This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.

Global economic, monetary and financial sector developments have increased risks and uncertainty. The ongoing recovery, supported by supply-chain improvements, rising tourist arrivals, the release of pent-up demand and accommodative policies, has recently lost momentum (Figure 1).

The post-pandemic recovery is moderating against the backdrop of heightened uncertainty. The strong outcomes of the latest annual spring wage negotiations, the highest in three decades, could signal a turning point for price, growth and income dynamics, a long-standing aim of Japanese policies. Global monetary and financial sector developments and persistent inflation are putting pressure on the monetary policy framework, while interest rate and credit risks in the financial sector warrant close monitoring. Given high public debt, fiscal consolidation to rebuild fiscal buffers, underpinned by a credible medium-term fiscal framework to reduce the primary deficit and put the debt-to-GDP ratio on a clear downward path, is key. Rapid population ageing will drag down trend growth unless productivity gathers speed. It will exacerbate fiscal pressures, which requires policies to contain health and long-term care spending. Increasing the share of basic research in total R&D spending and the share of business-financed R&D performance at universities, strengthening competition and improving access to finance for start-ups would foster business dynamism and innovation. Longer-term sustainability also requires reducing greenhouse gas emissions in line with government targets, calling for green investment and innovation plus carbon pricing.

Japan faces serious demographic headwinds. Under current fertility, employment and immigration rates, the population would fall by 45% by 2100 and employment by 52%. Given the challenges of a shrinking and ageing population, the government has pledged to “create a children-first economic society and reverse the birth rate decline”. One priority is to strengthen the weak financial position of youth, which leads many to delay or forgo marriage and children. Making it easier to combine paid work and family is also critical so that women are not forced to choose between a career and children. Policies should also cut the cost of raising children, the key obstacle to couples achieving their desired number of children. Given the challenge of reversing fertility trends, Japan needs to prepare for a low-fertility future by raising productivity and employment, particularly among women and older people. Breaking down labour market dualism, which disproportionately affects youth, women and older people, is a priority. Abolishing the right of firms to set a mandatory retirement age (usually at 60) and raising the pension eligibility age would also promote employment. Foreign workers are helping ease labour shortages, but more needs to be done to attract foreign talent. A comprehensive approach is needed to raise fertility, the employment rates of women and older persons and inflows of foreign workers.