Remarks by Angel Gurría
Nippon Press Centre, Tokyo, 13 April 2017
(As prepared for delivery)
Dear Ambassador Oe, Colleagues of the press corps, Ladies and Gentlemen,
It is a great pleasure to be back in Tokyo to present the OECD’s 2017 Economic Survey of Japan. Let me thank the Japanese Government, in particular the Cabinet Office, for their support in the preparation of this Survey.
We are presenting this study at a complex moment. Our latest Interim Economic Outlook confirms that a modest upswing is underway: we project global GDP growth of 3.3% in 2017, rising to 3.6% in 2018. This modest pick-up largely reflects the continuing fiscal and structural reforms in Japan’s key trading partners – notably China, Canada and the United States – as well as, a slightly more expansionary fiscal stance in the euro area.
China will remain the major driver of global growth for the foreseeable future with its economy set to grow by around 6.5% in 2017 and 6.3% in 2018. However, financial risks are mounting on the back of rising corporate debt, excess industrial capacity and inflated housing prices.
Yet, the global economy is still stuck in a low growth trap, facing many global risks, vulnerabilities, and policy uncertainties. Weak investment and trade continue to weigh on the drivers of consumption, such as productivity and wage growth; while other emerging dangers such as growing populism and protectionism risk derailing the fragile recovery.
All countries must get around the table to reverse these trends and chart the path towards fairer, more inclusive globalisation.
In this difficult context, it is encouraging to see that Japan’s economy is gathering speed. During the past four years, real output per person in Japan has more than doubled to 1.2% (compared to an average 0.5% in 1997-2012), around the OECD average; and employment has risen 3%, pushing the unemployment rate down to 2.8%, the lowest since 1994.
Growth remained above potential in 2016 due in part to stronger export performance, led by shipments to Asia and to the United States. A pick-up in international trade is expected to sustain Japan’s export growth.
GDP growth in 2017 will improve slightly to 1.2% (from 1.0% in 2016), driven by job creation, a pick-up in wages and record high corporate profits. Growth is projected to decelerate to 0.8% in 2018, as the fiscal support fades, but Japan will continue growing, albeit at a modest pace.
These are all positive outcomes, and much of the credit goes to Abenomics, with its three arrows of bold expansionary monetary policy, fiscal stimulus packages, and a reform-driven growth strategy. Prime Minister Abe added additional arrows, such as raising the birth rate from 1.4 to 1.8 children per woman and creating a society in which no one has to quit their job to care for their elderly parents.
Despite this general improvement, Japan still faces important economic and social challenges. Let me bring your attention to three of them that we consider crucial for Japan’s present and future.
One of our main concerns is labour shortages, which result from Japan’s decreasing population. The numbers are sobering. The population is projected to fall by almost a quarter by 2050 to below 100 million. That’s a decline of more than half a million each year! Meanwhile, the share of the population over the age of 65 will rise from 26% to almost 40%, remaining the highest in the OECD.
It’s no exaggeration to say that Japan’s future economic prosperity and the well-being of its people depend on a large extent on how it manages this unprecedented demographic transition. Japan is a front-runner in addressing these challenges, which will eventually be faced by many other countries.
“Womenomics” – allowing women to play a greater role – is therefore a priority. While the female employment rate has risen significantly, much of the increase has been in non-regular jobs, with hourly pay of only 60% of that earned by regular workers.
The segmentation of the labour market into regular and non-regular workers – two-thirds of whom are women – contributes to Japan’s large gender wage gap of 27%. As Prime Minister Abe stated, the goal should be to “eliminate the term ‘non-regular workers’.”
In addition to breaking down labour market dualism, the Survey also calls for expanding employment opportunities for women by reducing childcare shortages and by changing the culture of long working hours to improve work-life balance.
Population ageing poses crucial challenges for Japan’s fiscal situation, as it is projected to raise age-related social spending by the government from 24% of GDP in 2020 to 31% in 2060. Japan’s future also depends on ensuring fiscal sustainability over the long term. Gross government debt reached 219% of GDP in 2016, the highest ever recorded in the OECD!
Implementation of a detailed and credible fiscal plan is therefore essential to maintain market confidence and to achieve the government’s goal of putting its debt ratio on a downward trend in the 2020s. Our Survey sets out a number of recommendations for controlling public social spending by the central and local governments, such as increasing the use of generic pharmaceuticals and moving long-term care out of hospitals.
Additional tax revenue is also needed, primarily through gradual increases in the consumption tax rate. Even with the hike to 10% in 2019, the rate will remain among the lowest in the OECD and about half of the average. Moreover, further revenues could come from raising the consumption tax and increasing environmental taxes.
Last but not least, meeting Japan’s demographic and fiscal challenges requires increasing productivity. Since 1990, labour productivity in Japan has been stuck at less than three-quarters of the average of the top half of OECD countries, which is surprising in a country with so much innovation potential and such rich human capital.
The Survey argues that Japan needs to broaden its productive base to generate strong and sustainable productivity gains, leading to inclusive growth that distributes the dividends of increased prosperity fairly across society. This is at the core of the OECD’s mantra. And indeed, this is also the objective of Prime Minister Abe’s 2016 plan to promote the “dynamic engagement of all citizens”.
The Survey also emphasises the synergy between policies to boost productivity and promote inclusive growth – what we have coined the “Productivity-Inclusiveness Nexus”. Reforms that focus on narrowing the large productivity gaps between manufacturing and services, and between large companies and SMEs would help achieve these dual objectives.
Reform priorities include: improving the personal bankruptcy system to facilitate the exit of non-viable firms; promoting entrepreneurship; successfully implement Japan’s new Stewardship and Corporate Governance Codes; and increasing Japan’s integration in the world economy.
Ladies and Gentlemen,
Japan is making great efforts to recover its economic dynamism. We are certain that it will succeed. But we need to address the structural challenges to liberate this country’s full potential. It’s true that the international context is not favourable, it’s true that inertia and vested interests produce strong headwinds, but let’s remember the words of Prime Minister Abe addressing the OECD Ministerial Council Meeting in 2014 “I consider such times as these to be tremendous opportunities to refashion our thinking and push forward with structural reforms.”
This is the type of dynamic thinking we need! Count on the OECD to make it happen.