Labour productivity growth in the service sector, which accounts for 70% of Japan’s economic output
and employment, has slowed markedly in recent years in contrast to manufacturing. The disappointing
performance is associated with weak competition in the service sector resulting from strict product market
regulation and the low level of import penetration and inflows of foreign direct investment (FDI).
Reversing the deceleration in productivity growth in the service sector is essential to raise Japan’s growth
potential. The key is to eliminate entry barriers, accelerate regulatory reform, upgrade competition policy
and reduce barriers to trade and inflows of FDI. Special attention should be given to factors limiting
productivity growth in services characterised by either low productivity or high growth potential, such as
retail, transport, energy and business services. Finally, it is essential to increase competition in public
services, such as health and education, where market forces have been weak.
