Müge Adalet McGowan
Tetsuya Yoshioka
OECD Economic Surveys: Japan 2026
Abstract
After three decades of near-zero inflation, there are signs that the Japanese economy is transitioning to a new equilibrium of price, growth and income dynamics. Headline consumer price inflation was above target for around four years, and nominal wages have recorded their highest growth since 1990s. Economic growth has overall remained resilient to a succession of shocks and external headwinds, despite some volatility. Policies need to balance keeping inflation around the 2% target, ensuring fiscal sustainability and boosting potential growth notwithstanding an ageing population. In a context of increasing debt servicing costs, putting public debt on a downward trajectory should be prioritised. This requires addressing ageing-related costs, increasing revenues and reforming the fiscal framework. Improving the relevance and targeting of adult learning to ensure fuller participation by female, older and non-regular workers and the flexibility of labour markets to boost labour supply would help counter adverse demographics and tackle labour shortages. Ensuring the forthcoming carbon pricing provides the right incentives for emission reductions and boosting the efficiency of permitting procedures to increase the share of renewables in electricity production are needed to meet the net-zero emissions target by 2050.
The Japanese economy is currently in a transitional period, shifting from three decades of near-zero inflation to an economy with rising prices and wages and growth supported by domestic demand. The increasing signs that Japan is reaching a new equilibrium, with inflation sustained at the Bank of Japan’s 2% target, is welcome. The rise in inflation was initially driven by global shocks, including the pandemic, supply disruptions and rising commodity prices. However, underlying price pressures have also picked up. Labour shortages arising from an ageing population accompanied by high corporate profits have pushed up nominal wages, which have experienced their strongest growth since the 1990s, and private investment. The increase in inflation expectations and pass-through of input price increases to output prices also suggest that the move towards this new equilibrium is likely to be sustainable.
Policies will need to be carefully calibrated to ensure the resilience of the Japanese economy. The ensuing steps towards monetary policy normalisation, with increases in the policy interest rate and reduction in purchases of Japanese government bonds by the Bank of Japan, creates opportunities and challenges. Higher interest rates can improve financial market functioning and resource allocation, boosting productivity growth (Chapter 2), including by facilitating the exit of low productivity firms. They can also increase the profitability of banks, although a disproportionate increase in bankruptcies could hurt bank balance sheets. Higher rates will also increase debt servicing costs for the government in nominal terms, given the high gross public debt-to-GDP ratio. As the investor base has to broaden and long-term rates have been increasing, fiscal policy needs to be prudent to ensure investor confidence.
Stronger fiscal consolidation efforts to build buffers need to be complemented with structural reforms to counterbalance the challenges from the shrinking and ageing population. The number of elderly as a share of the working population is projected to be 79% in 2060, the second highest in the OECD. GDP per capita growth has been lagging its peers (Figure 1.1, Panel A), reflecting the fall in the working age population and sluggish productivity growth (Chapter 2). Thanks to structural reforms, most notably those that increased labour force participation of female and older workers, per capita income growth has picked up since 2012 (Panel B). While the pandemic disrupted progress, the changing domestic economic environment is expected to deliver robust growth, despite the recent rise in external headwinds, including the surge in energy prices.
Note: G7 refers to GDP weighted average of its members.
Source: OECD, National Accounts database.
Additional reforms are needed to further boost potential growth. In recent years, Japan has increased its spending commitments for children-related and green policies designed to raise fertility rates and meet climate targets. The new government’s strategic areas for investment include digitalisation, artificial intelligence, semiconductors and defence (Box 1.1). It will be important to prioritise growth-enhancing reforms, such as increasing labour market participation and flexibility, facilitating labour mobility to address labour shortages and boosting productivity growth (Chapter 2).
The government’s policy agenda, outlined in the Comprehensive Economic Measures to Build a Strong Japanese Economy, consists of three pillars:
1. Securing everyday life and addressing rising prices: The policies include measures to counter energy inflation (abolishment of the provisional gasoline and diesel tax rates in 2025-26) and targeted subsidies and grants to local governments to enable them to tailor programmes to local needs. Basic deductions for income tax have been raised in line with inflation, and a one-off child-rearing support allowance of JPY 20 000 is provided. In addition, support to SMEs to improve productivity, raise wages and carry out business succession and mergers (e.g. the promotion of price pass-through, labour-saving investment) and support for key industries in local areas to boost regional growth potential will be implemented.
2. Building a robust economy through strategic investments to enhance resilience against potential crises and growth-oriented investment: This includes boosting economic security and strengthening supply chains, via public-private partnerships in 17 strategic sectors (AI and semiconductors, shipbuilding, quantum tech, synthetic biology and biotechnology, aerospace, digital and cybersecurity, content (animation, music, movies, etc.), food tech, resource and energy security and green transformation (GX), disaster prevention and national resilience, drug discovery and advanced medicine, fusion energy, critical minerals and parts/materials, port logistics, defence industry, information and communications and maritime and ocean).
3. Strengthening defence capability and diplomatic power: The aim is to reinforce defence capabilities to respond to an evolving security environment, enhance international cooperation and boost national resilience, such as disaster prevention and reconstruction, and stable energy and good supply. For example, an expansion of international agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, will be pursued.
The FY2025 supplementary budget allocated funds for all the pillars, including bringing forward plans to raise defence spending to 2% of 2022 GDP to FY2025 from FY2027. The Headquarters for Japan’s Growth Strategy was established in November 2025. Policies will also aim to address eight cross-sectoral issues (becoming a technology-driven nation and strengthen competitiveness, human resource development, startups, unleashing potential through finance, labour market reform, reducing burdens of caregiving, childcare, improving the environment for wage increases and cybersecurity). Following the formulation of roadmaps for 17 strategic sectors by relevant ministries, including details, timing and target amount of the investments, a Growth Strategy is expected to be published in the summer of 2026. Measures, such as multi-year budgeting, are planned to increase investment certainty. A Disaster Management Agency will be established in 2026. Another important goal is to build a social security system for all generations. Reforms to lower health and long-term care premiums will be considered (e.g. out-of-pocket costs for over-the-counter equivalents, revision of drug prices, strengthening ability to pay for co-payments), taking into account the burden on those with chronic illnesses or low incomes. A consultation process has been launched to design a refundable tax credit scheme for low- and medium-income households.
Note: This box is not exhaustive and reflects the situation before the elections for the Lower House of Parliament on 8 February.
Source: Government of Japan (2025), Comprehensive Economic Measures to Build a “Strong Japanese Economy”.
Against this background, Section 1 sets out recent macroeconomic developments and forecasts. Sections 2 and 3 discuss monetary and financial policies, respectively. Section 4 focuses on fiscal policy developments and long-run fiscal sustainability challenges. Sections 5 and 6 cover two structural issues, labour shortages and climate mitigation and adaptation, respectively.
Real GDP grew robustly at 1.2% in 2025. While growth has been below that in the G7 average, it has been above potential output (Figure 1.2, Panel A). While net exports have fluctuated due to frontloading ahead of higher tariffs, domestic demand has been the main driver of growth (Panel B). The number of employed persons has been increasing, and the unemployment rate remains near historic lows, at 2.7% in March. Monthly indicators, such as industrial production and exports, point to a strong start to 2026, which will partly be disrupted by the Middle East conflict.
Note: Shaded area refers to projections.
Source: OECD, National Accounts database; and OECD, Economic Outlook database.
Nominal wage growth has gained momentum, reflecting labour shortages, higher prices, and robust corporate profits. The average rate of headline wage increase agreed by labour unions was a historically high 5.25% in the 2025 Shunto wage negotiations. The average rate of base pay increase, among unions for which increases can be identified, was 3.7%, with wage growth spreading to SMEs (Figure 1.3, Panel A). The preliminary outcomes for the 2026 wage negotiations imply an increase of 5.1% for total wages and 3.5% for base pay. Wages have also been supported by higher minimum wages, which increased by JPY 66 from the previous year to JPY 1 121 in FY2025. Nevertheless, private consumption started to pick up only recently, as nominal wage growth was 2.3% in 2025 and high inflation constrained real wage and disposable income growth (Panel B).
Note: 1. The horizontal axis shows fiscal years for the minimum wage. 2026 values are as of 14 April.
Source: Japanese Trade Union Confederation; Ministry of Health, Labour and Welfare; and Cabinet Office.
Headline consumer price inflation and inflation excluding fresh food have been above the Bank of Japan’s 2% target between April 2022 and December 2025 (Figure 1.4, Panel A). The main driver of the headline inflation of 3.2% in 2025 was high food price inflation, in particular of rice, driven by temporary and now easing supply factors (Panel B). Base effects and temporary factors, such as energy subsidies, lowered headline inflation in early 2026. The surge in energy prices from the Middle East conflict is expected to push inflation up in the second quarter of 2026, even though Japan introduced subsidies to cap retail gasoline prices to JPY 170 per litre. Other indicators related to firm behaviour and expectations also suggest that inflation will converge towards target in 2026-27. The changes in wage and price dynamics have impacted firms’ ability and willingness to pass on rising costs to client firms (Panel C). Survey-based measures of firm inflation expectations have stabilised above the 2% target (Panel D).
Note: 1. Surveyed among business-to-business firms.
Source: Ministry of Internal Affairs and Communications; SME Agency; Bank of Japan; and OECD calculations.
Despite the uncertainty and higher tariffs, business sentiment remains favourable, especially among larger firms in the non-manufacturing sector (Figure 1.5, Panel A). High corporate profits have been supporting wage growth and business investment, which is expected to be maintained in FY2026 (Panel B). The Bank of Japan’s March Tankan Survey points to continued investment plans, with a 3.0% y-o-y increase for all large enterprises, which partly reflects labour shortages. Industrial production has been volatile, but the outlook remains positive. Nevertheless, risks from the Middle East conflict and global uncertainty on investment remain high. Japan imports around 90% of its crude oil from the Middle East. Although Japan maintains abundant strategic reserves equivalent to around seven months of consumption as of 28 April 2026 and only around 10% of its LNG imports is from the Middle East, elevated oil and gas prices could erode the profits of Japanese importers and damp consumer demand.
Note: 1. Non-financial firms. Horizontal axis indicates fiscal years. For FY2025 and FY2026, firms’ plans on current profits and investment in March were adjusted with three-year averages of revision rates to the outturns of their growth.
Source: Bank of Japan.
The United States and China each account for around 20% of Japan’s goods exports, while transport makes up 22% of goods exports (Figure 1.6). Since the pandemic, Japan’s real effective exchange rate depreciated significantly. Between 2020 and 2022, this may have been driven by a negative term of trade shock (Figure 1.7, Panel A), as supply constraints raised import prices of energy and raw materials.
Note: Data refer to goods trade. Other Regional Comprehensive Economic Partnership (RCEP) includes Australia, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand, and Vietnam. Russia and Ukraine are included in Other Europe.
Source: Ministry of Finance and OECD calculations.
The exchange rate pass-through rate to consumer price inflation has increased between mid-2000s and 2020s, reflecting higher import penetration (Yagi et al., 2022[1]). The yen depreciation supported the profitability of some exporting firms, particularly those that do not heavily rely on imported inputs, and inbound tourism, while increasing the burden on the import sector through higher import prices. Nevertheless, the combination of cyclical and structural factors (pandemic-related demand shocks, rising competition, supply chain disruptions and restructuring) contributed to a loss of export market share, despite the yen depreciation. A variety of factors, including interest rate differentials, carry trade, and volatility in global markets, contributed to exchange rate developments since 2022. Japan’s export market shares stabilised between 2022 and 2025, which may be reflecting the end-of pandemic related disruptions, the yen depreciation and increasing service exports (Figure 1.7, Panel A).
Note: Panel C: Digital services include professional and management consulting services, telecommunications, computer, and information services and charges for the use of copyrights. Tourism-related services include travel and passenger transport. Some categories are omitted, and components do not add up to the service balance.
Source: OECD, Economic Outlook database and Bank of Japan.
The changes in US tariffs (a flat tariff of 10% in April 2025, 15% in August 2025 and 10% in February 2026) created some frontloading and correction of exports (Panel B). Real goods exports to the United States recorded a quarterly growth of 8.4% in the first quarter of 2025, before contracting in the second and third quarters, followed by a 2.4% and 3.2% rebound in the fourth quarter of 2025 and the first quarter of 2026, respectively. At the same time, exports to non-US destinations, especially Asia excluding China, increased, highlighting the importance of trade diversification. Despite a robust inbound tourism, the services trade balance remains slightly negative, as digital-related services imports have been at high levels (Panel C). Supported by yen depreciation, primary income balance, mainly investment income, has risen to 6.3% of GDP in 2025 (Panel D), contributing to the increase in the current account.
While Japanese industries have increasingly participated in global value chains, higher geopolitical tensions and higher tariffs are leading to some shifts towards reshoring, near-shoring and local production. OECD modelling shows that a supply chain localisation scenario would lower trade, GDP and resilience to shocks globally and in Japan (OECD, 2025[2]). As countries consider strategic shifts in response to supply chain vulnerabilities, maintaining open markets will be key to balance economic security with continued growth (OECD, 2025[3]). Hence, it is welcome that Japan has continued to promote bilateral and multilateral rule-based international trading partnerships, with the coverage of Japan’s trade agreements expanding from around 20% in 2018 to around 80% in 2024 (Cabinet Office, 2025[4]). At the same time, in 2024, Japan has added advanced electronic parts to the critical goods designated under the 2022 Economic Security Promotion Act, of whose stable supply should be secured. Furthermore, the Strategy for Semiconductor and the Digital Industry seeks to increase domestic development and production of advanced semiconductors, with a goal to increase the sales of domestically-produced semiconductors by more than JPY 15 trillion by 2030 (OECD, 2025[3]). In this context, Japan supported the creation of a new chip venture (Rapidus Corp) with public funds of JPY 1.7 trillion.
