Japan

   

Economic Policies

#28
Key Findings
Making modest but insufficient economic progress, Japan falls into the lower-middle ranks with regard to economic policy (rank 28). Its score on this measure has improved by 0.1 point relative to 2014.

The country has experienced an exceptionally long economic upswing. However, actual growth rates remained modest at about 1.7% in 2017, with lower rates forecast for 2018 and 2019. A 2% inflation-rate target has been pushed back to 2020. Successive fiscal-stimulus programs have raised further fiscal-consolidation concerns. The country led efforts to conclude a revised trans-Pacific free-trade agreement.

Unemployment rates are very low, though irregular jobs remain common. A new labor-standards law caps the amount of allowed overtime hours, and seeks to address the wage gap between regular and non-regular jobs. Corporate tax rates have declined over recent years. A consumption-tax hike has been persistently delayed, with its expected proceeds no longer earmarked solely for debt reduction.

Public debt levels are very high and continuing to rise, with deficits large. Government plans to achieve primary budget balance by 2020 have been pushed forward to 2025. Interest rates remain low, in part because public debt is held largely by domestic investors. A decline in various R&D indicators is diminishing the country’s status among the top technology nations.

Economy

#34

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
5
Recent macroeconomic developments have been mixed. Japan has experienced an extremely long business-cycle upswing, dating since late 2012. But growth rates have remained relatively modest, while structural constraints such as demographic conditions and labor-market rigidities continue to cast a shadow on future growth prospects. The real growth rate in the year 2017 was 1.7%, with the IMF in October 2018 forecasting lower rates of 1.1% and 0.9% respectively for 2018 and 2019. The goals of a 2% annual inflation rate and concomitant increases in inflation expectations have still not been achieved, and the target for reaching these goals has been moved to fiscal year 2019/20.

Despite this consistent government and central-bank activity, and despite the presence of significant cash holdings within companies deriving from retained profits, consumption and domestic investment levels remain low. The New Economic Policy Package for 2018 contains supply-side measures aimed at strengthening childcare and promoting innovation. These are welcome expenditures insofar as they may boost much-needed productivity growth, but their actual effectiveness remains to be seen. Moreover, it is proving to be extremely challenging to compensate for the negative effects of an aging and shrinking workforce.

In terms of trade policy, the Japanese government was able to achieve significant progress in 2017 by leading efforts to conclude a revised trans-Pacific free-trade agreement (dubbed the Comprehensive and Progressive Agreement for Trans- Pacific Partnership, CPTPP) without the United States, and including exemptions in some controversial areas. Moreover, after four years of negotiation, it signed a bilateral free-trade agreement (FTA) with the European Union in mid-2018. However, the China-U.S. trade conflict is casting a shadow over future growth prospects, and it remains unclear whether the Trump administration’s intention of negotiating an FTA with Japan will create further problems for Japan’s exports.

Citations:
Noriyuki Suzuki, Japan’s longest growth run in 16 years may not guarantee future prosperity, Japan Times, 15 November 2017, https://www.japantimes.co.jp/news/2017/11/15/business/economy-business/japans-longest-growth-run-16-years-may-not-guarantee-future-prosperity/

Japan and EU hail creation of a ‘gigantic economic zone’ as trade talks conclude, Japan Times, 9 December 2017, https://www.japantimes.co.jp/news/2017/12/09/national/politics-diplomacy/japan-eu-reach-final-accord-trade-pact-eye-implementation-early-2019/

Trade deals: Who needs America?, The Economist, 16 November 2017, https://www.economist.com/news/finance-and-economics/21731428-eleven-countries-resurrect-trans-pacific-partnership-who-needs-america

Cabinet (Japan): New Economic Policy Package, Provisional Translation, 8 December 2017, Mimeo.

OECD: OECD Economic Outlook, Vol. 2018 Issue 1, Paris, pp. 175-178

IMF: World Economic Outlook, October 2018

Labor Markets

#10

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Japan’s unemployment rate reached a quarter-century low of 2.4% in August 2018 (although this figure would likely be somewhat higher if measured in the same manner as in other advanced economies).

