Remarks by Angel Gurría, OECD Secretary-General, for the launch of the Brochure "Policies for a revitalisation of Japan" at the Yomiuri International Economic Society
25 April 2012
(As prepared for delivery)
Ladies and Gentlemen,
I am very happy to be back in Tokyo to share with you our latest publication on the Japanese economy: this brochure on “Policies for a Revitalisation of Japan”.
One year ago, just after the Great East Japan Earthquake, I came to Tokyo to give a message of optimism: Japan would soon overcome the effects of the Great East Japan Earthquake and its economy would bounce back quickly from the disaster by building on its unique stock of human capital, financial wealth, technology and discipline. Fortunately, that prediction came true.
Today I am here to follow up on this message and share with the Japanese authorities our key OECD policy recommendations in areas that are critical for Japan’s future: from fiscal consolidation, tax reform and the opening of the economy, to education and skills, innovation, agricultural reform and green growth.
I will not go over the full spectrum of topics covered in the brochure, but I would like to focus on one critical issue for Japan and many other OECD countries: social cohesion.
Our countries face a widespread concern of rising inequalities
Our 2011 report “Divided We Stand” is an important wake-up call. It shows that income inequality in OECD countries is at its highest level for the past half century. The average income of the richest 10% of the population is indeed about nine times greater than that of the poorest 10% across the OECD, up from seven times 25 years ago.
Japan is no exception: measured by the Gini coefficient inequality has risen since the mid-1980s and is now above the OECD average among working-age people. The top 10% of Japanese earn ten times more than the bottom 10%. And Japan’s rate of relative poverty – the share of population with an income below one-half of the national median – is more than 15%; the sixth highest in the OECD area.
The 2008 global economic crisis added urgency to the inequality challenge. The social compact is under tremendous stress in many countries. Uncertainty and fear of social decline and exclusion have reached the middle class. People feel that they are bearing the brunt of a crisis for which they are not responsible. Addressing the question of “fairness” is thus necessary and even urgent to fully restore confidence.
To do this, Japan needs to tackle labour market dualism
The “Divided We Stand” report found that the single most important driver of inequality has been greater inequality in wages and salaries.
In Japan, wage inequality has been exacerbated by the rising share of non-regular workers, which has doubled since 1990 to 34% of total employment in 2010. Non-regular workers are paid substantially lower wages, even after adjusting for type of job and education.
In addition, non-regular jobs are precarious. One quarter of workers with non-regular contracts are fixed-term workers or dispatched from temporary work agencies. Given the relatively short tenure of non-regular contracts, only 28% of such workers receive on-the-job training, less than one-half the proportion for regular workers. Non-regular workers also receive less coverage by social insurance. More than one-third of firms do not pay employment insurance contributions for their non-regular workers.
The negative consequences of labour market dualism are exacerbated by limited mobility between regular and non-regular employment. Since 2002, only about 2% of non-regular workers have transitioned to regular work each year.
Breaking down labour market dualism requires a comprehensive approach, combining less employment protection for regular workers and greater training opportunities for non-regular workers. It also requires providing them with better coverage by the social insurance system. Japan made important reforms in this regard in 2009-10, which resulted in an increase in the number of workers covered by employment insurance by 2.2 million.
Promoting gender equality is also crucial
Women are under-represented in Japan’s labour market and when they do participate they are over-represented among non-regular workers. This widens the gender gap in Japan, which is the second highest among OECD countries.
Reducing persistent gender inequalities in economic opportunities and outcomes is essential for fairness and equity. In addition, it would create more attractive employment opportunities for women, thereby increasing their labour force participation. This is a priority for Japan, to support the long-term growth potential of the economy and to mitigate the effects of rapid population ageing.
But giving women a better chance to pursue economic opportunities also requires making workplaces more family-friendly and moving from seniority-based to performance-based wage systems. It also requires increasing the supply of affordable, high-quality childcare and removing aspects of the tax and social insurance systems that create disincentives for second-earners in families.