Real GDP is projected to ease slightly, but continue to expand at a moderate pace and growing above potential at 0.7% and 0.9% in 2026 and 2027, respectively (Table 1.1). Despite the headwinds from the rising cost of energy imports, growth will be mainly driven by domestic demand. Business investment is projected to be supported by solid corporate profits and government subsidies. High corporate profits will enable continued wage growth, which together with easing inflation, will support private consumption. The fiscal stimulus package (below) will support public consumption and investment in 2026. The increase in energy prices is expected to result in stronger price pressures in the near-term, but headline consumer price inflation is projected to move back to the 2% target in 2026-27.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Calculated as the sum of the seasonally adjusted quarterly indices for each year.
3. Consumer price index excluding food and energy.
Source: OECD, Economic Outlook database.
The main risks are high energy prices, potential disruptions in supply chains and weaker-than-expected external demand due to geopolitical tensions and trade policy uncertainty. While Japan has reduced its dependence on single suppliers, it remains heavily dependent on China for some rare earth minerals. Sharp movements in bond and equity prices could destabilise financial markets and hurt the balance sheets of financial institutions and the government. Yen carry-trade (borrowing yen at a low cost to invest in other currencies and assets offering higher yields) could increase volatility. A loss of confidence in Japan’s fiscal sustainability and an increase in the sovereign risk premium could also adversely affect the financial sector and the real economy. A faster-than-expected reconstruction of global supply chains and the development of new export channels could further boost exports and support growth. In addition, other lower probability threats to the outlook could adversely impact growth (Table 1.2).
With significant developments towards a positive wage-price (virtuous) cycle, rising corporate profits, a stronger relationship between input and output prices, and an increase in inflation expectations, monetary policy normalisation has commenced. The changing price dynamics, coupled with labour shortages, have led to robust increases in nominal wages and private investment. As a result, despite some volatility, the Japanese economy has been resilient to several shocks and growth is projected to remain above potential in 2026-27. The Bank of Japan (BoJ) has gradually raised the policy rate, which reached 0.75% in December 2025, and started reducing the size of its balance sheet (Table 1.3). A smaller balance sheet can provide more policy space, lowers the risks of financial losses for the BoJ and improves Japanese Government Bond (JGB) market functioning.
Monetary and financial conditions remain accommodative (Figure 1.8). The range of the estimates of the natural rate of interest is -0.9% to 0.5% (Bank of Japan, 2026[5]). While these estimates remain highly uncertain, assuming that inflation is 2%, the current policy rate would be near the bottom end of the range of the nominal neutral rate. The short-term policy rate is projected to reach 2% by the end of 2027. High uncertainty, most recently due to the Middle East conflict, calls for close monitoring and a data-driven pace to monetary policy normalisation. The OECD projects that inflation will converge towards the 2% target in 2026-27 and GDP growth will remain resilient, driven by robust domestic demand. Hence, given inflation projections, signs of sustained wage growth and a closing output gap, the policy interest rate should continue to be increased gradually to avoid overshooting.
Note: Panel B: A positive value indicates accommodation.
Source: OECD, Economic Outlook database and Bank of Japan.
The BoJ’s approach to reducing its purchases of JGBs and its clear communication is welcome. Long-term yields have risen (Figure 1.9, Panel A), partly reflecting interest rate increases and changes in market participants’ expectations for future hikes. The ongoing reduction of JGB purchases has improved market functioning (Panel B), but uncertainties and risks remain. The BoJ's JGB holdings are expected to remain at a high level, given the high stock (Panel C), implying purchases will likely continue to affect the shape of the yield curve (Nakazawa and Osada, 2024[6]). The scale of the balance sheet reduction in Japan is modest relative to those of other central banks, in line with the gradual changes to the policy interest rate (IMF, 2025[7]). The tapering plan remains flexible, as evidenced by the June 2025 announcement on the pace of reduction in response to market developments. Going forward, the BoJ should stand ready to modify the pace and maturity profile of its purchases in case of disruptions to financial and bond market conditions.
The authorities are considering potential risks from the absorption of JGB issuance, meeting with market participants, which should be continued. In the last decade, the share of JGBs held by institutional investors (banks, insurance companies, pension funds) has declined due to compressed interest rates and low market liquidity (Figure 1.9, Panel D). For example, the share of JGB held by banks declined from 41.9% in March 2013 to 15.2% in December 2025. Expanding the retail investor base, currently limited to individual holders, to non-profit corporations and non-listed corporations, with the aim of issuing such bonds by January 2027, is currently under consideration.
A 2024 review of monetary policy found that while the large-scale monetary easing since 2013 had an overall positive impact on the Japanese economy, there have been some side effects on the functioning of the JGB market and profitability of financial institutions. However, there is no strong evidence of an adverse impact on financial intermediation (BoJ, 2024[8]). The effect on the economy was smaller and slower than expected, partly reflecting the fact that the effect on inflation expectations was not sufficient to anchor inflation at 2%. The review also highlights the risk that negative side effects may materialise with a lag, as the functioning of the JGB market might not fully recover, given the large stock of the BoJ’s JGB holdings. Financial intermediation might also deteriorate due to exposure of banks to borrowers with relatively low resilience to a decline in income or an increase in interest rates.
Note: Panel B: Diffusion index is the difference between firms answering high and low to the question of how they view the bond market functioning. Panel C: Japanese government bonds do not include treasury bills.
Source: LSEG; Bank of Japan; Federal Reserve Bank; and Bank of England.
Japan’s financial system appears stable, supported by robust capital and liquidity buffers (Figure 1.10, Panel A). Equity and real estate prices have been rising (Panels B-C), with some potential signs of overheating for the former (BoJ, 2025[9]). The rise in real estate prices, especially in major metropolitan areas, reflects higher construction costs, demand by foreigners and population inflows towards major urban areas. The gradual increase in interest rates has helped overall bank profitability, but risks associated with a potential acceleration of interest rate increases could be challenging, especially for some smaller banks with considerable amount of JGB holdings and exposures to firms which are more likely to go bankrupt. Potential sudden changes in global financial conditions, or sharp rises in corporate bankruptcies from higher interest rates highlight the importance of close monitoring of risks, in a changing domestic and global landscape. Hence, the full-scale commencement of the common data platform between the BoJ and the Financial Services Agency (FSA) in March 2025 is welcome.
Note: 2025Q1 data for the OECD average are calculated using the latest available quarter for OECD countries.
Source: IMF, Financial soundness indicators; Refinitiv; and OECD, Analytical house prices database.
Potential vulnerabilities in some segments of the real estate sector should be monitored closely. While interest rates on housing loans have increased, delinquency rates remain low. Risks are closely related to individual borrower characteristics, but some financial institutions face risk management challenges in assessing borrower’s repayment capacity (BoJ, 2025[10]). This highlights the importance of careful screening and follow-up assessments of the income of borrowers (BoJ, 2025[11]). The “5-year and 125%” mortgage rules, that monthly payments change infrequently (every 5 years) and the increase is capped at 25%, will help mitigate the impact of rising interest rates, when applied. If the risks were to rise significantly, traditional borrower-based macroprudential tools, such as limits on loan-to-value ratios, could be considered, as recommended in the 2024 OECD Survey of Japan. Other risks due to declining expected returns of commercial real estate, and shift of bank loans to real estate funds and real estate businesses other than housing should be monitored closely.
Corporate bankruptcies have risen, albeit from a low base, with 10 261 bankruptcies in 2025, a 3.6% increase from a year ago. The causes include labour shortages, difficulty in finding successors and the end of zero-zero loans. Bankruptcies have been concentrated in the non-manufacturing sector and smaller firms. While overall corporate profits have increased, defaulting SMEs and micro firms tend to be those with operating losses with negative worth (BoJ, 2025[11]). So far, the impact of rising interest rates on bankruptcies have been limited, but further rises could result in the exit of unproductive firms, increasing reallocation and productivity growth (Chapter 2).
Although the share of financial assets held by domestic non-bank financial intermediaries (NBFI) sector remains unchanged at around 30%, the composition is changing, with an increase in the share of investment funds, which can be more vulnerable than the well-regulated insurance and pension funds. Furthermore, banks’ exposure to the foreign NBFI sector, especially investment funds, and investment in Japanese stocks and bonds by foreign NBFIs have increased (Figure 1.11). This increases the risk of potential spillover effects to the Japanese financial system.
Note: NBFI refer to non-bank financial intermediaries.
Source: Bank of Japan (2026), Financial Stability Report, April.
The supervisors have increased their assessment and monitoring of the NBFI sector in recent years, through specific studies on its size, composition and interconnectedness (Eguchi et al., 2025[12]), and participation in international data collection efforts. The regulators should continue to monitor NBFIs and fill data gaps, especially with respect to foreign hedge and private funds. International guidelines highlight the importance of granular and frequent data, and the need to tailor policies to the specific conditions and regulatory framework of countries. For example, some OECD countries are introducing macroprudential policies for non-banks. One option to consider is expanding the scope of institutions eligible to receive emergency liquidity assistance to systemic NBFIs (IMF, 2025[7]).
While the profitability of regional banks has improved with more efficient business operations and higher interest rates, they continue to face medium-term headwinds from a shrinking population. Financial supervisors have supported regional banks by providing financial incentives for M&As, and relaxing regulations on the scope of services they can offer. They should continue to monitor regional banks closely, given the uneven distribution of profitability and regional demographic developments and provide incentives to facilitate digitalisation and mergers. The FSA monitors individual banks’ liquidity risks through the Early Warning System, which works well, but could consider establishing individual minimum liquidity and capital requirement for domestic banks to improve resilience to shocks (IMF, 2024[13]).
1.5.1. Prioritising fiscal consolidation
The near-term fiscal situation has been improving, mainly due to high tax revenues amid robust nominal growth (Figure 1.12, Panel A). However, the fiscal deficit is projected to increase in 2026, reflecting the latest fiscal stimulus package, before improving in 2027 (this assumes no additional supplementary budgets, whose use should be limited, as discussed below). The gross public debt to GDP ratio has recently declined, thanks to strong nominal GDP growth being higher than debt servicing costs, but remains the highest in the OECD (Panel B).
Note: Panel A: Shaded area refers to projections. Panels C and D: Data are based on the OECD Long-Term Economic Model, except for pension projections, which are OECD calculations based on the Actuarial Valuation of the Public Pension System (scenario based on projections of medium population growth and GDP based on the Transferring to a New Economic Stage Case) by Ministry of Health, Labour and Welfare and the Economic and Fiscal Projections for Medium to Long Term Analysis by the Cabinet Office in 2024.
Source: OECD, Economic Outlook database; Ministry of Health, Labour and Welfare; Cabinet Office; OECD Long-term Economic Model; and OECD calculations.
The government’s fiscal targets are based on the primary balance for the central and local governments, excluding net interest payments on outstanding debt. The latest official targets (prior to the latest fiscal package) are a primary balance surplus in FY2025-26, updated from the previous target of a surplus by FY2025, and a steady reduction of the nominal public debt to GDP ratio towards the pre-COVID level by FY2030. The government projections for reaching a primary surplus in FY2027 assume continued steady economic growth while expenditures are assumed to reflect growth rates in prices and wages. Furthermore, among the three scenarios (projection of past trend (PP), transferring to a new economic stage (TN) and higher economic growth (HG)), the debt to GDP ratio is not on a downward trend in the PP trend one (Cabinet Office, 2026[14]).
In November 2025, the cabinet approved a fiscal stimulus package of JPY 21.3 trillion (3.5% of 2024 GDP). The package consists of three pillars: measures to address high prices, medium-term strategic investments to enhance resilience against potential crises and stimulate growth (e.g. artificial intelligence, semiconductors, shipbuilding; JPY 7.2 trillion) and strengthening defence and diplomatic capabilities (JPY 1.7 trillion). The first pillar includes electricity and city gas subsidies (JPY 0.5 trillion), support for households through local governments, e.g. food and shopping coupons (JPY 2 trillion) and cash handouts for households with children (JPY 0.4 trillion). This is in addition to the already enacted expansion of the income deduction (JPY 1.2 trillion) and higher gasoline subsidies, which were switched to abolishment of the provisional gasoline tax rate from December (JPY 1.0 trillion). The provisional diesel fuel tax rates were abolished in April. Such subsidies should be phased out, as they are untargeted and distort price signals (see below). The package ended up larger than initially intended to meet the opposition parties’ requests, as the leading coalition had a minority status at the time. Other spending measures should be financed by concrete increases in revenues or cuts in spending in other areas. The annual budget for FY2026, approved on 7 April, was a record JPY 122.3 trillion, 6.2% higher than the initial budget for FY2025, due to inflation, ageing cost and higher interest rates.
The consistency of increases in expenditures and revenues should be improved. Japan has sizeable spending commitments for children-related and green policies, defence and disasters, which are necessary to address rising needs. However, some of the financing information has not been determined or announced (Table 1.5). In addition, defence and green investments began in FY2023, but legislation on some of the revenue sources has not been passed or clarified. Given the limited fiscal space, plans to offset higher spending through higher revenues should be finalised and implemented. Furthermore, some financing for additional spending is expected to come from expenditure reform. There is a need to swiftly identify the areas for savings, which can be facilitated by spending reviews (see below).
In the medium-term, higher interest rates and ageing-related spending will intensify fiscal sustainability challenges, highlighting the importance of putting debt on a downward trajectory. Pension, health and long-term care costs and interest payments on public debt are projected to increase by 2050 (Figure 1.12, Panels C-D). Without reforms, rising debt service costs would squeeze primary spending. While rising, long-term interest rates in Japan remain lower than those in G7 peers. As the Bank of Japan eases off bond purchases, the impact on interest rates could be larger than projected in the baseline scenario, leading to higher debt service payments.
Without further measures to offset ageing-related costs discussed below, the general government debt-to-GDP ratio is projected to start rising again in the mid-2030s, reaching around 217% of GDP by 2050 (Figure 1.13, current policies scenario). Although real GDP growth is projected to accelerate in the long run, based on the OECD long-term model’s assumptions of convergence of total factor productivity growth to that of the frontier economy, long-term interest rates are expected to exceed nominal growth. This adds further pressure to net interest payments from 2030s. Fiscal consolidation efforts and the growth effects of the structural reforms listed in Box 1.2 would bring debt on a downward trajectory to around 114% of GDP in 2050 (Figure 1.13, prudent path with growth impacts of structural reforms scenario). Structural reforms can also raise tax revenues due to behavioural effects (higher employment and working hours), which would further lower public debt.
