding land consolidation.
Last but not least, Japan should shift the focus from food self-sufficiency to food security by a multi-faceted approach to food security. This would include a more competitive domestic production sector and diversified sources of imports, but also sufficient emergency food reserves and long-term conservation of the agricultural resource base.
We believe that Japan’s agriculture has great potential and could capture growing market opportunities in Asia. It could to thrive within open and competitive markets. Our Survey presents a programme to unleash this capacity. The time for reform is now. We will continue to support Japan’s reform efforts to achieve this objective.
Improving the returns to investment in science by “opening Japan” to collaboration and partnerships.
Third, it is also important to open Japan to international collaboration and partnerships in science. Japan is the fifth-largest investor in R&D in the OECD, with the business sector accounting for more than three-quarters of the total. However, returns on these large investments in R&D are limited given the relatively closed science sector to international collaboration. The share of R&D funds received from abroad is among the lowest in the OECD, as is the share of internationally co-authored articles involving researchers based in Japan. The closed nature of R&D means that there are few Japanese universities with a global stature. Moreover, the output of Japan-based researchers is less frequently cited by their peers.
Making greater use of ICT-based innovation to address the needs of Japanese society
Last but not least, Japan needs to make greater use of ICT-based innovation to address the needs of the Japanese society. For example, Japan has launched over 1 000 telemedicine projects to monitor the health of the elderly. This could be further developed, particularly as population ageing occurs more rapidly in sparsely populated areas than in urban areas. ICT is also needed to promote green innovation, such as developing a smart electrical grid to support the introduction of electric cars.
Similarly, Japan has one of the most advanced broadband networks in the world, while its mobile communication operators are among the most innovative. Nevertheless, all OECD countries, and Japan is no exception, still have very high prices for international mobile roaming that act as a barrier to trade and travel. The OECD has proposed reforms to encourage effective competition and ensure fairer prices.
Last but not least, Japan needs to make the best use of its human resources and have everybody on board, particularly women, but also elder workers and young people. Business has a critical role to play here, to adjust working schemes and practices to encourage stronger women participation in the labour force.
Ladies and gentlemen:
This is an ambitious agenda to address the difficult challenges facing Japan. But I am sure that with a vibrant and dynamic private sector support, Japan will be able to face these and more challenges.
Next year marks the 50th anniversary of Japan's membership in the OECD. We will continue to work with Japan as it embarks on a new growth path. Together, we can help turn today’s challenges into opportunities for a better tomorrow.