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After two decades of low growth and persistent deflation, Japan is showing signs of renewed economic dynamism. But to regain its primacy as a leading economic powerhouse and raise the well-being of its citizens, Japan needs a structural reform package to narrow the productivity gap with leading OECD countries, notably by increasing the labour participation of women and older citizens.
The Japanese economy is recovering after having suffered severe shocks from the 2008 financial and economic crisis and the 2011 Great East Japan Earthquake.
This working paper presents the background and the details of the simulations behind Box 1.4 of the May 2013 OECD Economic Outlook. A small simulation model is used to evaluate the contribution that the three pillars of the government’s strategy – fiscal consolidation, growth-boosting structural reforms and higher inflation – could make to reversing the rise in Japan’s public debt ratio.
The 2011 disaster and nuclear problems opened the door to a new energy policy, as they raised
fundamental questions about the electricity system’s ability to prevent and respond to accidents.
The problems of Japanese agriculture – in particular low productivity and the prevalence of part-time farmers and small plots have been evident for the past 50 years.
With gross government debt surpassing 200% of GDP, Japan’s fiscal situation is in uncharted territory. In addition to robust nominal GDP growth, correcting two decades of budget deficits requires a large and sustained fiscal consolidation based on a detailed and credible multi-year plan that includes measures to control spending and raise revenue.
The coming expansion will be driven by exports, and should increase business investment and employment and bring an end to deflation. While we are encouraged by these developments, it remains critically important for Japan to address extremely high and still rising levels of government debt and other challenges posed by its ageing population, said OECD Secretary-General.
Japan's key challenges are to achieve sustained growth and fiscal sustainability. The three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy should be effectively implemented to realise these goals.
Japan is poised for an economic expansion, but long-term growth prospects remain contingent on additional efforts to revitalise the economy and reduce unsustainable levels of public debt, according to the OECD’s latest Economic Survey of Japan.
The 11 March earthquake is the country's worst disaster of the post-war period and addressing reconstruction needs must be a priority. Policy must then be directed to sustaining growth through; correcting the fiscal situation, addressing labour market dualism and reforming education.