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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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Meeting fiscal challenges in a rapidly ageing society

Japan’s fiscal situation, with gross government debt of 226% of GDP in 2018, is the highest ever recorded in the OECD area, and places the economy at risk. The government now aims to achieve a primary surplus by FY 2025. Additional fiscal consolidation, based on a detailed plan covering specific spending cuts and tax increases, is necessary to put the government debt ratio on a downward trend in the face of rapid population ageing. This is a very difficult task and a stronger fiscal framework would help keep policy on track to achieve fiscal targets. Controlling social spending requires making better use of healthcare resources, in part by reducing overinvestment in hospitals and increasing the use of generic drugs. Another priority is ensuring the sustainability of local government spending, in part by reducing costs through the joint provision of local public services and infrastructure across jurisdictions and the development of compact cities in the context of depopulation in many parts of Japan. Increased revenue should come primarily from hikes in the consumption tax rate, which is among the lowest in the OECD. In addition, disincentives to employment in the tax and benefit system should be removed, as sustained economic growth is crucial to ensure fiscal sustainability.

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