By Kei Oguro, Douglas Sutherland and Vincent Koen, OECD Economics Department

The pandemic dealt a heavy blow to the Japanese economy, at a time past reforms were bearing fruit in raising labour force participation and reducing the size of budget deficits. Difficulties in bringing infections under control and the pressure new cases put on hospitals forced the government to declare a succession of states of emergency. The prolonged imposition of sanitary measures in combination with voluntary distancing measures held back growth after the initial bounce-back in economic activity (Figure 1).  However, after a relatively slow start, the share of the fully-vaccinated population is now amongst the highest in the OECD. The government has recently outlined a new sizeable policy package to support the recovery. Thus conditions are in place to underpin a strong pick-up in growth, once the impact of the omicron variant is mitigated.

Figure 1. The pandemic hit economic activity hard

Real GDP

The pandemic exposed structural weaknesses, notably the long-standing plight of temporary and non-regular workers, who were more exposed to the economic downturn. But other weaknesses had hitherto been less in focus. The difficulties workers, businesses and government faced in moving to remote working and targeting support to those most in need, highlighted the patchiness of the digital transformation.

The OECD Economic Survey of Japan advocates policies to address these weaknesses. These policies would contribute to sustainability by boosting productivity and resilience to future shocks. In addition, they would reduce inequalities and promote fiscal sustainability.

Addressing structural weaknesses to boost productivity and labour supply

Past reforms have successfully increased labour force participation by women and older workers.  Yet more can be done, particularly by promoting workplace flexibility and addressing other barriers to participation. Continuing Work Style reforms that promote flexibility and cap overtime hours while increasing the provision of childcare places will help boost participation further (Figure 2). Reforms such as promoting equal pay for equal work also promise to reduce inequalities by eroding the differences between regular workers and those workers with temporary jobs or less secure positions. Output can be boosted further by raising productivity growth, which has been very sluggish in recent years. One aspect of this is weak business dynamism hindering the diffusion of new technologies. Policies to enhance entry and exit of firms, such as by increasing competitive pressures and facilitating bankruptcy, could help in this context.

Figure 2. Labour force participation has risen but gender gaps remain sizeable

Making the most of digital transformation

Japan is well placed to benefit from greater digitalisation. The digital infrastructure is well-developed and most people are highly skilled. However, while some parts of the economy are at the international frontier, such as in robotics, the diffusion of new technologies is often not widespread. Small firms and those in the service sector in particular often make less use of digital technologies. Furthermore, research and development in the ICT sector is weaker than in the rest of the economy and than in ICT sectors elsewhere in the OECD. Policies that strengthen business dynamism and promote the diffusion of new technologies would help lift productivity. Complementary investments in intangible capital are needed to ensure that the potential benefits are fully exploited.

The government itself can also play a role in promoting the adoption of digital tools. At present, hankos (physical stamps) are still widely required for many official procedures and the use of online forms for government services is amongst the lowest in the OECD (Figure 3) and this has hindered the development of digital service provision. Some parts of government have already taken the initiative to raise e-government supply, to wit the case of the city of Fukuoka, which has identified around 3 800 procedures that can now be completed without a hanko. However, more can be done in this direction and to utilise available data. The newly established Digital Agency can push such developments across government.

Figure 3. Individuals using the Internet for sending filled forms via public authorities’ websites

To capture the full benefits from digitalisation, policy needs to ensure people have the necessary skills. The government has recently ensured that schoolchildren have access to computers, but schools and teachers are often unprepared and need training and support to make best use of them. In addition, comparatively few students graduate in science, technology, engineering and mathematics (STEM) disciplines, particularly women (Figure 4). Reforming STEM curricula to make them more attractive to study and breaking down the barriers, especially for women, could enhance labour supply and deepen the pool of talent in a digital era. Finally, the system of firm-based training and adult learning is weak. Promoting training and job mobility will also help raise skills and productivity and help those workers most at risk from technological shocks remain in employment longer.

Figure 4. Relatively few students graduate in science, technology, engineering or mathematics

References: OECD Economic Surveys: Japan 2021

by Patrick Lenain and Kosuke Suzuki, OECD Economics Department

While the world is struggling to exit from the coronavirus crisis, the region Asia & Pacific is a notorious exception: many countries in the region have stopped the COVID-19 pandemic after the first wave, and they quickly returned on a path of growth in the second half of 2020 – a rare accomplishment. The OECD projects that the region’s recovery will continue in 2021 and 2022 (Table 1).

