2003 OECD Economic Surveys: Japan 2003

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Despite recent acceleration of growth in Japan, OECD warns in its 2004 survey that Japan still faces serious structural problems that limit its growth potential and weaken demand.  This report carefully examines such issues as deflation, fiscal sustainability, product market competition, and further structural reforms and makes recommendations to strengthen Japan’s macroeconomic framework.

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Assessment and Recommendations

The recent acceleration of growth has raised hopes that Japan’s economic fundamentals are changing for the better following a disappointing decade, during which economic growth averaged only 1 per cent a year. Indeed, Japan has made progress in addressing some structural problems, notably the weakness of the banking sector, while restructuring in the corporate sector has advanced. However, despite these positive signs, there is still considerable uncertainty regarding Japan’s economic outlook. Achieving a robust, sustained expansion will depend on overcoming serious structural problems, which still limit Japan’s growth potential and weaken demand. Resolving such problems requires greater resolve in pursuing a broad-based policy that features structural reforms to improve resource allocation, revitalise business sector activity and restore the soundness of the banking sector. The latter would improve the effectiveness of monetary policy, which, while very expansionary, has proven incapable of bringing an end to the deflation that has persisted since the mid-1990s. Monetary policy must remain expansionary until the recovery is secure and deflation has definitely ended. Extensive use of fiscal stimulus has increased public debt to more than 150 per cent of GDP just as Japan enters a phase of marked population ageing. The challenge for fiscal policy is to pursue sustained fiscal consolidation over an extended period...

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