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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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Labour market reform to cope with a shrinking and ageing population

Fundamental reform of traditional Japanese labour market practices is essential to cope with rapid population ageing and the era of 100-year lives. A shift to more flexible employment and wage systems based on performance rather than age would enable Japan to better utilise its human capital. Abolishing the right of firms to set mandatory retirement – typically at age 60 – would enable employees to extend their careers and reduce the link between wages and seniority. It would also facilitate a further increase in the pension eligibility age above 65, thereby helping to reduce poverty among the elderly. Life-long learning is another key element to extending careers. It is also crucial to address a range of issues that discourage the employment of women, namely the lack of work-life balance and shortages of high quality and affordable childcare and long-term care for the elderly. Fighting discrimination and gender stereotypes is also important to allow women to assume greater leadership roles. Coping with population decline also requires pursuing recent efforts to increase the role of foreign workers in Japan. Breaking down labour market dualism is crucial to expand employment opportunities for women and older people, while reducing income inequality and relative poverty.

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