The following is the Executive summary of the OECD assessment and recommendations, taken from the Economic Survey of Japan 2006 published on 20 July 2006.
The economic expansion, which began in 2002, has enabled Japan to finally overcome the negative legacy of the collapse of the asset price bubble in the early 1990s. The upturn is projected to continue through 2007, underpinned by improving labour market conditions and accelerating exports, with inflation positive. However, as Japan emerges from a decade of economic stagnation, it faces a new set of challenges to sustain robust growth over the medium term in the context of rapid population ageing.
Successfully implementing a new monetary policy framework
The Bank of Japan should be cautious in raising interest rates, given remaining deflationary pressure. Although the announcement of the Board Members’ understanding of price stability enhances the transparency of monetary policy, the choice of a 0 to 2% zone does not leave an adequate buffer against deflation. The lower bound of the inflation zone should thus be increased. Avoiding an early and significant rise in long-term interest rates would be beneficial to economic activity, the fiscal situation and the banking sector. The financial soundness of the banking sector should be promoted by scaling back the role of public financial institutions and moving ahead with the privatisation of Japan Post.
Achieving fiscal consolidation
With gross public debt now above 170% of GDP, reducing the still-large government budget deficit is urgent. Continued spending restraint should be the priority, in part by reforming the social security system and further reducing public investment. However, expenditure cuts alone are insufficient in the context of population ageing, making revenue increases necessary, by broadening the income tax base, while some increase in the consumption tax rate may also be inevitable. It is important to maintain confidence in the government’s fiscal consolidation programme by making the Structural Reform and Medium-Term Economic Perspectives a more detailed and binding plan of spending and revenue measures to achieve a primary budget surplus at least large enough to stabilise the public debt ratio by the early 2010s.
Reducing income inequality and relative poverty
While population ageing is partly responsible for the rise in measured inequality and relative poverty, increased dualism in the labour market is another important factor. The growing use of non-regular workers should be reversed by a comprehensive approach, including reducing employment protection for regular workers. In addition, public social spending should be better targeted at vulnerable groups, such as single parents.
Upgrading the national innovation system to promote productivity growth
Raising productivity growth in the face of population ageing requires increasing the return on Japan’s high level of investment in innovation by improving the R&D system and upgrading the education system. Greater mobility of researchers is needed to enhance links between government and private research institutions. Strengthening competition, particularly in the service sector and network industries, is a key to promoting the creation and diffusion of technology. Government science and technology policy should limit the risk of government failure caused by picking priority sectors and avoid focusing too much on manufacturing, while improving framework conditions to encourage business-sector R&D.
Strengthening the integration of Japan in the world economy
Japan remains relatively isolated in terms of import penetration, the stock of inward foreign direct investment (FDI) and the inflow of foreign workers. Making fuller use of foreign goods and services, FDI and foreign workers is important to boost productivity growth, as well as to cope with labour shortages in some sectors. Achieving this objective requires reducing barriers to FDI and imports, particularly in agriculture, and relaxing controls on inflows of foreign workers.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Japan 2006 is available from:
For further information please contat the Japan Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Randall Jones, Tadashi Yokoyama and Taesik Yoon under the supervision of Willi Leibfritz.