Note: The "current policies" scenario is based on the OECD Economic Outlook database until 2027 and the OECD Long-Term Economic Model thereafter. Pension data are OECD calculations based on the Actuarial Valuation of the Public Pension System by Ministry of Health, Labour and Welfare and the Economic and Fiscal Projections for Medium to Long Term Analysis by the Cabinet Office in 2024. The “prudent path scenario” assumes consolidation via the measures outlined in Table 1.6. The “prudent path with growth impacts of structural reforms scenario” assumes additional annual real GDP growth of around 0.2%pts with policies outlined in Table 1.7.
Source: OECD Long-term Economic Model; Ministry of Health, Labour and Welfare; Cabinet Office; and OECD calculations.
This box summarises potential medium-term impacts of selected structural reforms included in this Survey on GDP (Table 1.6) and the fiscal balance (Table 1.7). The quantification impacts and the packages of reforms are only illustrative. The estimated fiscal effects include only the direct impact and exclude potential behavioural responses that might occur due to a policy change.
Fiscal savings (+) and costs (-)
Relative to baseline
Source: OECD, Long-term Model.
Ensuring medium-term fiscal sustainability in a context of a shrinking labour force will require improvements in several areas. First, a credible medium-term fiscal consolidation strategy, including both revenue and expenditure measures, to put public debt on a downward path, should be established. Such a strategy would also increase the credibility and transparency of official fiscal projections and targets. This requires addressing ageing-related costs, raising revenues and strengthening the fiscal framework, as discussed below. Second, continuing to raise the labour force participation of vulnerable groups, through labour market and tax reforms, would not only help address labour shortages (below), but also help improve public finances. Finally, the level of hourly labour productivity in Japan lags the OECD average. Annual growth in hourly productivity fell from 1.2% in the 2000-08 period to 0.3% between 2019 and 2024 (Chapter 2). Hence, boosting productivity growth can improve fiscal sustainability, by lifting real GDP, expanding the tax base and easing spending pressures.
1.5.2. Addressing ageing-related costs
Pensions
Old-age dependency, which is already high, will continue to rise (Figure 1.14, Panel A). Japan’s public pension system consists of the basic and employee’s pensions, which provide flat-rate and earnings-related benefits, respectively. The government conducts a financial verification of the public pension system every five years, leading to a reform of the system, if needed. Following the 2024 verification, the 2025 Pension Bill increased the upper limit of social insurance contributions and coverage of part-time and irregular workers, as recommended in the 2024 OECD Survey of Japan. The reform also increases work incentives for older workers, by increasing the threshold for the deduction of pension benefits when older workers combine work and pensions, which is welcome.
Without further policy changes, the expected duration of retirement is set to increase markedly, with longer life expectancy. The pension eligibility age for the flat-rate component of the Employee’s Pension Insurance is 65. The eligibility age for the earnings-related component rose to 65 years for men in 2025 and is set to reach 65 for women in 2030, but individuals can start claiming benefits at 60 years or delay the initial take-up until 75, with the deferral increasing the pension benefit by 8.4% per year. However, Japanese men (women) who entered the labour market in 2022 at the age of 22 years and who retire at the earliest possible age without penalties, are projected to spend 5.2 (6.0) years longer in retirement than those who retired in 2022 (Figure 1.14, Panel B). At the same time, relative old-age poverty at 20% is above the OECD average of 12.5%, while the future adequacy of pensions for pensioners with a full career at 42% is lower than the OECD average (Panel C).
The pension system’s financial assets are at around 54% of GDP at the end of 2024 and the automatic adjustment of pension benefits (macroeconomic indexation) aims to ensure the financial sustainability of the pension system. Macroeconomic indexation automatically adjusts benefits in line with rising life expectancy and the declines in the working-age population, but the adjustment is delayed in times of negative price or wage growth. A carry-over mechanism, introduced in 2016, in principle corrects for the delayed adjustment in following years. However, if the replacement rate (currently estimated to be 61.2% based on the Japanese method for calculating the rate) is projected to fall below the threshold of 50%, the pension system will be reviewed rather than mechanically continuing or suspending the macroeconomic indexation mechanism. The 2025 Bill states that if the next actuarial verification scheduled for 2029 finds that the macroeconomic indexation leads to a decline in basic benefits, reserve funds from the employee’s pension scheme can be used to keep basic pension benefits from falling too much. In addition, there was discussion of whether macroeconomic indexation could be eliminated, but this would endanger the financial sustainability of the system.
Note: Panel A: 65 and older as a share of the population aged 20 to 64. Panel B: Difference between the normal retirement age for a person who enters the labour force at age 22 and life expectancy at age 65. Panel C: OECD calculations based on the pension model, showing the pension benefits of a worker who enters the system that year at age 22 and retires after a full career. Panel D: BLPP refers to Basic Livelihood Protection Programme and data are for the end of July.
Source: United Nations (2024), World Population Prospects 2024; OECD, Pensions at a Glance 2025; and Ministry of Health, Labour and Welfare.
If future reforms eliminate the macroeconomic indexation, counterbalancing reforms should be adopted to ensure the financial sustainability of the system. One option is to include the extension of the basic contribution period from 40 to 45 years, which could raise the replacement rate at the termination of the macroeconomic indexation by around 7%, depending on assumptions. The 2019 actuarial valuation showed that delaying the start of pension benefits to 68 would increase the replacement rate by 11-14 percentage points. Hence, raising the pension eligibility age above 65, linking it to increases in life expectancy (partial or full), should be considered. For example, Denmark and the Slovak Republic have a one-to-one link between the retirement age and life expectancy, while Finland and Sweden have partial links. Reforms to the mandatory retirement system in companies (discussed below) would also help. This would strengthen work incentives, reduce poverty among the elderly, improve intergenerational equity and promote the sustainability of the pension system.
Lack of income security from the basic pension for some elderly also puts pressure on the tax-financed public assistance system. The Basic Livelihood Protection Programme (BLPP) assists those of all ages with an income below the minimum standard of living threshold who meet the eligibility criteria, which take into account their assets and the ability of family members to provide help. The share of recipients aged 65 and over has been increasing (Figure 1.14, Panel D), reflecting population ageing, but the BLPP also acts as a supplement to low basic pensions for some retirees. Pension reforms should ensure that a decline in basic pensions does not create an additional burden on public finances, as the BLPP is funded by tax revenues.
Health and long-term care
Japan’s health system performs very well in international perspective, with the second highest life expectancy in the OECD, and good quality of care and access (OECD, 2023[15]). However, the high number of hospital beds, long length of hospital stays, and high number of doctor consultations suggest that there is room for spending efficiency gains (Table 1.8). In addition, private expenditures on healthcare and out-of-pocket expenditures are lower than the OECD average.
Note: 1. In days. 2. Per 1 000 population aged 65 and older. 3. In hospitals.
Source: OECD, Health Statistics database.
Outpatient medical care accounts for about 30% of healthcare spending, reflecting the high frequency of consultations with doctors at 12.1 times annually per person, far above the OECD average. This partly reflects the generous coverage by health insurance, and reduced co-payment rates for those aged 70 and over. While there is an income test, only the elderly - with an income well above the average - pay the 30% co-payment required of those under age 70. The increase in the co-payment ratio from 10% to 20% for those aged 75 and over, whose income surpasses a certain threshold in 2022, led to a 1% and 3% decline in medical service use and health expenditures, respectively. Without further reforms, the burden on the working-age population will increase with population ageing. Hence, co-payment rates for the elderly should be increased, based on means-testing, as recommended in previous OECD Economic Surveys.
Japan has a large number of hospital beds and long hospital stays, which contributes to higher healthcare spending. Community Health Care Visions, launched in 2014, aimed to restructure the hospital and care systems, while integrating medical and long-term care services. An aim was to improve the allocation of hospital beds by function (acute, advanced acute, recovery and chronic) by forecasting needs to 2025. The total number of beds has slightly declined at the national level, but to improve the efficiency of healthcare service delivery by reducing long hospital stays and healthcare visits, further optimisation of capacity allocation and functional differentiation of healthcare institutions should continue to be promoted. For example, the number of long-term care beds per 1 000 population aged 65 and older remains high (Table 1.8), which can increase costs. Raising spending efficiency will also require a robust governance structure between prefectures and medical institutions and long-term care providers (Mitsubishi Research Institute, 2024[16]), complemented with a good data infrastructure to allow benchmarking the performance of providers and local authorities.
Another purpose of Community Health Care Visions was to reallocate resources to efficiently meet the future health and LTC needs of regions, with existing resources. To that end, the shift from a hospital-based healthcare system, where all services from advanced acute care to chronic care were provided within a single hospital, to a community-based healthcare system, involving hospitals, community clinics, nursing facilities, and home care services, is progressing. This also requires enhancing the role of primary care teams (Nomura et al., 2022[17]), which can help contain costs, since hospital visits for non-specialised healthcare needs can be costly. Hence, the government should clarify and support the role of primary care teams as gate-keepers, while ensuring that they are equipped with expertise in general practice.
Spending efficiency gains also hinge on an advanced digital and data infrastructure. Japan’s level of digital health readiness is lagging in international perspective, lacking both the analytical capacity to link and use health data across critical domains and effective dataset governance (Figure 1.15). The lack of common unique patient/person ID number across datasets (Oderkirk, 2021[18]) is being addressed by the shift to the use of My Number card for health insurance purposes in 2025. This will facilitate information exchange between healthcare facilities, improving quality of care.
Note: Panel A: Ability to access and link datasets in healthcare. Panel B: Score calculated as a sum of proportions of national healthcare datasets with recommended governance elements. Higher score corresponds to a better outcome.
Source: OECD, Health Data Governance for the Digital Age.
The Medical Digital Transformation Promotion Headquarters, established in 2022, aims to create a nationwide platform for sharing and exchanging information on all aspects of health and long-term care and standardise electronic medical records. This would create efficiency gains, by reducing data entry and storage burdens and should be implemented swiftly, as they can also help with labour shortages in the sector (see below). This will require overcoming the existing legal or policy barriers to sharing data among public authorities, and a public authority responsible for linking health data (OECD, 2022[19]).
Promotion of data utilisation is crucial for reducing inappropriate healthcare use, promoting access to high quality healthcare and evaluating health policies, including through spending reviews (see above). After the data infrastructure to link national health records is established, a system to allow access to analyse data for relevant stakeholders should be implemented. This requires the implementation of robust data privacy and security measures (Nomura et al., 2022[17]). For example, some OECD countries have public bodies to oversee the primary and secondary use of individualised health data, including strong processes to preserve patient confidentiality, and stringent and transparent protocols enabling researchers and policy-makers access to properly de-identified datasets for analysis and service oversight purposes (Box 1.3).
Denmark has a well-developed governance framework and a central authority for the approval of requests to process personal health data. Every citizen has a Central Personal Register number that allows longitudinal tracking of health outcomes, by allowing linkages across the various national registries. The Danish Health Data Authority (Sundhedsdatastyrelsen) oversees the collection, quality assurance, and access to national health data. Researchers can access de-identified data under strict ethical and security requirements. Findata is a centralised system issuing permits and a one-stop shop for the secondary use of health and social care data in Finland, made possible due to Finland’s personal identification code. It grants data use permits, collects, links and prepares the data, provides the data in a secure IT-environment for data users, offers a help desk for data users, and works in collaboration with the controllers of the data.
Source: (OECD, 2022[19]).
1.5.3. Increasing revenues and removing disincentives to employment
Japan’s tax revenues as a share of GDP are around the OECD average (Figure 1.16, Panel A). To ensure debt sustainability, a medium-term tax reform strategy to increase revenues and reduce distortions in the tax system that discourage employment is needed. Some OECD countries have had independent tax commissions (Box 1.4) to bring a medium-term perspective, including laying out the trade-offs, such as short- and medium-term effects and distributional consequences. While such recommendations are non-binding, they can raise public awareness to make difficult reforms acceptable and provide recommendations away from political or short-term considerations. For example, survey evidence shows that while the Japanese public is opposed to consumption tax increases, they are more favourable when the option is presented as a trade-off between that and an increase in social insurance premiums or a decrease in benefits (Tokyo Foundation, 2024[20]).
Independent tax reviews can provide objective, expert analysis and recommendations on a country’s tax system to improve its design, efficiency, fairness, and sustainability. For example, the Mirrlees Review, a comprehensive review of the UK tax system, was undertaken in 2010 to evaluate how the tax system could be made more efficient, equitable, and simpler and make medium-term tax reform proposals, based on economic theory and empirical evidence. The Irish Commission on Taxation and Welfare, established in 2021, was an independent body tasked to “review how best the taxation and welfare system can support economic activity and income redistribution, whilst promoting increased employment in a resilient way and ensuring that there are sufficient resources available to meet the costs of public services and supports in the medium and longer term.” In 2010, Australia conducted a tax system review taking into account its relationship with the transfer payment system and other social support payments, rules and concessions.
According to a simulation of different tax reforms, an increase in consumption taxes (value-added, VAT) would yield the highest revenues, with relatively small adverse effects on long-run GDP and welfare (IMF, 2022[21]). Consumption taxes have relatively low distortionary effects on labour, savings and investment, and distribute the tax burden equitably across generations. They can also be a relatively stable revenue source, which could support rising social expenditures (MoF, 2025[22]). The consumption tax (standard VAT) rate of 10% in Japan remains among the lowest in the OECD, and revenues from taxes on goods and services at 6.8% of GDP are relatively low (Figure 1.16; Panels A-B).
The consumption tax rate should be raised gradually, following a regular medium-term schedule enshrined in legislation, to limit the economic impact and minimise policy uncertainty, as recommended in previous OECD Economic Surveys of Japan. Part of the revenues from the reform should be used for targeted transfers to low-income households. The coalition agreement states that a temporary reduction in the consumption tax on food to support households against higher inflation will be considered. However, the first best solution is to create an environment enabling robust real wage growth, rather than lowering consumption taxes, which is an untargeted and costly measure.
