“Abenomics has delivered faster economic growth and job creation,” OECD Secretary General, Angel Gurría said today at the presentation of the OECD Survey on Japan (April 2017), “However, meeting Japan’s demographic and fiscal challenges will require greater efforts and further reforms, notably to raise productivity, which now lags behind the leading OECD economies. In the labour market, employment opportunities for women must be expanded. Achieving stronger and sustainable productivity gains should lead to more inclusive growth that distributes the dividends of increased prosperity fairly across society.”
While wage growth was sluggish, consumer purchasing power was boosted by the fall of headline inflation into negative territory, due in part to declining oil prices. Even excluding energy and food, inflation is now close to zero. Household income was also boosted in 2016 by a 1.0% rise in total employment, the largest since 1997, primarily due to a marked rise in the number of non-regular employees since spring 2016, in the context of growing labour shortages.
Emerging capacity shortages are also supporting business investment, along with record high profit levels, large cash hoardings, the cut in the corporate income tax rate and the rebound in exports in the second half of 2016. Stronger export growth was led by shipments to Asian countries, including China, and to the United States .
Economic growth is projected to pick up to 1.2% in 2017 before slowing to 0.8% in 2018, with headline inflation rising to 1.1% in 2018, says OECD’s survey. A fall in the saving rate to its pre- 2013 level is projected to sustain private consumption, despite an easing in real wage gainsin 2017-18 as the rise in inflation outstrips wage growth.
The rebound in export growth is expected to continue with some pick-up in international trade and the decline in the yen since last October. In turn, this will support investment in the business sector, supported by the high levels of profitability and cash holdings. As fiscal stimulus fades, the downward trend in public investment will resume, although it will be partly offset by construction related to the 2020 Olympics.
Major downside risks
The risks to the projections appear to be balanced. The major short-term uncertainty is the pace of wage growth. If firms raise wages more rapidly than projected, private consumption would be stronger.
Real wages have lagged behind labour productivity growth over the past 25 years , reflecting in part the increasing proportion of low-paid non-regular workers. The gap between productivity and wage growth since 1990 in Japan is more than double the OECD average.
Another domestic downside risk is that the improvement in consumer confidence will not be sustained, depressing private consumption growth. On the external side, the expected pick-up in world trade may falter.
Recent yen depreciation (the yen has fallen 9% relative to the dollar since October 2016) may moderate that risk, while boosting corporate profits and inflation.
The impact of interest rate increases in the United States on worldwide capital flows is uncertain.
Despite Japan faces vulnerabilities that are difficult to assess in the context of the projection, in OECD’s view macro-financial indicators suggest that vulnerability in terms of growth sustainability, price stability, external position and financial stability remains contained.
“Womenomics,” adress labour market dualism and pay for overtime work
Faced with labour market shortages linked to population ageing, it is important that Japan remove obstacles to female employment, notably by increasing the availability of affordable childcare and changing its culture of long working hours through a binding ceiling on overtime work which would improve work-life balance for all workers. This also matchs well with Prime Minister Shinzo Abe’s strong emphasis on promoting “womenomics” and his recent efforts on “work style” reforms.
Despite “Womenomics” the employment rate of women is still 17 percentage points below that of men, reflecting shortages of childcare, long working hours and a large gender wage gap.
Breaking down dualism in the labour market, the current segmentation between “regular” and “non-regular” workers, with differing levels of benefits, pay and employment protection , is key to promoting inclusive growth, OECD Survey says.
Wage growth remains slugish despite the tightest labour market conditions in 25 years. The minimum wage relative to the median wage is one of the lowest in the OECD. Raise the minimum wage toward half of the median wage and reduce the amount of unpaid overtime by firms is key to dinamise consumption and push inflation up in a healthy way.
While it has gone up by close to 10% in nominal terms over the past four years, minimum wage is still one of the lowest in the OECD at 40% of the median wage. The government is aiming to raise it by around 3% per year.
Labour market dualism is becoming even more entrenched, with non-regular workers now accounting for 38% of employment, driving up the relative poverty rate. Dualism, which especially affects women, drives up inequality and holds back productivity growth, as nonregular workers are paid low wages and receive little training. Limited training of non-regular workers slows productivity growth.
In September 2016, 38% of employees who worked overtime were not paid for their extra hours (Research Institute for the Advancement of Living Standards, 2016). Firms should be required to compensate workers for all overtime work, OECD recommends.