All these policies favouring greater gender equality are described in our up-coming report on Gender Equality, to be discussed at our Ministerial Meeting next May. It should be a source of inspiration for the Japanese policymakers.
Education is another key ingredient in reducing inequality
The Japanese education system is exemplary in many ways, but there is still room for improvement. For example, in the area of pre-primary education. The share of public spending on pre-primary education in Japan is the third lowest in the OECD area. We thus recommend more investment in pre-school education.
Another equity concern in Japan is the prominent role of juku. The problem is not that juku helps students improve their performance and obtain the higher test scores that allow them to attend more prestigious universities. The issue is that better-off families can afford to pay more, which creates a link between the performance of students and household income. By helping break this link, less reliance on juku would have a long-term impact on inequality.
The high level of university tuition is another obstacle to students from low-income families. About one-third of university students receive loans, compared to up to 75% in a number of OECD countries. Making loan repayments contingent on a students’ income after graduation would increase the affordability of higher education and help reduce inequalities.
Improving social spending is essential
There is also a role for well-targeted social spending to reduce inequality and relative poverty. Cash transfers and income taxes lower inequality by only 17% in Japan, well below the OECD average of 25%, even if total public social spending matches the OECD average of 20% of GDP. This is due to the fact that social spending is concentrated on old-age and health-related expenditures.
In contrast, total income support for the working-age population accounts for only 1.7% of GDP, less than half the OECD average. We thus recommend the government to develop social welfare programmes targeted at those most in need. But we recommend moving cautiously and incrementally in doing so, and carefully designing these programmes to achieve their intended objectives, while avoiding wasteful spending, which Japan can ill afford, and negative externalities.
The scope for additional spending – both for new programmes and to cope with the pressure of population ageing – is indeed limited by Japan’s fiscal situation, which has reached a critical point.
To promote these changes Japan needs to improve its fiscal situation
Two decades of budget deficits have pushed gross government indebtedness to uncharted territory at around 200% of GDP, the highest ever recorded in the OECD area. The debt ratio will continue to rise, given that a budget deficit of around 9% of GDP is expected in 2012. Although the impact of high debt has been mitigated thus far by very low long-term interest rates, Japan is vulnerable to a run-up in rates, which would place an additional burden on an overall stretched budget.
Achieving the government’s goal of a primary budget surplus by 2020 and putting the public debt ratio on a downward trend from 2021 will require both spending cuts and revenue increases. The scope for spending cuts is limited by population ageing, which is boosting outlays on pensions and health and long-term care.
Tax revenues, the fifth lowest in the OECD area as a share of GDP, have thus a major role to play. The negative short-term impact of tax hikes on growth can nevertheless be mitigated by shifting the composition of the tax take toward the consumption tax and other indirect taxes, notably environment-related taxation.
The standard rate of Japan’s consumption tax, which is a value-added tax, is indeed only 5%, the lowest among OECD countries. Relying primarily on indirect taxes would maintain Japan’s low tax wedge, which is important for long-term growth and employment. In sum, there is much room for raising additional revenue in a relatively neutral, non-distorting way.
The Prime Minister’s proposal to double the consumption tax rate in two steps to 10% is an important step in this regard. The first step – to 8% -- should be implemented as planned in 2014, if not before. And it is important to maintain the single-rate structure to avoid distorting consumer choices.
The negative impact on income distribution should be addressed through other measures targeted to low-income earners, such as an earned income tax credit.
Ladies and Gentlemen:
Japan faces a difficult challenge of achieving socially sustainable growth while addressing the public debt problem. Higher tax revenue is needed to stabilise and eventually reduce the public debt ratio and cover the impact of population ageing on social spending.
Given the high debt level, large-scale increases in social spending are not affordable. Instead, Japan needs to focus on addressing the underlying cause of rising equality and poverty through structural reforms that can provide a double dividend by boosting economic growth as well as fostering social cohesion. We very much hope that this Brochure will help design and promote these reforms. The new rise of Japan is just starting and the OECD wants to be part of this effort.
Thank you very much.