Japan’s personal income taxes yield low revenues due to generous deductions, especially work-related expense, compared to G7 peers (Figure 1.16, Panel C). In 2025, the Employment Income Deduction was raised to JPY 650 000 of gross employment income for those with a gross salary of JPY 1.9 million or less. The deduction then increases with income until reaching the ceiling of JPY 1.95 million. Reforming this deduction, which mainly benefits high-income households, could increase tax revenues by about 0.2% of GDP if the cap was set at JPY 1.5 million (IMF, 2022[21]).
Note: Panel A: Provisional estimates for all countries. Revenues from social security contributions are imputed for Japan. Data for Japan are presented in fiscal years.
Source: OECD, Revenue Statistics database; OECD, Consumption Tax Trends - 2024; and OECD, Taxing Wages - 2025.
The government has launched a consultation process to design a refundable tax credit scheme to reduce the burden of taxes, social insurance premiums and higher prices on low-and medium-income households. Lower consumption taxes on food are currently under consideration as a temporary untargeted interim measure (2 years) until the establishment of the scheme. The idea of such a scheme is not new in Japan, but has been historically hampered by lack of transparency about income, particularly among the self-employed, and the absence of a unique identifier combining different sources of income. The ongoing expansion of the use of the individual number (My Number) for taxpayers and social security contributors could help overcome these barriers to enable an effective implementation of this potential tax reform. As discussed in the 2019 OECD Survey of Japan, refundable tax credits can also boost work incentives, especially for second-earners and Basic Livelihood Protection Programme recipients and reduce the number of working poor.
The income tax and social insurance systems have several income threshold barriers, which can lower work incentives, especially for part-time workers and secondary earners (Table 1.9). The 2025 Pension Bill will abolish one of these thresholds (the JPY 1.06 million barrier), which is one of the conditions to meet for mandatory enrolment in pension and health insurance. This is welcome, as it can help improve working hours and pension adequacy for non-regular workers and lower labour market dualism. The remaining income thresholds, which increase the effective marginal tax rates on labour income of second earners (typically married women), give incentives to keep their earnings below JPY 1.3 million and JPY 1.6 million to avoid social insurance contributions and personal income taxes, respectively.
The impact of the JPY 1.3 million barrier might be lowered with the forthcoming changes in the pension reform. However, as the number of dual income households increased from around 9 million in 2006 to 13 million in 2024, and there remains a large margin to boost female working hours, the remaining thresholds should be reformed to boost tax revenues, alleviate labour shortages and narrow the gender wage gap (Kitao and Mikoshiba, 2024[23]). OECD simulations show that the removal of the spousal allowances under the national and local income tax systems would increase work incentives for second earners. The reform would lower the fraction of gross earnings that a family loses to higher taxes and/or lower benefits when a family member makes a transition from out-of-work to in-work (participation tax rate), or from part-time to full-time work, i.e. raise earnings (marginal effective tax rate), particularly around the thresholds where the allowances are withdrawn (Figure 1.17).
Note: The gross earnings of the primary earner are fixed at 67% of the average wage. The primary out of work benefit is social assistance. Housing benefit top-ups or temporary into-work benefits are not included. Calculations are for 2025, and the reference municipality is Tokyo.
Source: OECD Tax-Benefit Model version 2.8.0.
1.5.4. Improving the fiscal framework
Japan has fiscal rules that aim to manage public debt and deficits, but they are not as strict as those in some OECD economies. Initial budgets are based on a budget ceiling mechanism, with the Ministry of Finance performing the central coordinating role. However, there is no mechanism to control the total budget, including supplementary budgets, making the ceilings non-binding and lowering the consistency of annual budgets with what is needed to ensure medium-term fiscal sustainability. Three quarters of advanced economies have expenditure rules, and 88% have formal enforcement procedures under either national or supranational rules (Alonso-Albarran et al., 2025[24]). Strengthening the rule-based fiscal framework would enhance transparency and accountability, which is becoming more important as the investor base for government bonds needs to broaden.
A stronger fiscal rule would help discipline the use of supplementary budgets. According to the 1947 Public Finance Act, supplementary budgets can only be used “if an addition or revision is needed to supplement the government's mandatory budget, or to add or modify expenses which become particularly urgent due to circumstances after the preparation of the initial budget”. Since there is no concrete definition, they have been used every year since 1947. As in other OECD countries, the amount increased with COVID-19, and while declining, they remain sizeable (Figure 1.18). Their use should be limited to large shocks with a more concrete definition under which circumstances they can be used. For example, the government could be obliged to declare a crisis or emergency formally to use supplementary budgets over a certain threshold. Furthermore, as the time to prepare the supplementary budget is limited (1-2 months after the Prime Minister requests), and there are no limits on their scope, it is more difficult to ensure the quality of fiscal spending (IMF, 2025[7]). The fact that a higher proportion of the budgets are carried over to the next year points to room for better fiscal planning.
National general account budget
Note: Horizontal axis shows fiscal years. Carried-over funds are remaining funds at the end of the fiscal year.
Source: Ministry of Finance.
Spending reviews can improve spending efficiency by guiding the prioritisation and reallocation of expenditures, and could especially concentrate on climate and health and long-term care expenditures, which are projected to increase (Arimura et al., 2025[25]; Nomura et al., 2022[17]). Spending reviews and Evidence-Based Policy Making (EBPM), which Japan has been using for policy evaluation since 2017, could be enhanced by strengthening their links to the budget process and medium-term fiscal planning. For example, in Denmark, spending reviews inform decisions on multi-annual budget agreements to improve links with the medium-term fiscal framework (Tryggvadottir, 2022[26]). The EBPM Action Plan, initiated in 2024, established a framework for EBPM evaluation of key policies, which is welcome. However, there are key implementation challenges, such as data gaps to conduct cost-benefit analysis and shortages of quantitative analysis experts (Haraoka, 2022[27]; Morikawa, 2023[28]). The latter could partly reflect the high staff rotation in ministries and agencies and the prevalence of generalist government staff (Toyoda, 2022[29]). Hence, developing and boosting the accessibility of policy-related data and government statistics, including microdata, and planning of ex-post empirical analyses in the budgeting process, should be prioritised. The establishment of a dedicated unit with the right expertise and skills, as in the United Kingdom and Singapore, could also be considered. Another option is an independent fiscal institution conducting spending reviews, as in some OECD countries.
Japan’s Council on Economic and Fiscal Policy, which has outside experts as members, publishes medium- and long-term economic and fiscal projections, with several scenarios. Establishing an independent fiscal institution, as recommended in the 2024 OECD Survey of Japan, would also help assess the government’s macroeconomic and fiscal plans and projections and could provide timely and transparent ex-ante evaluation of selected policies, such as pension and tax reform scenarios.
Since the early 2010s, except for the pandemic, Japan has been facing severe labour shortages. The vacancy-to-unemployment ratio is one of the highest in the OECD (Figure 1.19, Panel A). The job openings-to-applicants ratio also remains elevated at 1.22 in 2025, but it might be underestimating labour market tightness as it is based on job postings and applicants registered with public employment agencies, while there has been a recent shift of job postings to private employment agencies, with the adjusted vacancy rate almost double that of the unadjusted one (Panel B). Perceived labour shortages are also prominent, although they vary by industry and firm size (Panels C-D). Furthermore, bankruptcies attributable to labour shortages have hit record highs in 2025.
There is also a need to address skill mismatches. While Japan displays one of the highest proficiency levels in literacy and numeracy in the OECD, the shares of under-skilled and over-qualified employees and those with a field of study mismatch are higher than the OECD average (Figure 1.20, Panel A). Japan also faces skills shortages, especially in technical skills and foreign languages (OECD, 2022[30]). Indeed, the share of adults with low information communication technology skills is high in international perspective (Panel B), highlighting the importance of enhancing digital skills.
According to a 2024 survey, firms are responding to labour shortages by improving working conditions, relaxing hiring requirements for new graduate and mid-career hires, offering greater training opportunities for employees, rehiring former employees and implementing labour-saving investments (Cabinet Office, 2024[31]). For example, firms in accommodation and hospitality, construction and retail sectors, which face acute perceived shortages, have been increasing labour-saving investment. Well-designed policies can help support these initiatives by facilitating a flexible and mobile labour market, boosting the participation of female, older and foreign workers and improving the efficiency of adult learning programmes to match training to labour market needs.
Note: Panel B: Adjusted vacancy rate takes into account the shift towards the use of private employment agencies. Panels C and D: The difference between the number of firms responding “insufficient” and “excessive” to questions on employment conditions at their firm. Negative numbers reflect labour shortages.
Source: OECD, Annual labour force survey, summary tables; OECD, Intra-annual registered unemployment and job vacancies; Eurostat, Labour Force Survey – Job Vacancy Statistics; Ministry of Health, Labour and Welfare; and Bank of Japan, Tankan Survey.
Source: OECD (2025), Do Adults Have the Skills They Need to Thrive in a Changing World? Survey of Adult Skills 2023; and OECD, Programme for the International Assessment of Adult Competencies.
1.6.1. Making the labour market more flexible
A fundamental labour market reform is necessary to meet the dual challenges of a shrinking and ageing population and structural changes due to the digital and green transformations, which require a flexible and dynamic labour market. Japan’s traditional model of lifetime employment (an implicit long-term contract, where firms hire new graduates and guarantee them a job until retirement), a seniority-based wage and promotion system (wages rising steeply with seniority, such that younger workers are paid below their marginal productivity, while those with long tenures have wages above it), mandatory retirement at age 60 (with guaranteed re-employment up to age 65), long working hours, firm-based training, the practice of simultaneous recruitment of new graduates and a relatively low share of mid-career hiring worked well when Japan’s population was young and increasing. However, in a context of longer working lives, and labour shortages and a rapidly changing external landscape, a more agile labour market is needed.
Lifetime employment is reflected in long job tenures, with the average length of service of 12.4 years higher than the OECD average (Figure 1.21, Panel A). The ratio of workers employed for ten years or more at 46.7% is also elevated. Wages rise steeply with seniority, particularly in large firms, and for male and high-educated workers, until mandatory retirement, often at 60 (Panel B). Reflecting the cost of seniority-based wages, 96.1% of firms have mandatory retirement for older workers. While decreasing, among the firms with mandatory retirement, the share of firms that set it at age 60 remains high at 66.3% in 2024 (Panel C). The share of firms keeping employees post-mandatory retirement until 70 has increased from 25.6% in 2021 to 31.9% in 2024 (JILPT, 2025[32]), but they often do so in non-regular jobs (see below). Lifetime employment and seniority-based wage setting can lower incentives for workers to change jobs throughout their careers. Mandatory retirement drives labour turnover within the company, but reemployment as non-regular workers can sustain the employment of older workers at the cost of lower job quality.
Several welcome reforms have been taken to address some of these challenges, such as introducing Work Style Reforms and requiring firms to secure employment for those who wish to work until age 65 (by offering continued employment, or raising or abolishing the mandatory retirement age). The reforms also encourage firms to offer flexibility to workers until age 70 in the form of continued employment or freelancing or other work styles.
Anecdotal evidence suggests that reforms are slowly changing labour markets, although the data do not yet fully reflect these trends. For example, while job change rates have not picked up, job change intention rates have been rising (Figure 1.21, Panel D), and the share of mid-career hiring for full-time permanent workers has increased from 63.1% in 2014 to 68.3% in 2024. Labour allocation is gradually becoming more efficient, with evidence suggesting that full-time employees are shifting to more productive firms and wages for high-skilled job changers have been on an increasing trend (Ikeda et al., 2025[33]). In addition, 40.4% of firms had revised their wage systems between 2019 and 2021, to better link pay to performance (Fujimoto, 2024[34]).
Note: Panel A: Average length of time in current/main job. Panel B: Large firms have more than 1 000 employees. Panel C: The data for 2015 and 2022 are from the General Survey on Working Conditions, which covers firms with 30 or more regular workers. The 2024 values are from the Summary of Elderly Employment Condition Report, covering firms with 31 or more employees.
Source: OECD Database on employment by job tenure intervals; Ministry of Health, Labour and Welfare; and Ministry of Internal Affairs and Communication.
Reforms should continue to support ongoing structural changes. First, enforcing limits on working time, introduced with Work-Style Reforms, can help boost labour mobility, as long working hours tend to be a barrier to job search activities (Cabinet Office, 2025[4]). Second, a comprehensive labour market reform, which includes several elements recommended in past OECD Economic Surveys, such as increasing the mandatory retirement age, with a view to abolishing it, and moving away from seniority-based wages towards performance and job-based pay, is needed. Swiftly implementing measures envisaged by the 2023 Integrated Three-Pronged Labour Market Reform (Box 1.5; (Cabinet Office, 2023[35])), should be prioritised. Breaking the link between seniority and wages would also pave the way for reforming the mandatory retirement age. This should be complemented with reforms to provide older workers with training and enable them to move into roles without the loss of job quality often seen in traditional re-hiring systems (see below; (OECD and MHLW, 2024[36])).
Support for skill development: The aim is to shift support from on-the-job training to a system where individuals select their own training options. The plans include increasing training in fields with the most severe shortages, shifting employment adjustment subsidies to training, streamlining online procedures and information on training benefits, and enhancing reskilling support for non-regular workers.
Facilitation of labour mobility to growth sectors and firms: The unemployment benefit system and retirement income taxation will be reviewed. Options include reforming unemployment pay, abolishing retirement tax systems favouring workers who have stayed with a company for 20 or more years, expanding portable retirement plans and removing barriers to voluntary resignation. The sharing of public and private information on job openings, and career advancement will also be enhanced.
Introduction of job-based personnel management aligned with individual company conditions: The aim is to promote the practice of hiring and paying workers based on the specific functions they perform. The policies include developing case studies to serve as references for firms for personnel placement, training, and evaluation methods, wage systems and leave systems.
