Foundations for Growth and Competitiveness 2026

Japan

Per capita income has remained around 30% below the upper half of OECD countries, with labour productivity among the lowest in the OECD, and sluggish growth over the past decades. Private investment as a share of GDP is relatively high in international perspective but real fixed assets per worker have been roughly flat for the past two decades, despite the need to compensate for a shrinking working-age population. The rising participation rates of women and older persons have supported employment, and the unemployment rate is the lowest in the OECD.

Boosting business dynamism, by facilitating firm entry and exit, and further attracting foreign capital are key to higher productivity growth. More intensive collaboration between firms and universities can facilitate the diffusion of technologies to a larger number of firms and sectors. Changing skill needs, including those to complement new technologies and extended working lives, highlight the importance of re-skilling and upskilling. Enhancing the use of renewable electricity supply would help Japan boost energy security and affordability, whilst achieving its ambitious climate targets.

Economic performance

Gaps to the average of the upper half of the OECD countries

Source: Panel A: OECD, Economic Outlook database; Panel B: OECD, Labour Force Statistics database; Panel C: OECD, Economic Outlook and Productivity databases; Panel D: OECD, Economic Outlook and Annual National accounts, GFCF by assets databases.

Selected policy gaps

Source: OECD calculations based on the Foundations for Growth and Competitiveness database.

Competition: Streamline regulations to reduce entry and exit barriers and address gaps in public procurement

A more competition-friendly regulatory framework would boost business dynamism and productivity growth. According to the OECD Product Market Regulation indicators, licensing requirements are relatively low, but the complexity of regulations, including the high number of procedures involved in the registration of start-ups, could be reduced. Public procurement does not guarantee a level playing field for all potential bidders. Complexity and lack of preventive measures lower the effectiveness of the insolvency regime and can be a barrier to firm exit.

Recommendations

✓ Reduce the complexity of regulations by streamlining requirements for businesses through enhanced digitalisation of public services, particularly to ease the administrative burdens on start-ups.

✓ Ensure that fees and entry requirements of the tender processes do not create a barrier to smaller firms.

✓ Enhance early warning tools for firms in distress and continue to streamline insolvency procedures for SMEs.

Foreign direct investment: Lower remaining constraints to inward investment

Japan has the lowest inward foreign direct investment (FDI) stock as a share of GDP in the OECD. While overall regulatory barriers to FDI are close to the OECD average, further easing access by and integration of foreign firms into the local ecosystems, including public procurement at local levels, could help raise inward FDI. Japan has one of the most open regulatory environments for trade in services and digital services, but services imports as a share of GDP are relatively low, reflecting some remaining barriers, such as those regarding electronic transactions.

Recommendations

✓ Continue to support inward FDI with eased business entry procedures, enhanced cooperation with domestic firms and multi-lingual support for foreign firms, especially at the local level.

✓ Promote inflows of FDI by reducing explicit restrictions, focusing on those affecting the service sector.

Innovation: Enhance business-academia links and redesign R&D tax credits

While business R&D investment is among the highest in the OECD, it is mostly concentrated in large firms in the manufacturing sector. Better diffusion of innovation would boost productivity growth. The share of innovative firms with process or product innovation, including in information communication technologies, is relatively low. The limited interaction between business, public R&D institutes and universities restricts the scope for basic research, which can create large knowledge spillovers. R&D tax credits are generous, but their design could be improved to enhance incentives for innovative start-ups and SMEs.

Recommendations

✓ Ensure that the University Endowment Fund (JPY 10 trillion) effectively enhances basic research capacity by monitoring and assessing selected universities’ research projects.

✓ Foster links between businesses, universities and public research institutions by encouraging staff mobility through cross-appointments.

✓ Promote business R&D, particularly in small companies, by making R&D tax credits refundable and allowing them to be carried forward.

Education: Enhance skill development opportunities, especially for ICT-related skills

While numeracy and literacy skills of students and adults are among the highest in the OECD, according to OECD PISA and PIAAC surveys, a well-functioning system of reskilling and upskilling is needed to help workers adjust to changes in labour market needs, such as the digital and green transformations. Off-the-job and on-the-job training offered by firms are trending up, but the index of learning at work remains weak. The use of information and communication technology (ICT) skills at work and at home is low, reflecting the high share of adults with low ICT skills.

Recommendations

✓ Support skill-building and usage at the workplace, especially for ICT and artificial intelligence.

✓ Expand job-training schemes, especially for the low-skilled and those with limited access to firm-based training, using the new professional and vocational universities and junior colleges to provide practical vocational education.

✓ Provide training and support for teachers to integrate ICT into their lessons, and boost students’ use of and skills in digital technologies.

Environment: Reduce dependence on imported fossil fuels by stepping up the development of green technologies and the use of renewables

Given Japan’s high dependence on imported fossil fuels, a faster expansion of the use of renewables, which remains below the OECD average, can enhance energy security and improve affordability. The fragmentation of the electricity system hinders the cost-effective integration of larger shares of renewable electricity sources. Research and development to reduce emissions using hydrogen and ammonia, and of carbon capture, utilisation and storage, can have spillover effects on growth-friendly innovation in other fields.

Recommendations

✓ Step up the promotion of research, development and deployment of green technologies and encourage greater energy efficiency.

✓ Continue investments in transmission and distribution infrastructure, based on cost-benefit analysis, and enhance the electricity grid.

Recent progress on structural reforms

Japan launched the Start-up Development Five-year Plan in 2022, and extended the maximum period of stay for foreign entrepreneurs under the Startup Visa programme to two years. The “Programme for Promotion of Foreign Direct Investment in Japan 2025” has ambitious targets, including a JPY 120 trillion FDI stock by 2030. The Integrated 2023 Three-Pronged Labour Market Reform agenda will provide additional incentives for reskilling and upskilling. ICT is being promoted in schools by the provision of one device per student and high-speed networks under the GIGA School Programme, and new programming courses in the national curriculum. The pilot schools designated to disseminate effective practices and support for ICT training will help boost teachers’ use of ICT. Moreover, the government set up a University Endowment Fund in 2022, which disbursed its first funds in 2025, to help universities raise their research capabilities and opportunities.