However, as in many other countries, the Japanese labor market has witnessed a significant deterioration in the quality of jobs. Retiring well-paid baby boomers have more often than not been replaced by part-timers, contractors and other lower-wage workers. The incidence of non-regular employment has risen substantially to about 40%. A major concern is that young people have difficulty finding permanent employment positions, and are not covered by employment insurance. Moreover, because of the non-permanent nature of such jobs, they lack appropriate training to advance into higher-quality jobs. Most economists argue that the conditions for paying and dismissing regular employees have to be liberalized to diminish the gap between both types of employment.

Unemployment insurance payments are available only for short periods. In combination with the social stigma of unemployment, this has kept registered unemployment rates low. There is a mandatory minimum-wage regulation in Japan, with rates depending on region and industry. The minimum wage is low enough that it has not seriously affected employment opportunities, although some evidence shows it may be beginning to affect employment rates among low-paid groups such as middle-aged low-skilled female workers.

The Labor Standards Law was finally changed in mid-2018. Among its provisions, the allowed quantity of overtime work, a serious problem in Japan, was limited to 100 hours per month. While this may be considered timid, it can be regarded as a step toward healthier and possibly even more productive labor conditions. At the same time, work-hour limitations and overtime payments for highly paid professionals have been removed. While this is understandable, the definition of professionals employed may lead to misuse. The law also addresses the wage gap between regular and non-regular work in a section dubbed the “equal pay for equal work” provision. However, some details have been left unaddressed, a fact that may lead to further controversies. Based on 2013 legislation, beginning in April 2018, fixed-term employees with at least five years of service can demand to become indefinite-term employees, although employers are still free to avoid using fixed-term contracts of this length.

The government has sought to increase the role played by women in the economy and to boost national birth rate. In fact, these two goals have proven difficult to achieve in parallel. However, one noteworthy element of the 2018 New Economic Policy Package is the elimination of child-care placement waiting lists.

Citations:
The Mainichi: As work-style reform bills pass, workers’ health, lives must be protected (Editorial), 30 June 2018, https://mainichi.jp/english/articles/20180630/p2a/00m/0na/016000c

Taxes

#30

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
Generally speaking, Japan has a reasonably fair tax system that in the past allowed its corporate sector to thrive.

In terms of competitiveness, the previous 35% corporate-tax rate has clearly been too high in international comparison. In 2016, the combined national and local corporate effective income-tax rate declined from 32.11% to 29.97%, and was further reduced to 29.74% in April 2018.

The fact that authorities are following up on their initial promise to lower corporate-tax rates despite the fiscal tension is a positive signal. However, only around 30% of Japanese firms actually pay corporate tax, with the remainder exempted due to poor performance.

Raising the comparatively low consumption tax is important for easing budgetary stress, particularly given the huge public debt and the challenges of an aging population. The government raised the consumption-tax rate from 5% to 8% in April 2014, while plans to increase it to 10% have been shelved several times ahead of elections. In June 2016, Abe postponed the tax hike to October 2019. However, the prime minster also announced that the proceeds from the tax hike would not be fully deployed to reduce the public debt; instead, half would be used for education and child care, he said. This served to deepen worries about fiscal reliability and prudence.

According to the OECD, energy-related taxes in the country should be increased, both for environmental and fiscal reasons.

The country’s tax system achieves a reasonable amount of redistribution. However, salaried employees benefit from far fewer tax deductions than do self-employed professionals, farmers and small businessmen.

Citations:
Nikkei, Japan to cut effective corporate-tax rate below 30% in FY17, Nikkei Asian Review, 11 October 2015, http://asia.nikkei.com/Politics-Economy/Policy-Politics/Japan-to-cut-effective-corporate-tax-rate-below-30-in-FY17

OECD, Japan: Promoting Inclusive Growth for an Ageing Society, Better Policies Series, Paris, April 2018

Budgets

#41

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
2
Gross public indebtedness in Japan amounted to about 240% of GDP in 2017, the highest level among advanced economies. The primary balance also continued to show a strong deficit of about 4% in 2017, with around 3.3% expected in 2018. Though these numbers are not expected to rise much further in the near future, their persistence is alarming. Because the goal of achieving a primary budget balance by 2020 has become unfeasible, the government moved that date forward to 2025 in its long-term economic policy plan released in June 2018.

