Going for Growth 2021 – Japan

Japan

Mindful of the strong population ageing already underway, the COVID-19 recovery strategy needs to enhance labour force participation and spur business dynamism. Moreover, significant potential to expand use of digital technologies, in both the public and the private sector as well as education, should be seized.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs).

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality. The latest available data for Japan is 2015.

Environment: Greenhouse gas (GHG) emissions include emissions or removals from land-use, land-use change and forestry (LULUCF). A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

Source: Economy: OECD, National Accounts, Productivity and Labour Force Statistics Databases; Inequality: OECD, Income Distribution Database and World Bank, World Development Indicators Database; Environment: OECD, Environment Database and United Nations Framework Convention on Climate Change (UNFCCC) Database.

Enhancing labour force participation and business dynamism

Improving resilience and inclusiveness of the labour market requires policies to support labour force participation of all available talent. Flexible working styles, including online work with adaptable hours or multiple occupations, should be encouraged. To draw on the large pool of talent among women, social security system rules and childcare provision need to improve (Figure 1A). Enhancing recurrent education and job training will foster labour market mobility, and pursuing digital transformation will make it easier to diversify working arrangements while also enhancing labour productivity.

Boost competition and investment to raise productivity growth that has long been anaemic. Reforming the insolvency framework and expanding access to entrepreneurial training and finance can foster business dynamism, helping a stronger recovery from the pandemic. The reforms tried out in the National Strategic Special Zones should be extended nationwide, and entry barriers on service imports and inward foreign direct investment reduced. In agriculture, greater use of digital technologies would allow shifting away from commodity-specific subsidies to enhancing effectiveness. Easing the regulations on the ownership of farmland by non-agricultural corporations would help optimise land use.

To sustain growth in the face of global competition in an increasingly information rich and digital era, education needs reform. Improvements in digital infrastructure should be expedited and the service tailored to the student’s needs and abilities. Also, curriculums of science, technology, engineering and mathematics should be enhanced.

Vulnerabilities and areas for reform

Further reforms to the tax system would underpin stronger growth. The effective corporate tax rate could be lowered further, while raising the taxation of capital gains and dividends. Harnessing digital technologies to ease tax procedures and tax collection would improve the efficiency of tax collection (Figure 1B). Once

the recovery is firmly on the way, establishing a pathway of small increases in the consumption tax rate, would make the tax system more growth-friendly and enhance long-term fiscal sustainability.

Implementation of planned measures to reduce greenhouse gas emissions and dependence on fossil fuels, should be coupled with promotion of research and development in these areas and deployment of renewable energy. There is also ample scope to raise energy efficiency and for the government to encourage green financing and investment, including as part of government stimulus during the recovery.

Japan: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

Successive Japanese governments have long recognised a number of the country’s structural weaknesses and have sought to push ahead with some of the needed reforms. However, reform implementation has been modest at times, with overarching high-level ambitions but less practical time schedules and performance indicators. The coronavirus pandemic exposed other weak points and has highlighted the need for new reforms and the urgency to implement them. The government is working on a roadmap for the post-COVID economy to bring about a digital transformation and a greener society.

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