Abenomics’ ‘third arrow’ key to revitalising Japan’s economy


15/04/2015-The Japanese economy is expected to return to growth, but fundamental structural reforms are needed to promote a more robust recovery, help ensure long-term fiscal sustainability and close the gap in living standards with the leading OECD countries, according to the latest OECD Economic Survey of Japan.


The Survey, presented in Tokyo by OECD Secretary-General Angel Gurría, highlights the impact of Abenomics - the government's ongoing use of bold monetary policy, flexible fiscal policy and a reform-driven growth strategy - to revitalise the economy and defeat deflation.  The OECD expects GDP growth of 1% this year and 1.4% in 2016.


"The unprecedented use of monetary expansion and flexible fiscal policies must be supplemented by rigorous implementation of Abenomics’ crucial ‘third arrow - structural reforms,” Mr. Gurría said. “Ambitious action is needed to raise productivity and boost Japan’s long-term growth potential, including by increasing women's role in the labour market and stimulating innovation, to ensure higher living standards while ensuring the public debt burden remains sustainable."  (read the full speech).


The OECD highlights productivity increases as the key to unlocking future growth, particularly given Japan's ageing population and already shrinking workforce. Labour productivity is surprisingly low – 25% below the average of the top half of OECD countries -  considering that Japan has very high levels of secondary and tertiary education and R&D spending. To remedy this, policies should aim to increase the return on R&D investment through improvements to the innovation ecosystem. This will require better corporate governance, reduced product market regulation and more labour market mobility.


Given population ageing, Japan must make better use of all workers. The female labour force participation rate is still 20 percentage points below that of men, one of the biggest gender gaps in the OECD. Ensuring that female participation rates converge to those of men by 2030 would drastically limit the expected fall in labour supply and boost economic growth, the Survey said.


Further remedial action will be necessary, however, to ensure fiscal sustainability in Japan over the long term. The gross government debt reached 226% of GDP in 2014, the highest level ever recorded in an OECD country. Given the budget deficit of around 8% of GDP, Japan’s debt ratio is set to rise further into uncharted territory. With public debt service now the biggest item in Japan's central government budget, a detailed and credible fiscal plan is essential to put the debt burden on a downward trajectory over the medium term.


Any such plan should include fiscal consolidation sufficient to achieve a primary surplus by Financial Year 2020, notably through efforts to cut healthcare costs and reduce the growth of social spending. Further increases in the consumption tax and a broadening of the base for personal income taxes will also be necessary, the Survey said.

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Furthermore, the Survey recommends tackling labour market dualism and better targeting public social spending on those who need it most, including through the introduction of an earned income tax credit for low-paid workers. This can help fight poverty and promote social cohesion. The necessary fiscal consolidation effort should take these social concerns into account.

An Overview of the Economic Survey, with the main conclusions, is freely accessible (in English, French and Japanese) on the OECD’s web site at: http://oecd.org/japan/economic-survey-japan.htm. You are invited to include this Internet link in reports on the Survey.


An embeddable version of the Economic Survey is also available, together with information about downloadable and print versions.

For further information on the Economic Survey, contact Naoko Kawaguchi, media officer in the OECD Tokyo Centre (+81 3 5532 0026), or the OECD Media Office (+33 1 4524 9700).


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