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The following OECD assessment and recommendations summarise chapter 5 of the Economic survey of Japan published on 7 April 2008.
The key to boosting Japan’s growth potential is to enhance productivity growth in the service sector by…
While a well-designed tax reform could have a positive effect on Japan’s growth potential, the key priority for long-term growth is to improve the labour productivity performance. The potential growth rate in Japan is estimated at 1.4% over the period 2004 to 2013, the lowest rate in the OECD area, reflecting a large negative contribution from a declining working-age population. As the drag on economic growth from population ageing increases in the years to come, sustaining an improvement in living standards will depend on accelerating labour productivity growth. Given that labour productivity per hour worked in Japan is 30% below the US level, there appears to be a large potential for faster productivity growth. To accomplish this, it is essential to reverse the decline in productivity growth in the service sector, from 3.5% a year in the period 1976 to 1989 to only 0.9% between 1999 and 2004, in contrast to the high and sustained growth of productivity in the manufacturing sector.
Labour productivity growth in the service sector has slowed sharply
Annual increase in output per hour worked.
Source: EUKLEMS Database (2007).
… strengthening competition through regulatory reform…
The slowdown in productivity growth in services, in contrast to manufacturing, highlights the importance of strengthening competition. Indeed, the OECD indicator of the stringency of product market regulations in the non-manufacturing sector ranks Japan in the middle of OECD countries and well below the top performers. It is important, therefore, to strengthen competition by accelerating regulatory reform, as well as by upgrading competition policy and increasing international openness. The 2007 Regulatory Reform Programme, which includes a number of services, such as education, distribution and energy, should focus on lifting key regulations on entry and operations. It should also accomplish its goal of improving administrative tools, such as the “No-Action Letter” scheme, which allows a firm to seek advance clarification about the application of regulations to its business plan. Finally, it is important to strengthen the links between regulatory reform and the Special Zones for Structural Reform initiative introduced in 2003, which appears to be losing momentum. The initiative should be made more effective by removing barriers to the implementation of reform measures in the zones and ensuring that the initiative focuses on its key objective of nationwide regulatory reform rather than on regional development.
… upgrading competition policy, increasing international openness
Enforcement of competition law by the Japan Fair Trade Commission has been strengthened by the 2005 revision of the Anti-Monopoly Act (AMA). Nonetheless, the legal framework and enforcement should be further reinforced. First, administrative penalties and fines, which are relatively low compared with other countries and compared with the potential gains from violating the AMA, should be increased to strengthen the deterrent effect. Second, explicit exemptions from the AMA in a wide range of areas, such as insurance, the liquor business, hair cutting, agricultural co-operatives and air and maritime transport, should be reduced. Exemption is appropriate only when necessary to correct clear market failures. Third, the special treatment of small and medium-sized enterprises, which play a dominant role in the service sector, should be scaled back. Fourth, the Japan Fair Trade Commission should ensure that the large number of trade associations do not limit competition. Foreign competition is also important to boost productivity, in part as foreign affiliates have higher productivity than domestic firms. However, the share of foreign affiliates in total service turnover in Japan, as well as the proportion of services in the total turnover of foreign affiliates in Japan, are the lowest in the OECD area. It is thus important to remove barriers to inward foreign direct investment, as well as product market regulations that discourage foreign investors, in order to strengthen competition. In addition, Japan is relatively closed to international trade in services. Indeed, the import penetration rate for services in Japan is the lowest among OECD countries, indicating the need to reduce trade barriers.
International competition in the service sector is weak in Japan
1. Majority-owned affiliates under foreign control.
Source: OECD (2005), Economic Globalisation Indicators, OECD, Paris, and Service Trade Database, 2007.
…and carrying out the privatisation of Japan Post
The privatisation of Japan Post, which began in October 2007 with its division into four companies, should be fully carried out in line with the announced schedule. This important initiative is likely to shift the flow of funds away from the public sector and towards the private sector, thus promoting the dynamism of the Japanese economy. Moreover, in December 2007, Japan announced a plan to strengthen the competitiveness of its financial and capital markets, including measures to enhance the transparency of regulations.
It is also necessary to address regulatory problems in key service industries
Competition in key service industries should be strengthened through wide-ranging reforms, while strictly enforcing competition law:
Retail sector: The transparency and predictability of the Large-scale Retail Store Location Law, which aims at “maintaining the living environment”, and the City Planning Law, which is intended to revitalise urban areas, should be improved to ensure that they do not act as entry barriers to large stores.
Energy sector: A single independent sectoral regulator should be established for both the electricity and gas sectors to ensure competition and the share of consumers allowed to choose their suppliers should be expanded. In electricity, although Japan has introduced accounting separation of vertically-integrated incumbents, competition should be further strengthened through formal separation, reducing barriers to new entrants and expanding the interconnection capacity.
Transport industry: Competitive pressures should be enhanced in ports by relaxing entry barriers and reforming the “Prior Consultation Process”. In the air transport industry, the current slot allocation scheme based on IATA guidelines should be improved by introducing market mechanisms. Moreover, airlines should be able to sell tickets directly to consumers at competitive prices. Airports should be privatised and their capacity expanded in order to increase efficiency and reduce high charges.
Business services: Pervasive regulation, including by professional associations, should be relaxed, while encouraging international competition through increased recognition of foreign certificates.
Electricity prices in Japan are high relative to other OECD countries
US$/kWh for the household sector, 2006 or latest year¹
1. Price excluding tax for the United States. For Korea, no tax information is available.
Source: OECD/IEA, Energy Prices and Taxes, 1Q2007.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English and in Japanese. It contains the OECD assessment and recommendations.
The complete edition of the Economic survey of Japan 2008 is available from:
For further information please contact the Japan/Korea Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Randall S. Jones, Masahiko Tsutsumi and Taesik Yoon under the supervision of Stefano Scarpetta. Research assistance was provided by Lutécia Daniel.