1.6.2. Boosting the employment of female, older and foreign workers
According to OECD projections, with constant fertility rates, net immigration and employment rates by gender and five-year age cohorts, the labour force would shrink by more than half by the end of the century, while the proportion of elderly increases. With the employment rate for men aged 15 to 64 already among the highest in the OECD at 84.7% in 2025, policies should focus on female, older (above 60) and foreign workers. A comprehensive strategy that increases employment rates and hours worked of these workers is needed (Figure 1.22), which would help lower labour shortages in the short- to medium-term. Boosting fertility rates, as explored in-depth in the 2024 OECD Economic Survey of Japan, would also deliver results, but with a lag.
Note: The reforms include foreign worker inflows of 320 000 per year; a convergence of female employment rates to those of men by 2050; and convergence of the employment rate for each five-year cohort from 60-64 to 70-74 to that of the preceding cohort (i.e., the rate for the 60-64 group would rise to the 2021 rate for the 55-59 age group, etc.) by 2050.
Source: OECD calculations based on the OECD Long-term Model.
Japan has significantly boosted the employment of female and older workers (55-74) to around 75%, and 63%, respectively. This reflects not only labour shortages, but also increases in childcare provision, Work Style Reforms and the mandatory retention of employees aged under age 65. However, there is room to boost female labour force participation and job quality further. The gender wage gap is among the highest in the OECD (Figure 1.23, Panel A), partly reflecting the low share of females in high-wage positions (e.g. management), lower length of service, and the overrepresentation of women in non-regular employment (Panel B). The gender gap in temporary employment at 12% in 2023 is the highest in the OECD, where the average is 2% (OECD, 2025[37]). Hence, reforms that require firms with 101 or more regular employees to disclose information on gender wage gaps and female managers are welcome. Furthermore, a large share of older workers becomes non-regular workers after mandatory retirement, at substantially lower wages (Panel C). Continuing to improve social insurance coverage and training programmes for non-regular workers, as recommended in the 2024 OECD Survey of Japan, is crucial.
Firms hire non-regular workers to act as shock absorbers – easy-to-hire and easy-to-fire resources that can be adjusted quickly in line with the business cycle – given the job security of regular workers. The 2019 Work Style Reforms include the principle of “equal pay for equal work”, i.e., eliminating unreasonable disparities in the treatment of regular and non-regular workers who are doing the same or similar jobs. While the overall OECD employment protection indicator for regular workers is around the OECD average, some gaps remain. It is difficult for workers to take complaints of unfair treatment to the judicial system, given their limited information and their underrepresentation in unions (OECD, 2024[38]). Japan’s Labour Contract Act states that any dismissal of workers that “lacks objective, reasonable grounds and is not considered to be appropriate in general societal terms, [shall] be treated as an abuse of power and be invalid.” This formulation allows the legal system considerable discretion. If a firm is judged to fall short of any of the criteria, the dismissal may be invalidated. Courts typically order the reinstatement of dismissed workers with back pay. Hence, employers face great uncertainty in dismissing regular workers, thus prompting them to turn to non-regular workers for flexibility. The authorities are currently analysing the actual state of dismissals and disputes surrounding dismissals to evaluate, in close cooperation with social partners, whether a reform could be feasible. Increasing the certainty of the dispute settlement system would help protect all types of workers, and should be accompanied by income and re-employment support to displaced workers.
Note: Panel A: Percentage of median wages of men in the same decile. Panel B: Aged 15-64. 2011 values are missing due to Great East Japan Earthquake and have been interpolated. Panel D: all individuals that work and do not work at the time of survey.
Source: OECD, Gender Wage Gap; and Ministry of Internal Affairs and Communications, Labour Force Survey (detailed tabulation).
Several other policies can help raise female employment and hours worked. The gender gap in unpaid work at around 178 minutes per day is higher than the OECD average of 126 (OECD, 2025[37]), while working hours in Japan are the longest in the OECD. Women are more likely to cite limited flexibility for preferring to work in non-regular jobs (Figure 1.23, Panel D), highlighting the importance of flexible work schedules and teleworking. The 2025 amendments to the Childcare and Family Care Leave Act expanded eligibility for overtime exemption and short-term leave for sick/injured children and for caregivers and introduced a requirement to employers to offer flexible working options for those raising children of three years of age or older and who have not yet entered elementary school. In addition, tax and benefits for second-income earners should be reformed (see above). Finally, the system where employees typically choose either the career track or the non-career (clerical) track, with limited mobility between the two, when they join a firm, disproportionately impacts women.
Enrolment in early childhood education is almost universal for those aged 3-5, while it is around 45% for those aged 0-2 (OECD, 2025[39]). Childcare for children aged 3-5 is essentially free. Parental contributions to childcare costs increase step-wise with parental income for 1-2 year olds, with lower fees for the second child and free from the third child. Such step-wise increases may affect work incentives to take up employment or increase earnings for second earners in some cases (Figure 1.24, Panel A). Subject to an evaluation of its cost effectiveness and feasibility as local governments decide fees with reference to national guidelines, a potential reform option is to linearise the parental contribution fee schedule for those who are not exempt from fees to avoid abrupt increases in parental contributions or sudden losses in subsidies. Such a reform could reduce net childcare costs for some households, especially lower-income ones (Panel B). For a family where the secondary earner has the minimum wage, net childcare costs would fall from 13.1% to 8.5% of the average wage following the reform, slightly above the OECD average. This could increase work incentives, by reducing the participation tax rate for secondary earners, especially for low-income households (Panel C).
Note: Panel A: The income of one parent is set at 20% of the average wage, while the income of the other parent varies between 21 and160% of the average wage. For the 3-year-old child, the child benefits from Free Early Childhood Education and Care programme and parents only pay for meals. The steps are upper limits set by national guidelines, while the fees are set and vary by local authorities. Panel B: Family with one child aged 2 years old. The income of the primary earner is at 67% of the average wage. Both parents are assumed to work full time. It is assumed that the household is eligible to social assistance or minimum income benefits. Data on net childcare costs for parents using centre-based childcare is after accounting for any benefits or tax credits designed to reduce gross childcare fees. The analysis excludes families with more than one child. Panel C: The secondary earner takes up full-time employment at different earnings level. In panels B and C: JPN* refers to Japan under the reform scenario of removing cliffs in subsidies, depending on the income, without cutting benefits for higher-income households. Data for Japan under both scenarios are for 2025, and 2024 for all other countries.
Source: OECD Tax-Benefit Model version 2.8.0.
Japan has made much progress in family policies, such as parental leave. The right to parental leave of up to 12 months for fathers is the longest among OECD countries and the obligation to disclose the percentage of eligible employees who take parental leave now applies to firms with more than 300 employees, instead of the previous threshold of 1 000 employees. Take-up of paternal leave has increased from 7.5% in 2019 to 40.5% in 2024 (MHLW, 2025[40]), but the length remains low, with 37.7% taking less than two weeks and 58.1% taking less than one month. In addition, return to regular employment for middle-aged women after a period of caring for young children is difficult. The share of regular employment among women declines after the age of 30, as discussed in the 2024 OECD Survey of Japan. For example, age-thresholds in applying for some public jobs could disproportionately impact these groups and could be reformed.
The number of foreign workers has been growing, reaching a record high of around 2.5 million in 2025 (Figure 1.25, Panel A), reflecting labour shortages and government policies, such as the Specified Skilled Worker and Engineer/ Specialist in Humanities/ International Services (EHI) programmes. Nevertheless, some estimations suggest that Japan needs 6.9 million foreign workers by 2040, which is around one million higher than the expected supply of potential foreign workers (JICA, 2024[41]). Japan’s foreign-born population, while rising, remains low at 2.7% in international perspective (Panel B).
Note: Panel A: 1. Includes (permanent) residents and spouses of Japanese or (permanent) residents. 2. Persons who have permission to engage in activities outside of their visa status. 3. Includes professors and teachers, artists, religious teachers, journalists, business management (including corporate intra-industry transfers), legal and accounting services, health and nursing care, entertainment, research, engineers and specialists in humanities and international services. Panel C: Cumulative number as of June 2024. Panel D: For high-skilled workers taking into account visa and admission policies for admission. Score: 0 (lower) to 1 (higher attractiveness).
Source: Immigration Services Agency; OECD, International Migration Outlook 2025; Ministry of Health, Labour and Welfare; and Andersson, L. (2025), “Measuring and assessing talent attractiveness in OECD countries”.
Japan’s immigration pathways for high-skilled foreigners are well-developed. The EHI programme accounts for around 20% of total foreign workers and 60% of skilled migrants. Japan also has a points-based system for high-skilled professionals since 2012. More recently, new faster routes to permanent residency (1 year under certain conditions instead of other categories ranging from 3 to 10 years), such as J-Skip for Special Highly-Skilled Professionals (e.g. university professors and researchers, engineers, and company managers) has been introduced. J-Find (Japan System for Future Creation Individual Visa) grants residency to graduates of universities ranked in the world’s top universities. Relaxing the strictness of access to permanent residency for qualifying immigrants, as recommended in the 2024 OECD Survey of Japan, is welcome. Other OECD countries, such as Australia, are continuously updating their immigration policies to attract skilled workers in the face of labour shortages (Box 1.6). Despite an expanding menu of options, Japan does not have a unique web platform that centralises all information on migration pathways. Given the recent multiplication of labour migration programmes for high-skill migrants, a platform to help potential migrants navigate the system, which can also help evaluate the various programmes, as Make it in Germany and New Zealand Now and Skill Finder platforms, could be considered (OECD, 2024[42]).
Australia’s migration system has been successful at facilitating a highly skilled stock of migrants that contribute positively to the domestic economy. The system is characterised by frequent evaluations and policy monitoring, with ongoing reforms to address impending challenges. Australia prioritises skilled migration, using a points-based system to select migrants based on factors, such as education, work experience, English proficiency and age. The system operates through several visa streams, including skilled independent visas, employer-sponsored visas, and regional migration programs. In 2024-25, Australia continued to implement its Migration Strategy, focusing on simplifying the immigration system and addressing labour shortages. A key reform was the introduction of the new Skills in Demand (SID) visa, which includes three streams based on salary thresholds and occupation lists. The SID visa offers a more streamlined process for both migrants and employers and provides visa holders with a clearer route to permanent residence. In December 2024, the government launched the National Innovation Visa (NIV) to attract exceptional international talent. The NIV is aimed at individuals who have achieved recognition internationally for their expertise or accomplishments in priority sectors, such as critical technologies, health industries, or infrastructure and transport.
Source: OECD (2025), International Migration Outlook 2025 and OECD (2023), OECD Economic Surveys: Australia 2023.
The pathways for low- and medium-skilled workers has been revised in 2024, with the expansion of the Specified Skilled Worker System (SSWS) and the revision of the Immigration Control and Refugee Recognition Act, which lays the framework for the abolishment of the Technical Intern Training Programme (TITP) and the creation of the Employment for Skill Development (ESD) Programme (Box 1.7). These reforms are welcome, as the ESD addresses the criticised parts of TITP, by allowing greater flexibility to change employers, increasing transparency in the recruitment process and regulating fees.
The Immigration Control and Refugee Recognition Act and the Act on Proper Technical Intern Training and Protection of Technical Intern Trainees were revised in June 2024 to prepare the groundwork for the abolition of the Technical Intern Training Programme (TITP) and the creation of the Employment for Skill Development (ESD) Programme to create a pipeline for the Specified Skilled Worker System (SSWS). ESD Programme is expected to be operational by 2027, with a transitory period till 2030 for TITP to be fully phased out. In March 2024, the number of specified industrial fields in SSWS was increased to 16 and the expected number of foreign workers to be accepted (maximum over five years) was raised from 345 150 to 820 000. The SSWS has two categories: (i) for workers “with a considerable degree of knowledge or experience” in the specified industries, who pass proficiency tests in the Japanese language and vocational skill; and (ii) for those with “expert skills”, who may renew their period of stay without restrictions and bring their spouse and children, provided they meet specific legal requirements. Those who complete three years of TITP can change their status to SSWS (i) without exams. The ESD Programme has been designed to secure workers in sectors with labour shortages, by training foreign workers to change over to SSWS (i) after three years, conditional on passing a skills proficiency and language test.
Source: (ISA, 2024[43]).
The new programmes have the potential to meet future labour demand effectively, but their visibility and accessibility abroad could be boosted. As of December 2025, there were around 382 000 workers on SSWS category (i) and around 8 000 in category (ii), but around 54% had come from TITP. Most applicants had already been in Japan when they took the relevant exams, and the distribution across sectors has been uneven (Figure 1.25, Panel C). Since its inception, the roll-out of skills testing for SSWS has been slow, with a relatively low number of applicants in origin countries. To develop scale, Japan must expand its ability to recruit workers directly from origin countries, for example by making the testing and qualification structure more transparent and increasing the number of tests administered abroad (OECD, 2024[42]). The transition period to ESD should be used efficiently to establish training capacity and pipelines, for example by investing in partner training institutions in origin countries to reinforce their capacity to provide suitable candidates. To ensure cost effectiveness, this could start with pilots in one or two designated countries at small scale.
The Comprehensive Measures for Acceptance and Coexistence of Foreign Nationals in 2018 and the Roadmap for the Realisation of a Society of Harmonious Coexistence with Foreign Nationals in 2022 have created a framework for integration policies. Furthermore, the Act on the Accrediting of Japanese-Language Educational Institutes to Ensure Appropriate and Reliable Implementation of Japanese-Language Education came into force in April 2024 to improve the quality of language teaching (OECD, 2024[44]). While these developments are welcome, implementing a comprehensive strategy to integrate migrants, as recommended in the 2024 OECD Survey of Japan, is key. Japan ranks relatively low in an international benchmark of the attractiveness of countries for foreign high-skilled workers (Figure 1.25, Panel D). The measure is based on several dimensions, including quality of opportunities, skills and family environments, quality of life and future prospects. According to a FY2024 survey, EHI immigrants felt discriminated against when searching for a home (17.4%), looking for work (12.4%), or at work (14.2%) (ISA, 2024[45]). Migrants also face barriers in accessing healthcare due to lack of information (Khin et al., 2025[46]). In addition, schooling is not mandatory for foreign children and there are no concrete policies to help spouses of skilled migrants integrate into the labour market. Hence, the comprehensive integration strategy should focus on these aspects.