Nominal interest rates remain low. A major contributor to these rates is the fact that more than 90% of public debt is held by Japanese, mainly institutional, investors. The government and institutional investors obviously have no interest in lower bond prices, and this oligopoly of players can thus sustain the current price level of Japanese government bonds for the time being. However, should national savings fall short of domestic needs – a foreseeable development given the aging Japanese population – future government deficits may be difficult to absorb domestically. In this case, government bond prices could fall and interest rates could rise quickly, which would create extremely serious problems for the Japanese government budget and the country’s financial sector. As the central bank already holds some 40% of government debt, it seems that decision makers are at least implicitly swinging toward a policy of debt monetization, an uncharted and highly perilous strategy.

In addition to such structural longer-term concerns, the unprecedented and continuing presence of the central bank in the financial market can lead to short-term liquidity shortages with regard to the availability of Japanese government bonds (JGBs). This can lead to considerable short-term swings in JGB prices and may ultimately trigger significant concerns regarding the stability of the financial system.

Given the record levels of indebtedness in global comparison, along with the recent rise in U.S.-dollar interest rates, Japan’s fiscal sustainability looks extremely fragile.

Citations:
International Monetary Fund, Japan 2017 Article IV Consultation – Press Release; Staff Report; and Statement by the Executive Director for Japan, IMF Country Report No. 17/242, July 2017

Scope Ratings AG, Japan Rating Report, March 2018

Takashi Oshio, Managing Japan’s debt and the financial risks, East Asia Forum, 5 August 2018, http://www.eastasiaforum.org/2018/08/05/managing-japans-debt-and-the-financial-risks/

Keiichiro Kobayashi, The Tenuous Myth of Japan’s Fiscal Infallibility, The Tokyo Foundation for Policy Research, 15 November 2018, http://www.tokyofoundation.org/en/articles/2018/tenuous-myth-of-fiscal-infallibility

Research, Innovation and Infrastructure

#8

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
Science, technology and innovation (STI) receive considerable government attention and funding. Current policies are based on the Fifth Science and Technology Basic Plan (2016-2020). The government has determined to spend 1% of GDP on science and technology. A major focus is on creating a “super-smart” society, also dubbed Society 5.0. Concrete measures include a reform of the career system for young researchers, an increase in (international) mobility, measures supporting the development of a cyber society, and – as before – the promotion of critical technologies, including defense-related projects considered indispensable for Japan’s security.

The government and outside observers realize that Japan’s strong position among the world’s top technology nations is declining, based on various indicators. A recent government survey even exposed a sense of crisis among the researchers interviewed. Relevant indicators include the often-used Nature Index, which showed a decline in high-quality scientific output of 3.7% in 2017. The ratio of high-quality research output to R&D input is particularly weak. One problem is that researchers find it difficult to pursue long-term projects, as they are pressured to produce short-term results. Another major issue is young researchers’ difficulty in finding stable professional positions. This is one of the problems that the current Basic Plan takes seriously and tries to address.

Citations:
Council for Science, Technology and Innovation/Cabinet Office, Report on the 5th Science and Technology Basic Plan, 18 December 2015

Catherine Armitage, Stalled ambition, Nature Index, 21 March 2018, https://www.nature.com/articles/d41586-018-02895-1

Ichiko Fuyuno, Resistance to reform, Nature Index, 21 March 2018, https://www.nature.com/articles/d41586-018-02896-0

The Japan Times, Review problems in science and technology policy (Editorial), 22 May 2018, https://www.japantimes.co.jp/opinion/2018/05/22/editorials/review-problems-science-technology-policy/

Global Financial System

#30

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
5
Developing initiatives for the reform of the global financial architecture has not been a high-priority issue for Japan. For example, the prime minister used the agenda-setting powers provided by the 2016 G-7 meeting in Japan primarily to push his domestic political agenda.

On the regional and plurilateral level, Japan’s influence has been somewhat eclipsed by China, as China is heavily involved in creating a number of new international financial institutions such as the (BRICS) New Development Bank, the BRICS Reserve Contingency Arrangement, and the Asian Infrastructure Investment Bank (AIIB). Japan initially elected not to join the latter. In early 2017, government sources indicated that this position could be reconsidered, but no substantial policy changes have since emerged.

For the time being, Japan has become a follower rather than a leader with regard to global and regional (financial) initiatives, despite the pressing urgency of the issues.

Citations:
LDP executive says Japan needs to soon join the AIIB, The Asahi Shimbun, 16 May 2017, http://www.asahi.com/ajw/articles/AJ201705160020.html
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