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2019 OECD Economic Surveys: Japan 2019

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Japan’s current economic expansion is its longest of the post-war era, with per capita output growth nearly matching the OECD area since 2012. However, the expansion has peaked and global uncertainties weigh on the outlook. Growth is projected to continue at a moderate rate, supported by expansionary monetary policies and fiscal measures to offset the 2019 consumption tax rate hike. Notwithstanding rising female participation, labour shortages are intensifying, reflecting Japan’s shrinking and ageing population, thus underlining the importance of labour market reform. Traditional labour practices, such as seniority-based wages and mandatory retirement, are poorly suited to the era of 100-year lives. Comprehensive reforms, including abolishing the right of firms to set mandatory retirement and removing obstacles to female employment, are essential. Population ageing also puts further upward pressure on public social spending and government debt, which relative to GDP is already the highest ever recorded in the OECD area. Japan needs a comprehensive fiscal consolidation plan covering specific spending cuts and revenue increases to ensure fiscal sustainability. It is essential to contain the rise in health and long-term care spending, while expanding the joint provision of local public services across jurisdictions and developing compact cities in the context of depopulation.

SPECIAL FEATURES: LABOUR REFORM IN AN AGEING SOCIETY; ENSURING FISCAL SUSTAINABILITY

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Key policy insights

The current expansion, which began in late 2012, is now the longest in Japan’s post-war history, though not its fastest. Output growth picked up from an annual pace of 0.5% over 1997-2012 to 1.3% since Abenomics was launched (Figure 1, Panel A). At the same time, persistent deflation has been replaced with positive, albeit low, inflation, helping boost nominal growth to 1.7%. On a per capita basis, output growth has converged toward the rate for the OECD area (Panel B). Moreover, output per working-age population has risen significantly along with the employment rate. Labour productivity growth, however, remains sluggish.

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