While the Immigration Services Agency plays the central role in measures related to foreign workers in Japan, various ministries and agencies are in charge of different aspects (Table 1.11), and there is room to have more coordination (Ishikawa and Goto, 2024[47]). Hence, the establishment of the Office for a Society of Well-ordered and Harmonious Coexistence with Foreign Nationals and the appointment of a responsible Minister of State in 2025 are welcome. The implementation of the national strategies will also depend on local authorities. So far, integration has been more successful in urban areas with concentrated foreign resident populations (Tian, 2025[48]). Around 80% of cities have plans or guidelines to promote multicultural existence, much higher than 10% in villages and towns (Ministry of Internal Affairs and Communications, 2024[49]). Local authorities need to be supported, for example through the continued development of a toolkit of resources, such as the recent creation of an e-learning portal for Japanese language training. Such tools should be evaluated frequently to improve design and ensure cost effectiveness.
1.6.3. Using digitalisation and artificial intelligence in care and education sectors
The use of digital technologies, including artificial intelligence (AI) and robotics, can play a crucial role in addressing labour shortages. Japanese firms are increasing investment in these technologies to address demographic headwinds and raise productivity growth (Chapter 2). Such technologies can also help improve working conditions and labour shortages in care and education sectors, by enhancing efficiency and automating administrative tasks, allowing workers to focus on core responsibilities. According to government estimates, compared to FY2022, Japan will require around 570 000 more caregivers in FY2040, when its elderly population is set to approach its peak. In education, the national competition rate for teaching posts of public (elementary) schools has declined from 5.7% (4.1%) in FY2014 to 3.2% (2.2%) in FY2024. Furthermore, the share of teachers under age 30 expressing their intention of leaving teaching within the next five years at 20% is at the OECD average, but 6 percentage points higher than that in 2018 (OECD, 2025[50]).
Japan has taken several measures to improve job quality in the healthcare sector, such as running public information campaigns, promoting task sharing among medical institutions, providing subsidies and utilising digital technologies. For example, robot adoption in nursing homes has been accompanied by improved quality and productivity and labour retention (Lee et al., 2024[51]). However, the use of digital tools, such as the proportion of primary care practices using electronic medical records, remains low in international perspective (OECD, 2023[52]). The adoption of AI-powered diagnostic tools and telehealth platforms, which should be promoted, will require the necessary skills among health professionals and robust data governance frameworks to protect patient information and maintain public trust (see above).
Japan should ensure that teachers receive the training to utilise digital tools to improve efficiency in the classroom, and reduce time spent on non-teaching tasks, as in other OECD countries (Box 1.8). Japanese teachers have the longest working hours in the OECD at 55.1 hours per week (OECD average: 41), but spend more time on administrative tasks than in the OECD (OECD, 2025[50]). Too much administrative work is cited as the most common source of stress among teachers (63%) (OECD, 2024[53]). A law passed in June 2025 introduced a gradual increase in additional financial adjustments for the teaching profession, from 4% to 10% by 2031, and set a target to reduce teachers’ after-work hours. Digital tools have the potential to improve efficiency, for example by automating repetitive and time-consuming tasks, but teachers require time to build their digital capacity and to adapt their teaching practices. 17% of Japanese teachers have used AI in their work, lower than the OECD average of 36% (OECD, 2025[50]), and while the need for the inclusion of ICT skills in their professional development was higher than the OECD average, the share for Japanese teachers who participated in professional development for ICT skills was below the OECD average (OECD, 2023[54]).
In Korea, the “National Education Information System” incorporates student information, administrative functions and a digital credential system in a centralised web-based platform (Korean Ministry of Education and Human Resources Development, 2025[55]). The objective is to digitalise or automate administrative tasks and reduce the time teachers spend on data entry, record keeping or verification procedures. In England, the Department for Education launched the “School Workload Reduction Toolkit” in 2018, which provides schools advice and digital tools to streamline a range of processes, including administrative tasks, lesson planning, data management and marking (UK Department of Education, 2024[56]). A 2020 evaluation found a positive impact on teachers’ wellbeing with reduced time spent on the targeted tasks and no negative impact on student outcomes.
1.6.4. Adapting adult learning policies to changing labour market needs
A well-functioning system of adult learning is essential to help workers adjust to changes in the labour market and ensure equal access. According to the OECD Priorities for Adult Learning dashboard, despite being well-financed, Japan has room for improvement in terms of coverage, inclusiveness, flexibility and alignment of skill needs (OECD, 2021[57]). The Japanese labour market also ranks relatively low in a recent OECD index of skills-first readiness and adoption, which measures learning ecosystems, talent recognition, and the broader enabling environment (OECD, 2025[58]).
Participation in adult learning outside the workplace remains low (Figure 1.26, Panel A). The concentration of training in the firm as on- or off-the-job training likely reflects Japan’s traditional employment practices, which limits the need and time for external training. Although employers are encouraged to provide education and training leave by law, only 7.5% of employers provided this type of leave in 2024. The dominance of in-house training by employers, which concentrates on firm-specific skills, is less suitable for higher job mobility and new emerging skill needs.
Note: Adults aged 25-65, formal and non-formal job-related adult learning in the 12-months prior to the survey. Low (high)-skilled is defined as scoring Level 1 and below (Level 4 and above) on the PIAAC literacy scale.
Source: OECD (2025), Trends in Adult Learning: New Data from the 2023 Survey of Adult Skills, Getting Skills Right, OECD Publishing, Paris.
Recent and planned reforms, outlined in The Basic Policy on Economic and Fiscal Management Reform 2025 and Box 1.5, aim to strengthen the adult training system. The upper limit of educational training benefits was raised from 70% to 80% in October 2024, and a benefit for educational training leave, which compensates for the salary of those on employment insurance when they take a training designated by the Ministry of Health, Labour and Welfare at their own cost, was introduced in 2025. In addition, a Human Resource Development Support Grant is available for employers when they implement development training.
As in other OECD countries, older, female, part-time, less-educated and low-skilled workers tend to participate less in adult learning (Figure 1.26, Panel B; (OECD, 2025[59])). The gaps between male and female workers at 10.9 percentage points (OECD average: 0.4), and full-time and part-time workers at 18.3 percentage points (OECD average: 7.4) are especially large. According to national surveys, in FY2024, the share of workers who had taken off-the-job training was 44.6% for full-time employees (18.4% for non-full-time employees), and 21.1% for workers aged 60 or more (against 37% for the entire workforce). Older workers are also less likely to participate in AI-related reskilling or upskilling programmes, with 25% of those aged 50 and over reporting joining training, compared to 37% of those under 35 and 32% of those aged 35-49 (OECD, 2025[60]).
Adult learning programmes should be better targeted to disadvantaged groups. Analyses of training for jobseekers and workers participating in training in the workplace and at public and private providers are scattered across different places. While these sources serve separate purposes, a more centralised and systemic monitoring of participation, can help formulate more targeted policies. For example, Australia and Germany provide more generous financial incentives targeted to older workers. Similarly, the Human Resource Development Support Grant could be made more generous for employers training older workers. In addition, lack of time due to work and family obligations, which especially impacts female and non-regular workers, is a bigger barrier to participation in adult learning in Japan than the OECD average (Figure 1.27, Panel A). Hence, increased use of e-learning and the offer of modular courses, which have expanded with the pandemic, can help target disadvantaged groups.
Note: Adults aged 25-65. Panel A: The average share of adults citing each given barrier to participation, among those who reported being unable to participate in a desired training over the past 12 months. Panel B: Non-formal job-related adult learning in the 12 months prior to the survey. OECD is an unweighted average of all participating countries. Panel C: Respondents were asked to identify a single primary focus of the most recent adult learning activity undertaken.
Source: OECD (2025), Trends in Adult Learning: New Data from the 2023 Survey of Adult Skills.
Lack of suitable training as a barrier (Panel A) partly reflects insufficient information on different training opportunities, especially those provided by non-formal private trainers. Japan has various platforms, such as the Manapass, focusing mainly on programmes offered by public higher education institutions, another website listing courses eligible for the training benefit, and several career guidance portals, such as that of the public employment agency. Creating a one-stop shop online platform on all formal and non-formal training courses could help prospective learners navigate the system. Once established, it could be expanded to include information on the quality of providers.
Enhancing quality control of training programmes would improve their effectiveness. Japan introduced non-mandatory guidelines to private, non-formal training providers in 2011 and the possibility to apply for a certification (to be renewed every three years) if they follow the guidelines, which gave them credibility and better access to some publicly-funded training tenders. However, the system was suspended in 2023, as the uptake was low, reflecting lack of enforcement and high application costs. As adult learning becomes more widespread, a quality assurance and signalling mechanism is needed to ensure value for money for the government and participants, and help employers and employees better assess the quality of training providers. This regulatory approach to quality assurance is common in Austria (Ö-Cert) and Switzerland (eduQua) (OECD, 2021[61]). Ö-Cert is well-accepted by adult learning providers in Austria due to its light-touch administration and low application costs (EUR 100) for accreditation (Eurydice, 2025[62]). Japan could introduce a similar accreditation process, starting with pilot projects in some local areas to ensure a design that incentivises take-up. As a complement, non-formal learning that leads to a certificate for the participants would provide workers with evidence of acquired skills and making learning more recognisable to employers, enhancing the transferability of skills across employers and sectors. On average across OECD countries, 62% of non-formal learning activities lead to a certificate, which is higher than that in Japan (Figure 1.27, Panel B).
As training needs are projected to increase with changing technologies and long working lives, the role of underutilised training providers will need to change. In 2024, only 8% of universities and public institutions offered off-the-job training for regular workers (Table 1.12). Since 2019, Japan launched a professional and vocational university system. Vocational and higher education institutions could play a greater role by offering more diversified and flexible study opportunities and programmes aligned with current and future skill needs, as recommended in the 2024 OECD Survey of Japan.
Note: Training carried out in a group setting within or outside the firm. Only firms with 30+ employees included. Multiple answers allowed.
Source: Basic Survey of Human Resource Development, 2025.
Lack of suitable training as a barrier to participation in adult learning could also reflect the fact that the training offers are not fully in line with labour market needs. The relationship between number of people attending job-related training and job offers in that occupation is not significantly strong in Japan (OECD, 2021[57]). Despite a low share of adults with ICT skills (see above) the share of non-formal job-related training in digital skills is less than the OECD average (Figure 1.27, Panel C). While labour shortages in the average Japanese firm are near the OECD average, firms operating in green and digital fields tend to face more acute shortages (Marcolin and Filippucci, 2025[63]). Japan already had a share of green-driven occupations at 20%, slightly above the OECD average between 2015 and 2019 (OECD, 2024[64]), but skill needs for the green transformation are expected to rise. Survey evidence also finds that 65% of employees in Japan cited digital skills as the top skill to acquire, including cybersecurity (54%), data analysis (51%) and AI and machine learning (46%) (Economist Impact, 2023[65]). Hence, policies to facilitate upskilling for the green and digital transformations, including by regularly reviewing the training programmes eligible for subsidies to ensure they remain consistent with identified skill needs, should be continued.
According to an international comparison of adult training opportunities for the green and digital transformations (GX and DX), Japan has well-established policies and strategies, including publicly-funded training programmes, and incentives for workers, jobseekers, and adult learning providers. However, information, advice and guidance initiatives could be further boosted (OECD, 2024[66]). Japan plans to expand the courses eligible for education and training subsidies for digital skills, including AI, and the Central and Regional Consortiums for Vocational Abilities Development Promotion, established in 2022, are focusing on skills needed for GX and DX, sharing best practices across local governments. This platform can be further utilised to ensure coordination of green, labour market and skill policies offered by different ministries to municipalities, enterprises, and financial institutions (OECD, 2024[64]).
The traditional employment practices made the link between training, occupation and skills needs less relevant. As employment practices are gradually changing, the government has been improving information on skill needs, and matching of skills to occupations and job descriptions, for example, with the introduction of the job information website (job tag), the Japanese equivalent of O*NET. While job tag is a major improvement, there is room to improve its functionality as a skill-occupation- wage-training information database, by updating it regularly and connecting it to other data sources (Mitsubishi Research Institute, 2023[67]). Occupational standards and national qualification frameworks should be included in job tag to help ensure that training is aligned to the needs of the labour market.
1.7.1. Accelerating implementation to reach targets
Despite good progress of decoupling of emissions and growth since their peak in 2013, Japan’s energy and electricity mix remains heavily dependent on fossil fuels (Figure 1.28, Panel A). 87% of greenhouse gas (GHG) emissions are linked to energy production and use, with energy industries as the largest source followed by manufacturing, transport and buildings (Panel B). Lowering the share of fossil fuels in electricity generation would reduce emissions and improve energy security. The 2026 Middle East conflict underscores the importance of reducing exposure to global energy supply disruptions and volatile prices. The outlook of FY2030 was around 41% of electricity generation from fossil fuels, with coal accounting for around 19%. The latest outlook for FY2040 has thermal power at approximately 30-40%, but there is no breakdown into coal, oil and gas. Given high uncertainty associated with several technologies, Japan does not provide a breakdown of energy sources in line with its 2050 net-zero goal.
Japan’s environment and energy policies are based on the principle of S+3E, where safety is the major objective, followed by: i) energy security, with the energy self-sufficiency ratio expected to increase from 12.6% in FY2022 to around 30-40% in FY2040; ii) economic efficiency to have internationally competitive prices; and iii) environment to pursue efforts to be consistent with the global 1.5°C goal (METI, 2025[68]). Besides the legislated long-term commitment to net-zero emissions by 2050 (Figure 1.28, Panel C), Japan’s main target under National Determined Contributions is a 46% emissions reduction from FY2013 levels by FY2030. This has recently been complemented with reduction targets of 60% and 73% by FY2035 and FY2040, respectively (METI, 2025[69]).
Note: Panel A: Renewables include hydro, wind, solar, geothermal, biofuels and renewable waste. Other includes non-renewable municipal waste and industrial waste. Panel B: Waste and other refer to waste and fugitive emissions from fuels.
Source: IEA, World extended energy balances; OECD, Air emissions – Greenhouse gas emissions inventories; and Government of Japan (2025), Seventh Strategic Energy Plan.