The region’s current resilience is in sharp contrast with the late 1990s, when the Asian Financial Crisis hit it very hard (Figure 1). Governments in the region drew lessons from this experience and were better prepared when the Global Financial Crisis arrived. They were also ready when the coronavirus struck: fiscal space was available, monetary policies were sound, exchange rates were flexible, foreign exchange reserves abundant, bank well capitalised, external indebtedness was low – and health systems had been re-organised.

Strong resilience in the face of crises contributes to long-term growth, especially in poor and emerging countries, as shown by a literature launched by Easterly et al. (1993). Thanks in large part to their growing resilience, the 15 countries and territories of Asia & Pacific doubled their share in world GDP from 19% in the early 1990s to 34% currently. The region has become an economic powerhouse and most likely will gain further ground. The Regional Comprehensive Economic Partnership (RCEP) recently signed will provide another boost to long-term growth, as discussed in the recent OECD Economic Survey of Thailand.

Of course, not all countries of the region have the same resilience. To throw light on this disparity, we use a hierarchical cluster analysis (Ward linkage), a statistical procedure that identifies homogenous groups of observations without making a difference between dependant and independent variables. We identify four groups of countries with common factors for each of the three crises. To group the region’s economies, we use the following indicators: 1) the depth of recession, 2) the speed of recovery, and 3) the post-recession scarring of growth. The first two indicators provide a contemporary measure of resilience when faced with a shock, while the third indicator is an ex-post measure of resilience. For the current crisis, we use the number of COVID-19 deaths as a proxy of ex-post resilience, in line with empirical findings that the spread of the coronavirus has damaged economic activity due a combination of government-imposed lockdowns and self-imposed lockdowns (Golsbee and Syverson, 2020).

Our cluster analysis reveals some diversity within the region. The resilience of individual economies has changed rapidly – in both directions (Table 2). Some key findings are:

• Australia has shown great resilience during the first two crises, but fell into a recession with the coronavirus.
• While China and India were resilient in the face of the first two crises, they have lost some ground with the COVID-19 pandemic, especially India.
• Korea and Thailand have seen their resilience improve after each crisis.
• Vietnam has consistently been the most resilient economy in the region.

Despite this diversity, the region displays overall a strong resilience and is placed to recover rapidly from the COVID-19 crisis, assuming that the pandemic is brought under control and that the large population can be vaccinated soon. If this happens, Asia & Pacific will confirm its new position as a global powerhouse. The return to economic growth should be an opportunity to address socioeconomic problems inherent in several countries, notably high informality and inequality, and make headways on a path of decarbonisation.

References:

Easterly, W., M. Kremer, L. Pritchett, and L. H. Summers (1993), “Good Policy or Good Luck? Country Growth Performance and Temporary Shocks,” Journal of Monetary Economics, 32, pp. 459–483.

Goolsbee A. and C. Syverson (2020), “Fear, Lockdown, and Diversion: Comparing Drivers of Pandemic Economic Decline 2020”, NBER Working Paper No. 27432, June.

OECD (2020), OECD Economic Surveys: Thailand 2020: Economic Assessment, OECD Publishing, Paris, https://doi.org/10.1787/ad2e50fa-en.

OECD (2020), OECD Economic Outlook, Volume 2020 Issue 2: Preliminary version, OECD Publishing, Paris, https://doi.org/10.1787/39a88ab1-en.

By Randall Jones and Haruki Seitani, Japan Desk, OECD Economics Department

With faster growth in the past six years, Japan’s real GDP growth in per capita terms has converged toward the OECD average and job creation has been strong. However, labour productivity and per capita income are well below leading OECD economies (Figure 1), while Japan faces challenges of rapid population ageing and high government debt. The 2019 OECD Economic Survey of Japan explores ways to address those challenges.

