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2006 OECD Economic Surveys: Japan 2006

image of OECD Economic Surveys: Japan 2006

This 2006 edition of OECD's periodic survey of Japan's economy opens with an assessment of recent economic performance and the economic outlook. It then moves on to analyse key challenges faced by Japan including ending deflation an sustaining soundness in the banking sector, fiscal consolidation, income inquality and social spending, upgrading the innovation system, and improving the environment for inflow of direct investment and workers.

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A Strategy for Fiscal Consolidation

With gross debt exceeding 170% of GDP, measures to reduce Japan’s large government budget deficit have become increasingly urgent. The government’s Reform and Perspectives should be improved to sustain confidence in the consolidation process and prevent a rise in the risk premium. The medium-term target should be a primary budget surplus large enough to stabilise the public debt ratio by the early 2010s. The first priority in achieving this objective is to reduce spending, although this will become increasingly difficult in the context of rapid population ageing. The Reform and Perspectives should provide a more detailed and binding schedule of expenditure reductions, in part through further declines in public investment. As spending cuts alone are unlikely to achieve the fiscal target, additional revenues will be necessary. This should be accomplished through broadening the bases of personal and corporate income taxes, as well as some increase in the consumption tax.

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