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 were only 0.8% in 2018, down from 1.9% in 2017. A 2% inflation-rate target has as yet proved unattainable. Consumption and domestic investment have remained sluggish, and it has proved difficult to compensate for the negative effects of an aging and shrinking workforce.

Unemployment rates are very low, though non-regular 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 in recent years. The consumption tax was increased after long delays.

Public debt levels are very high and continuing to rise, with deficits large. Government plans to achieve a primary budget balance have been pushed forward to 2025. Interest rates remain low, in part because public debt is held largely by domestic investors. A new high-priority “Moonshot” research initiative is intended to help solve major applied-sciences problems such as carbon emissions.

Economy

#35

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, lasting 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 2018 was only 0.8% according to the IMF, down from 1.9% in 2017.

The policy goals of a 2% annual inflation rate and concomitant increases in inflation expectations remain elusive. The core annual inflation rate, excluding fresh food, stood at only 0.3% in September 2019. In mid-2019, the Bank of Japan trimmed its 2020 inflation target and hinted that it would not hesitate to take additional easing measures if the economic situation worsened. This signaled that existing measures were not considered sufficient, particularly if a global recession were to emerge.

Despite consistent government and central-bank activity, and despite the presence of significant corporate cash holdings deriving from retained profits, consumption and domestic investment rates remain sluggish. Compensating for the negative effects of an aging and shrinking workforce has proven to be extremely challenging. The initiation of the Comprehensive and Progressive Agreement for Trans- Pacific Partnership and the free-trade agreement with the EU in 2019, as well as the preparations for the 2020 Tokyo Olympic Games, may be interpreted as positive signals. However, the China-U.S. trade conflict and the increasing likelihood of a global recession are casting a shadow over future growth prospects.

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/

IMF: World Economic Outlook, October 2019

Daniel Leussink, Japan’s July core inflation hovers at two-year low, adds pressure on BOJ, Reuters Business News, 23 August 2019, https://www.reuters.com/article/us-japan-economy-inflation/japans-july-core-inflation-hovers-at-two-year-low-adds-pressure-on-boj-idUSKCN1VC2PZ

BOJ stands pat and trims inflation outlook ahead of expected Fed rate cut, The Japan Times, 30 July 2019, https://www.japantimes.co.jp/news/2019/07/30/business/economy-business/boj-stands-pat-trims-inflation-outlook-ahead-fed-rate-cut/

Labor Markets

#7

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
8
Japan’s unemployment rate reached a 26-year-low of 2.2% in July 2019 (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 to higher-quality jobs. Most economists argue that the conditions for paying and dismissing regular employees have to be liberalized to diminish the gap between the two types of employment.

Unemployment insurance payments are available only for short periods. In combination with the associated social stigma, this has kept 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 changed in 2018. Among its provisions, the allowed quantity of overtime work, a serious problem in Japan, was limited to 100 hours per month. At the same time, work-hour limitations and overtime payments for highly paid professionals have been removed. The law also addresses the wage gap between regular and non-regular work (“equal pay for equal work”). However, a number of structural issues have not yet been fully addressed. In December 2018, the OECD published a report in which it recommended further improvements in job quality and reforms to the mandatory retirement age.

The government has sought to increase the role played by women in the economy while additionally boosting the national birth rate. These two goals have proven difficult to achieve in parallel.

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

OECD: Working Better with Age: Japan, 20 December 2018

Taxes

#31

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 has helped the government to finance expenditures and allowed the corporate sector to thrive. Following the international trend of declining corporate-tax rates, Japan’s government cut its corporate-tax rate (calculated as the statutory national rate plus the local rate) over several years from 35% to 29.7% in April 2018. The fact that authorities followed up on their initial promise to lower corporate-tax rates despite the country’s tight fiscal situation provides a positive signal. However, only around 30% of Japanese firms actually pay corporate tax, with the remainder exempted due to poor performance.

Increasing the comparatively low consumption-tax rate is an important factor in easing budgetary stress, particularly given the huge public debt and the challenges presented by an aging population. The government raised the consumption-tax rate from 5% to 8% in April 2014, and after several deferrals, increased it further to 10% in October 2019. While this displayed the government’s willingness to tackle difficult issues, the rate change has not significantly improved the country’s fiscal situation.

The OECD has recommended that the country’s energy-related taxes be increased both for environmental and fiscal reasons. Apart from a fairly low “global warming tax,” imposed since late 2012 on the consumption of fossil fuels such as petroleum, natural gas and coal, fostering environmental sustainability does not figure as a prominent consideration in Japan’s tax system.

Japan’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

Takeshi Kawakatsu, Soocheol Lee and Sven Rudolph, The Japanese Carbon Tax and the Challenges to Low-Carbon Policy Cooperation in East Asia, Discussion Paper No. E-17-009, Graduate School of Economics, Kyoto University, December 2017, http://www.econ.kyoto-u.ac.jp/dp/papers/e-17-009.pdf

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

United Nations, Committee of Experts on International Cooperation in Tax Matters, Eighteenth session
New York, 23-26 April 2019, https://www.un.org/esa/ffd/wp-content/uploads/2019/04/18STM_CRP4-Environmental-tax-issues.pdf

Robin Harding, Japan data point to bigger than expected hit from sales tax rise, Financial Times, 8 October 2019, https://www.ft.com/content/90f19130-e8e2-11e9-a240-3b065ef5fc55

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 2018, the highest such level among advanced economies. The primary balance continued to show a significant deficit of about 3.8% in 2018, although with a declining tendency. If a serious global recession were to emerge, these numbers could rise again. In 2018, the government shifted back its goal of achieving a balanced primary budget to 2025, but it was unclear how this was to be achieved.

Nominal interest rates remain low, partly due to 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 – 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 could lead to short-term liquidity shortages with regard to the availability of Japanese government bonds (JGBs). This could 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 public indebtedness in global comparison, along with the imminent risk of a global recession, 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 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 to Japan’s security. A new high-priority project launched in 2019 (“Moonshot”) is meant to help solve some of the major applied-sciences-related problems such as carbon emissions. A total of JPY 100 billion (about €840 million, based on September 2019 exchange rates) have been earmarked for the initiative.

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, an issue 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

Werner Pascha and Tobias Fausten, “Neue Industriepolitik” am Beispiel der japanischen “Society 5.0,” Wirtschaftswissenschaftliches Studium, 48 (2019), 5, pp. 24-29

Smriti Mallapaty, Japan prepares ‘moonshot’ project to solve global problems, Nature, 09 April 2019, https://www.nature.com/articles/d41586-019-01094-w

Global Financial System

#35

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. The 2019 G-20 summit in Osaka was not used by Japan to promote major new policies relating to global financial markets.

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 has for now elected not to join the last of these three. Still, Japan developed its own “Partnership for Quality Infrastructure” in the 2015 – 2016 period, has worked on a so-called Quad alliance with the United States, Australia and India that also covers infrastructure investment, and helped drive the passage of the G-20 Principles for Quality Infrastructure Investment in Osaka.

In sum, Japan is primarily 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

Werner Pascha, The new dynamics of multilateral cooperation mechanisms in East Asia – China’s Belt and Road Initiative, the Asian Infrastructure Investment Bank, and Japan’s Partnership for Quality Infrastructure, in: Yuan Li and Markus Taube (Eds.) How China’s Silk Road Initiative is Changing the Global Economic Landscape, London and New York: Routledge 2020
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