State deficit reduction, needed
The 2014 consumption tax hike and spending restraint lowered the primary deficit in 2014-15. Nevertheless, the government debt ratio is on an upward track and government projections show that a primary deficit may persist through FY 2024.
Japan’s gross government debt continues to rise into uncharted territory, reaching 219% of GDP in 2016, the highest in the OECD, raising the risk of a loss of confidence. A rise in government bond yields, which are currently near zero, poses a risk to fiscal sustainability.
The already large transfers to the elderly population are increasing is such a proportion that raise concerns about inter-generational fairness. Healthcare spending is now the eighth highest in the OECD area, due in part to the burden of long-term care.
Continued increases in health and pension spending linked to population ageing will put upward pressure on government debt, which reached 219% of GDP in 2016, the highest ever recorded in the OECD.
Ensuring long-term fiscal sustainability requires the implementation of a detailed and credible fiscal plan to put the debt ratio on a downward path. The Survey lays out recommendations for controlling public spending and raising additional revenues, notably by gradually raising the consumption tax and increasing environmental taxes.
Tax revenue is below the OECD average, reflecting a very low value-added tax rate and relatively little revenue from Japan’s personal income tax.
The report advises Japan the commitment to a more detailed medium-term fiscal consolidation path with specific spending cuts and tax increases to strengthen confidence in Japan’s fiscal sustainability.
Increasing productivity there where it lags behind: Services and SMEs
The Survey emphasises that increasing productivity can simultaneously help Japan address demographic and fiscal challenges and make growth more inclusive.
The productivity gap between the service sector and manufacturing and between leading and lagging firms has widened, contributing to wage and income inequality.
Increasing the productivity of SMEs by strengthening R&D links between firms and universities is needed.
Obstacles to entry and exit of firms is another great problem, as those limit the number of innovative new companies trapping labour and capital in low productivity activities.
Reforms that narrow the wide productivity gaps between manufacturing and service sector firms and those between large companies and SMEs would help achieve these dual objectives. Priorities include, for example, improving the personal bankruptcy system to facilitate the exit of non-viable firms.
Facilitate the exit of non-viable firms by reducing the use of personal guarantees, as well as promoting second chances for failed entrepreneurs by making the personal bankruptcy system less stringent would help.
Besides regulatory and corporate reforms, boosting investment in knowledge-based capital, such as vocational education and training, is also essential, says the report, to spur productivity growth, by increasing business-sector dynamism.
Increase integration in world economy, also needed
Japan ranks fourth in world exports and imports, which each accounted for about 16% of its GDP in 2016.The share of trade in Japan’s GDP is about half of the OECD average, reflecting the large size of the Japanese economy. Moreover, only about 12% of employment in Japan is directly linked to international trade, compared to nearly 30% in some OECD countries.
Nevertheless, international trade has played a key role in Japan’s economic development. In recent years, Japan has become increasingly integrated in global value chains (GVCs), especially in Asia.
Asian countries (China, ASEAN and the NIEs) account for about half of both Japanese exports and imports (Table 5). Japan’s participation in GVCs is driven by its exports of intermediate parts, particularly to overseas affiliates in China (OECD, 2016e). The final goods are shipped primarily to the United States and Europe.
Both the he EU-Japan Free Trade Agreement and the Trans Pacific Partnership Agreement (TPPA), currently under negotiation, would help to Japan’s increased integration in world economy.
Looking for the cityzen’s engagement with Abenomics
The government launched a plan in 2016 to promote the dynamic engagement of all citizens, based on a “virtuous cycle of growth and distribution”. This requires broadening Japan’s productive base to generate strong and sustainable productivity gains, leading to inclusive growth that distributes the dividends of increased prosperity fairly across society.
Indeed, there is synergy between policies to boost productivity and promote inclusive growth, underscores OECD.
Such policies would improve well-being in Japan, which is strong in many respects. The probability of becoming unemployed is the lowest in the OECD and net household financial wealth is among the highest. The literacy and numeracy skills of Japanese adults are the highest in the OECD, as is personal safety. However, only 35% of Japanese adults perceive their health as good compared to the OECD average of 69%, even though life expectancy in Japan is among the longest in the world. Japan also scores poorly on housing conditions and work-life balance: 22% of those employed work more than 49 hours per week. Japan ranks well below the OECD average in subjective well-being.
Well-being would also be enhanced by improving environmental quality, which is currently close to the OECD average.
Image over the headline.- Shibuya crossing (Tokyo -Japan-). Photo By Hide1228 – Own work, CC BY-SA 4.0. To watch the original photo, click here
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