The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of Japan 2006 published on 20 July 2006.
Another way to lift productiviy growth is by greater integration in the world economy through inflows of FDI…
Along with innovation, strengthening Japan’s links to the world economy is essential to boost productivity growth. Indeed, the stock of inward FDI, import penetration and the proportion of foreign workers in the labour force in Japan are each the lowest in the OECD area. Although the stock of inward FDI tripled between 1998 and 2002, the pace of inflows has slowed during the past few years. The government’s recently announced target of doubling the stock of FDI as a share of GDP by 2010 should spur ministries and agencies to improve the environment for foreign investors. Most importantly, the market for mergers and acquisitions (M&As) should be fully opened to foreign firms by allowing them to use their own shares to finance mergers and granting them the same tax deferrals that are available in the case of domestic M&As. In addition, while most discriminatory regulations on FDI inflows have been removed, it is important to make further efforts to facilitate FDI inflows, particularly in the service sector and network industries, by accelerating regulatory reform in product markets, notably to reduce entry barriers to both domestic and foreign firms.
The stock of Inward foreign direct investment in Japan is the lowest in the OECD area
1. Or latest year. See the source for the exact year.
2. The data used for foreign affiliates are broken down by industry of sales to be compatible with national total data.
Source: OECD, International direct investment database and OECD (2005c), Economic Globalisation Indicators, 2005.
…increasing openness to trade…
Improving the environment for inflows of FDI may also help expand international trade. Despite the marked increase in trade with China during the past decade, import penetration is significantly below the expected level, even after taking account of factors such as country size, transport costs and per capita income, although there may be other economic factors. It is important to further reduce tariff and non-tariff barriers, which appear to be higher than in other major trading regions in the OECD area, according to some measures. Trade liberalisation should be pursued through multilateral trade negotiations, the preferred approach to reducing barriers, and participation in WTO consistent regional trade agreements. Although Japan has been a latecomer to the worldwide surge in such agreements, it is now engaged in negotiations with a number of countries. However, the high level of agricultural protection appears to be an obstacle to both multilateral and regional trade agreements. It is important to reduce the level of protection for farmers in Japan, in part through a further opening of the rice market, which would provide significant economic benefits to Japanese consumers. Aspects of multifunctionality in agriculture, as well as income support for farmers, can be better dealt with through carefully targeted policy measures that minimise trade distortions.
…and liberalising inflows of foreign workers
Increasing the number of foreign workers is a major issue in regional trade agreements, given that some Asian countries wish to see improved opportunities for their nationals to work in Japan as part of such agreements. Currently, foreign workers, both legal and illegal, account for about 1% of employment in Japan, the lowest ratio in the OECD area. The number of sectors in which foreign workers are allowed should be expanded to include non-technical areas, such as caring for the elderly. In addition, the range of foreign qualifications that are valid in Japan should be expanded. Increasing immigration should help meeting emerging labour shortages, particularly for long-term nursing care, where demand is growing rapidly due to population ageing. In addition, a liberalisation of restrictions on the employment of skilled foreign workers would be positive for productivity.
Net migration into Japan is low
1. Net migration is measured as the difference between the total population on 1 January and 31 December for a given calendar year, minus the difference between births and deaths.
Source: OECD, Labour Force Statistics.
Population ageing also requires raising female labour force participation
While increased inflows of foreign workers would be beneficial, they will not be large enough to offset the projected decline in Japan’s working-age population by nearly one-fifth over the next 25 years. Removing disincentives for female labour force participation would be more effective in limiting the falling proportion of workers in the total population. While the relatively low participation rate of prime-age women reflects a number of private-sector practices, such as seniority-based wages, the government should reduce or eliminate aspects of the tax and social security system that discourage women from working full-time. In addition, it is essential to increase the availability of childcare facilities and to encourage the take-up of parental leaves and the creation of more family-friendly workplaces. Such policies would also be likely to boost the fertility rate from 1.3 children per women, one of the lowest rates in the OECD area.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assesment 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.
Strengthening the integration of Japan in the world economy to benefit more fully from globalisation