Bold reforms and accelerated implementation are needed to meet the new targets. If GHG emissions declined at historical values (average of 2.4% in the FY2013-22 period), they would be 47.5% below that in FY2013 by 2040, against the target of 73%. In addition, targets are set using a gross-net approach, where the base year does not include emissions and removals from land use, land-use change and forestry (LULUCF), which is a small net carbon sink, while the target includes them (OECD, 2025[70]). The Seventh Strategic Energy Plan, the Global Warming Countermeasures Plan, which includes Japan’s Nationally Determined Contributions under the Paris Agreement, and the GX2040 Vision outline Japan’s main policies and targets. These include expanding renewables, increasing energy efficiency, providing financial support and subsidies for investment and R&D and introducing “pro-growth carbon pricing”.
Climate governance is key for effective climate mitigation. Independent climate advisory bodies can enhance the legitimacy of the policymaking process and strengthen public trust and support for climate action (Averchenkova and Lazaro, 2020[71]). For example, Finland determined its net-zero target following the recommendations of the Finnish Climate Change Panel (Nachtigall et al., 2022[72]). Climate advisory bodies can play a crucial role as independent monitors, guiding governments towards evidence-based policy decisions and providing transparency through regular reviews (Nick and Duwe, 2021[73]). The Central Environment Council (CEC), composed of non-governmental experts and around 80 members, is the major advisory body to the Ministry of Environment for environmental policies. However, the CEC is positioned within the Ministry and members are appointed by the Prime Minister (OECD, 2025[70]). While the public consultation process in the update of energy plans is extensive in Japan, the members tend to be males between the ages of 50 and 70, concentrated on energy supply representatives, with limited participation from NGOs (Hiroyuki, Hirata and Mochizuki, 2024[74]).
An independent climate advisory body, as in Germany and the United Kingdom (Box 1.9), could help the Japanese government identify policies that would help reach its long-term targets while improving transparency and evaluation (OECD, 2025[70]). The 2025 Plan for Global Warming Countermeasures has strengthened the management process to review and adjust measures and policies. However, the Plan continues to focus primarily on expected emission reductions from existing policy measures, using linear projections to targets, while climate plans in European countries often have additional policies scenarios. An independent climate advisory body could help fill these gaps.
Independent climate advisory bodies in the United Kingdom and Germany play a central role in ensuring that climate policies are guided by scientific evidence and remain accountable to long-term emissions goals. The Climate Change Committee is a statutory, independent body established under the Climate Change Act 2008, which advises the UK government on setting carbon budgets, achieving the net-zero target by 2050, produces annual progress reports to Parliament, assessing whether the government’s policies are on track to meet emissions targets. In Germany, the Expert Council on Climate Issues was created under the 2019 Federal Climate Change Act. This independent panel of scientists reviews the government’s annual emissions data, evaluates whether sectoral targets are being met, and provides assessments of new climate measures.
1.7.2. Ensuring the effectiveness of the Green Transformation Strategy
Japan uses a diverse mix of policy instruments to reduce emissions, in line with evidence that a well-balanced combination of policies is more effective than a few (D’Arcangelo, Kruse and Pisu, 2024[75]; OECD, 2025[70]). Japan has traditionally relied on subsidies (energy efficiency, renewables, electronic vehicles), R&D support and non-market-based policies (regulations, performance targets and voluntary agreements with industry), while market-based instruments, such as energy and vehicle taxes have played a smaller role (see below). Hence, it is welcome that the 2023 Green Transformation (GX) Basic Policy, revised as GX2040 Vision in 2025, includes plans to expand carbon pricing later in the decade in exchange for upfront industrial subsidies for investment, supported by GX Economy Transition Bonds. The design will be important to ensure its effectiveness in reducing emissions and getting value-for-money.
Investment support
The government is frontloading JPY 20 trillion in subsidies, tax incentives, and R&D support to firms, with the goal of reaching public and private investment of JPY 150 trillion. The financing is set to come from GX Economy Transition Bonds, which will be redeemed by FY2050, with the first issuance (JPY 1.6 trillion) in February 2024. The 16 priority areas include steel, chemicals, paper and pulp, cement, automobiles, batteries, aircraft, sustainable aviation fuel, ships, life-related industry, resource circulation, semiconductors (power semiconductor, photoelectric fusion, etc.), hydrogen and its derivatives, next-generation renewable energy (perovskite solar cells, floating offshore wind power, and next-generation geothermal power), nuclear power and carbon capture and storage. The sectoral strategies are regularly updated by Ministry of Economy, Trade and Industry (METI), most recently in early 2025. The GX Implementation Council, headed by the Prime Minister and including several ministers, industry stakeholders and experts from corporates, oversees implementation and provides strategic guidance.
The GX Acceleration Agency, established in May 2024, is in charge of providing financial support, including equity investment and loan guarantees. The selection criteria include alignment with government policies, implementation and promotion of GX-related technologies, addressing risks that cannot be fully borne by the private sector, an overall assessment of sustainability and the establishment of an appropriate management and implementation structure. As in other countries, the selection process of businesses for green support should be competitive, non-discriminatory and transparent to avoid favouring incumbents and deterring new entrants (Millot and Rawdanowicz, 2024[76]). Such policies, while necessary and common across the OECD, should include a clear timeline for policy phase-out, promote competition and establish strong mechanisms for monitoring, evaluation and reporting of fiscal costs (OECD, 2024[77]). The implementation of a competitive and transparent selection process for firms and technologies receiving support is essential to ensure additionality of the financial support. Regular review and feedback mechanisms, including independent evaluation of supported investments, also boost effectiveness (OECD, 2025[70]; Goto, 2025[78]). Hence, transparency of the operation of the GX Acceleration Agency should be ensured via disclosure of information and communication of the impact and evaluation of projects to the public.
Taxation
Higher environmental taxes would provide more consistent price signals, generate revenues and improve the effectiveness and efficiency of other policy instruments (Stechemesser et al., 2024[79]). Environmentally related tax revenues as a share of GDP and total taxes at 1.2% and 3.6%, respectively, with energy taxes applying to CO2 emissions from the combustion of fossil fuels since 2012 at JPY 289 (USD 1.9/tCO2) relatively low. The average effective carbon rate (excluding pre-tax subsidies) in Japan was EUR 23/tCO2 in 2023, with only 8.4% above EUR 120 (Figure 1.29), which is the mid-range estimate of the carbon price needed by 2030 to be consistent with net-zero goals. Net effective carbon rates (ECR) are only EUR 3.3/tCO2, one of the lowest in the OECD, and are uneven across sectors, with negative ECRs in the agriculture and off-road transport sectors. The low rate and scope of carbon taxation have lowered their effectiveness in reducing emissions (Gokhale, 2021[80]). There are also two subnational emission trading systems (ETS), which covered 1.6% of emissions as of 2023, much lower than the average coverage of 31% in other OECD countries with ETS (OECD, 2024[81]).
Note: Panel A: Excluding biofuels CO2. Cross-country comparison of effective carbon prices for 2023 is affected by temporary energy price support measures in many OECD countries.
Source: OECD, Net Effective Carbon Rates; and OECD, Share of Emissions Priced.
A GX surcharge (surcharge on fossil fuel supply) is set to be introduced from FY2028, and the national ETS is being phased in in three stages over ten years. The first voluntary baseline and credit phase commenced in FY2023, with more than 700 companies, accounting for more than 50% of CO2 emissions registered as of August 2025. It became mandatory in FY2026 for firms with emissions above a certain threshold (annual emissions of 100 000 tons or more), with the government allocating allowances. The final phase will be the auctioning of allowances to power companies from FY2033. In May 2025, the GX Promotion Act was amended to establish the foundations for the mandatory implementation of the ETS and define the technical requirements necessary for the introduction of the GX surcharge in FY2028, whose implementation will be carried out by the GX Acceleration Agency. However, the surcharge level and coverage rates and the total amount of emission allowances are not yet defined, which could lower investment certainty.
The design and timing of the ETS and forthcoming levy should include several features to boost its effectiveness and investment certainty, as recommended in the 2024 OECD Survey of Japan, and the 2025 OECD Environmental Policy Review of Japan. First, enshrining in legislation the ETS cap, the GX-surcharge rate and their future tightening trajectories, which could be automatic, should be considered. Second, a quicker phase-in would be more effective in helping meet intermediate targets of 2035 and 2040. Some modelling suggests a 2025 introduction of carbon pricing would have been needed to promote behavioural change and industrial restructuring (IGES, 2023[82]). Third, the surcharge should be set at a rate to provide sufficient incentives. For example, a rate corresponding to paying the GX bonds of JPY 20 trillion, as announced, could imply JPY 1 000/tCO2 (Nikkei, 2022[83]), which would be well below that would be needed to be consistent with net-zero emissions (OECD, 2025[70]). Fourth, auctioning can help correct potential market distributional distortions, such as penalising new entrants, generate revenue, and increase the mitigation effectiveness of the ETS. Bringing forward the auctioning of allowances from FY2033 could be considered. Finally, a further phase of extending the auctions to sectors beyond power generators, as in Phase 4 of the European ETS, with the revenues used to support decarbonisation in those industries, could be considered (REI, 2025[84]).
Strengthening carbon pricing can have negative distributional effects. As low-income households spend a disproportionately large share of their income on energy, they are particularly vulnerable to price increases (Inoue, Matsumoto and Morita, 2020[85]). Many OECD countries recycle revenues from carbon taxes and ETS and to a lesser extent from fuel excise taxes (Marten and van Dender, 2019[86]). Japan has earmarked the revenues from the forthcoming GX surcharge and ETS to repay the GX Economy Transition Bonds, which will finance the investment in low-carbon energy technologies. It will also be important to provide targeted support to vulnerable households. Low-income and older households in rural areas with high car and kerosene for heating dependency are the most vulnerable in Japan (Okushima and Simcock, 2024[87]). For example, Canada provided higher transfers from its carbon pricing scheme to rural households.
While Japan provides means-tested social benefits to low-income households, there is room to improve targeted transfers when carbon pricing kicks in, which requires clear definitions of energy and transport poverty as well as an effective system to identify the beneficiaries and implement the transfers. An improved ability to target measures against high energy prices is needed. The general government subsidies for fuel and energy (e.g. electricity, city gas and gasoline), mostly untargeted, increased from JPY 306 billion in FY2021 to 4 681 billion in FY2023. Such untargeted measures weaken incentives to save energy, conflict with climate mitigation objectives and are costly and regressive. Inefficient fossil fuel subsidies should be phased out to ensure that the GX subsidies and carbon pricing deliver effective incentives. The gasoline subsidies were replaced by the abolishment of the provisional gasoline tax rate from December 2025 (see above), which is expected to result in an annual revenue loss of JPY 1 trillion (Cabinet Office, 2025[88]), and the provisional diesel tax rate was abolished from April 2026. These changes, designed as measures against high prices, nevertheless conflict with the forthcoming carbon tax and could lower the adoption of electric vehicles (below), and should be reconsidered.
1.7.3. Decarbonising the power sector and accelerating renewable energy deployment
Lowering the share of fossil fuels can boost energy security and decarbonise the economy. The government plans to expand renewables and nuclear power, as well as using emerging technologies, like hydrogen and carbon capture. Given the challenges of public acceptability for some renewables and nuclear and scaling up of some emerging technologies in a cost-effective manner, contingency planning, with concrete alternative roadmaps to achieve targets, should continue to be enhanced, based on the different energy scenarios in the Outlook for Energy Supply and Demand in FY2040, as recommended in the 2024 OECD Survey of Japan.
Nuclear
The Seventh Energy Plan has introduced a shift in Japan’s nuclear energy plans from “reduce the nation’s dependence on nuclear energy” to “make maximum use of nuclear power”. The new targets include raising the share of nuclear power from 8.5% in FY2023 to around 20% in FY2040. As of April 2026, 14 out of 33 operational reactors had restarted, with the remaining at different stages of approval or construction or without the assessment process having started. Given the relatively long restart times, the goal of making all 36 reactors operational to reach the FY2040 target could be difficult to achieve (REI, 2025[89]; Climate Integrate, 2025[90]), and depends on stringent safety standards and consultations with local communities to increase social acceptability. According to a February 2024 poll, 50% of the population support restarting reactors, a much higher share compared to the aftermath of the Fukushima Daiichi Nuclear Power Station Accident in 2011. The increase in support reflects the energy shock, and communication, consultation and stakeholder engagement initiatives.
There are also plans to develop and deploy next-generation advanced reactors with built-in new safety mechanisms, with eased permitting regulations to reconstruct them at sites where nuclear power plants are being decommissioned. Nuclear power can contribute to improving energy security, and nuclear electricity production is more stable over time compared to intermittent renewables, although concerns involve high-impact negative risks in case of severe nuclear accidents. Hence, it is important for nuclear projects, as well as any other energy project, to be underpinned by transparent and comprehensive life-cycle cost-benefit analyses that inter alia account for the cost of constructing power plants, storing nuclear waste and decommissioning disused power plants.
Coal, hydrogen, ammonia and carbon capture and storage
Coal remains a major source of GHG emissions from energy production and use. While Japan’s coal fleet is among the most efficient in the world, even a highly efficient coal plant emits more CO2 than other alternative power sources (IEA, 2024[91]). In 2024, together with other G7 countries, Japan pledged to phase out existing unabated coal power generation in energy systems during the first half of 2030s or in a timeline consistent with keeping a limit of 1.5°temperature rise within reach, in line with countries’ net-zero pathways. The fade-out of inefficient coal-fired power generation has not progressed sufficiently due to the emergence of supply capacity shortages, but the government announced that it will continue to promote the fade-out through voluntary efforts by operators toward 2030 (METI, 2025[69]). For the rest, decarbonisation of thermal power generation will be pursued by utilising technologies, such as hydrogen, ammonia and carbon capture, utilisation and storage (CCUS). At the same time, some stakeholders are asking for exceptions from the fade-out (Nikkei, 2025[92]). While energy security, such as ensuring a stable electricity supply, should be taken into account, measures to ensure the phase out of unabated coal power generation, as pledged, could be considered. For example, committing to a phase-out timeline, as done by most OECD countries with coal power capacity, would smooth the transition and incentivise the scale-up of renewables (OECD, 2025[70]).