Japan’s population is projected to decline by one-fifth to around 100 million by 2050, while the elderly population will reach 79% of working-age population, remaining the highest in the OECD. One important challenge of the demographic change is a shrinking labour force. Assuming constant labour market entry and exit rates, Japan’s labour force would drop by a quarter from 67 million to 51 million by 2050 (Figure 2). Reforms of labour policies and practices to remove obstacles and disincentives to work for men and women of all ages would limit the decline in the labour force.

Demographic change is also having a big impact on the fiscal situation. Public social spending doubled from 11% of GDP in 1991 to 22% in 2018, surpassing the OECD average. Twenty-seven consecutive years of budget deficits have driven up gross public debt from 60% of GDP to 226%, the highest ever recorded in the OECD area. Population ageing is projected to raise social spending by another 4.7% of GDP over 2020-60. An illustrative analysis indicates that fiscal consolidation beyond the government’s FY 2025 primary surplus target is necessary to stabilise government debt (Figure 3).

Those challenges are
intertwined. Weak economic growth, due to low productivity and declining labour
force, makes it difficult to ensure fiscal sustainability. Distortions in tax
and benefit systems impede employment, particularly of women and the elderly. Against
this backdrop, the main messages of this Survey
are:

• Bold structural reforms, including improved
  corporate governance and policies to make small and medium-sized enterprises
  more dynamic, are needed to boost productivity and promote inclusive growth as
  labour inputs decline.
• Fundamental labour market reform is a priority
  to enable Japan to make full use of its human resources, thereby mitigating the
  impact of a shrinking labour force.
• Achieving fiscal sustainability requires a
  detailed consolidation plan that includes measures to control spending in the
  face of rapid population ageing and gradual hikes in revenue, beginning with
  the 2019 consumption tax hike.

Further reading:

OECD (2019), OECD Economic Surveys: Japan 2019, OECD Publishing, Paris.

by Randall Jones, Head of Japan Desk, OECD Economics Department

Labour productivity in Japan is about a quarter below the average of the top half of OECD countries (Figure 1), which is surprising given Japan’s outstanding performance in education and skills and high level of R&D spending. As in other countries, the labour productivity gap between leading and lagging firms has widened in Japan, resulting in greater wage inequality between firms. The 2017 OECD Economic Survey of Japan examines the scope for positive synergy between policies to promote productivity and inclusive growth.

The Survey stresses the importance of facilitating the exit of non-viable firms and the entry of innovative start-ups to narrow inter-firm productivity and wage gaps. Japan’s low exit rate, which is only about half of that in other advanced countries (Figure 2), results in a large number of non-viable firms. The widespread use of personal guarantees and the stringency of the personal insolvency regime are important impediments to firm exit. Japan’s growth strategy set a goal of raising both the exit and entry rates to around 10%. Of course, increased exit of non-viable firms would raise the number of displaced workers, making it important to promote their re-employment.

Japan’s firm entry rate is also well below other advanced economies (Figure 2, Panel B). Consequently, firms more than ten years old account for three-quarters of Japan’s small enterprises compared to less than half in most OECD countries. The Survey identifies weak entrepreneurship in Japan as a major reason for the low entry rate. Indeed, the number of entrepreneurs in Japan is among the lowest in the OECD (Figure 3). Increasing entrepreneurship requires improving its image; less than a third of Japan’s working-age population views entrepreneurship as a good career choice, the lowest in the OECD. The negative perception in Japan reflects a lack of perceived opportunities (7%, the lowest in the OECD), perceived capabilities (12%, the lowest) and a fear of failure (55%, the second highest).

The main messages of this Survey on the nexus between productivity and inclusive growth are:

• The dispersion in productivity and labour income between firms is relatively large in Japan and has been widening.
• The firm entry and exit rates in Japan are well below other advanced economies and the number of entrepreneurs is low.
• Policies to facilitate the exit of non-viable firms and to increase the entry of innovative new firms are a priority to boost productivity and promote inclusive growth.

References

Ministry of Economy, Trade and Industry (2014), 2014 White Paper on Small and Medium Enterprises in Japan, Tokyo.

OECD (2016b), Entrepreneurship at a Glance, OECD Publishing, Paris.

OECD (2017a), OECD Economic Outlook: Statistics and Projections (database).OECD, Paris.

OECD (2017), OECD Economic Surveys: Japan, OECD Publishing, Paris.