The use of hydrogen, ammonia and CCUS technology is an important part of Japan’s plans to reduce emissions from existing and new thermal power plants. Japan was the first country to develop a hydrogen strategy in 2017, has allocated funding for R&D in these technologies and the development of international supply chains, and enacted legislation (Hydrogen Society Promotion and Carbon Capture and Storage Business Acts) to regulate and promote them. Globally, deployment of large-scale projects for the production of low-emission hydrogen, ammonia, and hydrogen-based fuels are expensive, with higher costs in Japan than in China and the United States (IEA, 2024[93]; BNEF, 2023[94]; IEA, 2023[95]). Given the considerable uncertainties about the scope for scaling up these technologies in a cost-effective manner, the magnitude and allocation of the support should be reconsidered in the absence of large technological breakthroughs.
Japan plans to co-fire ammonia in existing and new coal power plants, and is providing significant subsidies to suppliers who aim to develop a commercial-scale supply chain of low-carbon hydrogen and its derivatives. If hydrogen and ammonia are not decarbonised, as is the case currently, investing in retrofitting existing or building new thermal combustion power plants could lead to higher emissions over the lifespan of these plants, as well as carbon lock-in (IEA, 2024[96]). The higher fuel cost of ammonia means that these plants run at lower capacity than unabated coal plants today and primarily serve to provide flexibility and backup capacity, rather than baseload electricity. Hence, it is important to use ammonia in sectors where these technologies would be the most cost-effective option, such as hard-to-abate industrial processes (fertilizer and chemical production, aviation, and long-duration storage) (IEA, 2023[97]). In addition, it is projected that Japan’s ammonia demand will increase from 1 million tons in 2021 (around 1% of global production) to 30 million tons by 2050 (around 11% of global demand projections (GR Japan, 2024[98]). Assuming that Japan continues to be a net ammonia importer, diversification of supply chains will be crucial to ensure energy security.
Renewables
The renewable power capacity has increased significantly, but further acceleration is needed. Thanks to generous feed-in tariffs and feed-in premium scheme introduced for renewable energy in 2022, the renewables share of electricity generation rose from 10% in 2013 to 23% in 2024, but still remains below the OECD average (Figure 1.30, Panel A). The Seventh Energy Plan revised the target share of renewables in energy supply from 36-38% in FY2030 to 40-50% in FY2040 (METI, 2025[69]). Alternative estimates of energy scenarios by other institutions suggest that renewables could account for around 70-80% of energy supply by 2035 and 90% by 2040 or 2050 (Shiraishi et al., 2023[99]; IGES, 2023[82]; REI, 2024[100]). Further expansion of renewables can create job opportunities in rural areas, where renewable energy potential is high (OECD, 2025[70]).
Note: Panel A: Solar PV refers to solar photovoltaics. The 2040 outlook refers to approximate values. Panel B: Korea and United States: offshore wind permitting times only.
Source: IEA, World extended energy balances; Government of Japan (2025), Outlook for Energy Supply and Demand in FY2040, and OECD (2025), Environmental Performance Reviews: Japan.
The cost of renewables, while declining, remains high in international perspective. The deployment of renewables faces geographical, regulatory and grid capacity and cultural barriers. Deep coastal waters allow for limited fixed offshore wind development, while geothermal resources are located mostly in environmentally-protected areas or interact with hot springs operations. A lack of inter-regional balancing capacity to manage variability in renewable output is another barrier. Nevertheless, despite limited land for solar energy deployment due to Japan’s mountainous terrain and competition with agriculture for land use, the country has successfully increased its solar power, having the highest density of PV-installed capacity per plain field in the OECD. Solar is projected to remain the largest source of renewable electricity generation by 2040, reflecting the feed-in-premiums and other support mechanisms for new technologies.
As in many OECD countries, complex and lengthy permitting procedures for renewable projects are a main barrier to wider deployment (Figure 1.30, Panel B). Since 2021, various measures have been taken to speed up the permitting process for wind power plants, such as easing certain assessment requirements, increasing the capacity thresholds for a mandatory environmental impact assessment (EIA) and using a specific zoning process to identify areas for offshore wind power projects. The 2025 amendments to the Act on Promoting the Utilisation of Sea Areas for the Development of Marine Renewable Energy Power Generation Facilities, which allows the installation of marine renewable energy power generation facilities in Exclusive Economic Zones, are welcome. EIA and permitting procedures should continue to be streamlined, while ensuring their effectiveness in identifying and mitigating potential environmental impacts (OECD, 2025[70]). For example, speeding up licensing procedures, by centralising procedures that span multiple administrative agencies, could help.
Efforts to raise public awareness and stakeholder engagement should be continued to boost local acceptance. Renewal Energy Promotion Areas not only simplify administrative procedures for renewable energy projects, but also help involve councils and stakeholders to ensure regional consensus, while prefectures use local ordinances to help manage trade-offs between development and local concerns (OECD, 2025[101]). It is important to ensure that these local ordinances do not become a barrier to the transition to renewable energy. In other countries, such as France and Korea, local consensus-building policies have yielded positive results (Tajima, Doedt and Iida, 2022[102]). Local acceptance can also be promoted by assigning a share of benefits to local communities.
The plans to increase investment in the grid should be regularly assessed and prioritised. The 2023 Master Plan for National Power Grid Development estimated investment needs of around USD 50 billion by 2050, including plans for the construction of the underwater DC transmission lines between Hokkaido and Honshu and the Chugoku/Kyushu connection facilities. The Master Plan is under review, given the rising demand for electricity. Japan should continue investments in transmission and distribution infrastructure, based on cost-benefit analysis, as recommended in the 2024 OECD Survey of Japan. In addition, as the fragmentation of the electricity network into regional grids limits the dispatch of renewable power, whose best potential lies in areas far from demand centres, the integration of the grid should be enhanced.
1.7.4. Reducing emissions from buildings and transport
The recent reforms making energy performance standards mandatory for all new buildings from 2025 and targeting net zero-energy for all new construction by 2030, are welcome. Even though the Japanese building stock is relatively new in international perspective, 80% of homes and 60% of non-residential buildings do not meet current energy performance standards (OECD, 2025[70]). The use of performance standards and certifications for existing buildings could help achieve the 2050 goal of net zero-energy on average for Japan’s whole building stock (OECD, 2024[103]). Strengthening energy efficiency requirements for major building renovations or using energy performance certifications during property transactions (i.e. when existing homes are sold or rented), and introducing whole-life carbon requirements, as in several European countries, could help (OECD, 2025[70]; OECD, 2025[104]).
The transportation sector accounts for around 17% of total GHG emissions, with road transportation contributing 90% of the sector’s total (OECD, 2025[105]). Subsidies are supporting the growth of alternative fuel vehicles, with hybrid car sales at around 54% of new passenger car sales. However, electric vehicles (EV) sales as a share of new passenger car sales at 2.8% in 2024 remain low (Figure 1.31, Panel A). This reflects the fact that Japan pursues a multi-pathway approach to reach its target of 100% “electrified vehicles” (electric, fuel cell, hybrid and plug-in hybrid vehicles) in the sale of passenger vehicles by 2035. The cost effectiveness of such subsidies, which were JPY 129.1 billion in FY2024, should be managed carefully. The criteria for receiving subsidies were widened in 2024 to other factors, such as the development of charging infrastructure, used battery collection systems and helping communities in disaster response (METI, 2024[106]).
Note: Panel A: Electric cars include battery electric vehicles (BEVs) and plug-in electric vehicles (PHEVs). Panel B: Chargers less than or equal to 22 kW are classified as slow, chargers greater than 22 kW and up to 150 kW as fast.
Source: IEA (2025), Global EV Outlook 2025.
The roll-out of publicly accessible EV charging infrastructure should be accelerated to keep up with the expected growth in EVs. The number of electric light-duty vehicles per public charging is relatively high (Figure 1.31, Panel B). Japan targets 300 000 public charging plugs by 2030, up from 68 000 in FY2024. The linking of subsidies to private investment in EV infrastructure provision is welcome and policies to expand the charging network should be continued, together with enhancements to the power grid. To contain costs, the government could target subsidies for public charging stations to underserved rural areas where private investments are commercially less attractive or unviable.
Per capita emissions from ground transport in rural regions are three times higher than in urban regions, reflecting the well-developed public transport in metropolitan areas and higher rates of vehicle usage in rural areas. Low population density, together with smaller administrations and lower technical and financial capacity, makes it difficult to provide low-carbon alternatives (OECD, 2025[101]). Policies to reduce car dependency, such as demand-responsive transport schemes and promotion of community buses, should be continued. Ride sharing programmes and deployment of electric vehicles should be prioritised for rural areas.
1.7.5. Adapting to climate change
Japan is highly exposed to weather-related hazards, such as tropical cyclones, storm surges, floods and heatwaves. For example, deaths due to heat strokes have increased (Figure 1.32). According to Japan Meteorological Agency, annual temperatures have risen by 1.4°C per century between 1898 and 2024, and are projected to rise by 3°C by the end of the 21st century compared to the 20th century. While population exposure to river and coastal flooding is lower than in many other countries, 28% of Japan’s built-up area is exposed to violent windstorms – among the highest shares in the OECD (OECD, 2025[70]). Key industries like agriculture, infrastructure, and energy are particularly at risk from extreme weather events. Japan incurred JPY 13.7 trillion (USD 90.8 billion) in climate-related damages over the past decade, and faces rising climate-related potential losses of JPY 952 trillion (USD 9.2 trillion) by 2050 (Yamada et al., 2025[107]). Furthermore, related damages could disproportionately impact regional banks, with suburban and rural areas historically experiencing greater damage than major metropolitan areas (Ashizawa et al., 2022[108]).
Source: Ministry of Environment; Ministry of Health, Labour and Welfare; EM-DAT database; OECD, Economic Outlook database; and OECD calculations.
Japan has a long history of coping with natural disasters, which has led to expertise in disaster risk management. The strong capacity to cope with natural disasters includes the use of advanced adaptive technologies and preventative maintenance to enhance infrastructure and climate resilience, and a well-designed national adaptation planning framework. A Disaster Management Agency to boost coordination, strategic planning, response capacity and regional capabilities, will be established in 2026. The Japan Climate Change Adaptation Act is in line with many best practices, including the requirement to measure and report implementation progress, develop evaluation methods, promote strong cooperation among various stakeholders, and review the plan every five years (OECD, 2024[109]). The 2023 revisions to the Act included legal reforms to strengthen measures against heatstroke, with a target of halving the number of heat-related fatalities (5-year moving average) by 2030. A 2023 interim review report states that future developments should focus on assessing the effectiveness and progress of adaptation measures, enhancing and utilising scientific knowledge and evaluating the impacts of climate change, promoting adaptation by regions and private firms, and communicating with the public.
Local authorities have a large role to play in climate adaptation, but they often lack technical and fiscal capacities. Hence, central governments need to provide technical support and a national regulatory and policy framework to encourage local authorities to build climate resilience (OECD, 2023[110]). Japan has established local climate change adaptation centres and the Climate Change Adaptation Information Platform (A-PLAT) to collect, analyse and provide information on climate change and adaptation, and offer technical advice and support to local governments. While the development of local adaptation plans is not mandatory, as of July 2025, all prefectures and 24.2% of municipalities had developed them. These efforts should be continued, as sharing information across levels of government can help boost preventative measures at the local level.
Effective reporting on implementation and evaluation are key to cost-efficient adaptation policies (OECD, 2024[111]). Japan has various key performance indicators, including at the sector level (e.g. agriculture, health, industrial and economic activities) that are provided annually by different line ministries, coordinated by the Ministry of Environment and monitored by the Climate Change Adaptation Promotion Council. It is important to ensure consistency of the indicators across different stakeholders by increased cooperation. In some OECD countries, for example, Ireland, these indicators are compiled by independent climate councils, which could also be considered. The indicators should also be accompanied by timelines to monitor implementation. The government is currently assessing the methods of examining the effectiveness of adaptation measures, which could be a good opportunity to boost their consistency.
Information on climate threats can be provided to communities and policymakers through climate risk assessments and vulnerability maps (OECD, 2024[111]). In Japan, hazard maps regarding risks on floods, high tides, tsunamis, landslides, volcanic eruptions and earthquakes are provided by municipalities and disseminated by the Ministry of Land, Infrastructure, Transport and Tourism. Several laws enable local governments to restrict construction and development in designated areas, such as disaster risk, landslide prevention, tsunami disaster alert and flood damage prevention areas. However, the practical implementation has been hindered by social, institutional and legal constraints, such as insufficient technical and financial capacity at the local level and resistance by residents (Yamazaki-Honda, 2025[112]). The dissemination of information of risks and provision of technical support to municipalities should be continued.
Natural catastrophe insurance is provided only by the private sector and is not mandatory in Japan. There is no insurance policy solely dedicated to climate-related disasters, which are provided as part of other insurance policies, such as for fire. Hence, there are data gaps, preventing an accurate assessment of coverage, and the insured and deductible amounts. Reporting should be improved, with a view to boost coverage. Making insurance against disaster risks (especially flooding) mandatory could be considered, alongside a national catastrophe insurance programme as in France and Switzerland. These programmes often benefit from government co-insurance, reinsurance or a guarantee. A state guarantee ensures that damages from extreme events can be covered. An advantage of the French system is that it provides complete coverage and affordable premiums while keeping a large role for private insurers, with benefits in terms of cost effectiveness. In Japan, public reinsurance is only provided for earthquakes through the Ministry of Finance.
There is also room to improve tools for financial institutions, including insurance companies, to conduct risk analysis. Claim payments due to floods and typhoons are on the rise, and supervisors have been improving their scenario analysis framework to help assess future risks. Financial institutions are developing their capabilities and initiatives to support clients’ adaptation measures, including dedicated departments, which are welcome. However, many face challenges in conducting assessments of quantitative risks and in formulating strategies, in a forward-looking and reliable manner (FSA, 2025[113]). Hence, supervisors should continue to monitor financial institutions’ efforts on climate-related risks.
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