World Economy

Japan Needs Growth Reforms

Japan Needs Growth ReformsJapan Needs Growth Reforms

As the Organization for Economic Cooperation and Development and the International Monetary Fund call for an urgent collective response to sluggish worldwide demand, OECD’s top Japan economist Randall Jones puts Japan’s economy into global perspective.

What does Jones believe are Japan’s most important economic issues? These include weak private consumption and continuing concerns over the labor market. Wage growth is needed to lift private consumption. Increased labor productivity is needed to grow the economy back to fiscal sustainability. “The OECD is worried about the fiscal situation in Japan,” he admits, Beacon reported.

Jones says that global growth remains ‘elusive’. World trade, a key driver of the global economy, grew twice as fast as world output in the 1990s. It then collapsed during the 2008 financial crisis, only to bounce back to disappointing levels. As a result, global growth in 2016 would not exceed last year’s 3% sluggish rate.

  Double Punch

China’s ‘rebalance’ only intensifies the impact of sluggish world trade growth on Japan’s economy. China is Japan’s largest trading partner. Exports of manufactured goods to China represent 3% of Japan’s GDP. China’s slowdown and shift away from manufacturing towards domestically produced (and consumed) services have therefore been a double punch to Japan.

Further, Japan’s aging and declining population is a factor slowing growth over the long run. “All OECD countries are aging to some extent, but here the headwinds are most severe because the aging is happening so fast,” notes Jones. Those headwinds will intensify as population decline speeds up in future years. Because of a shrinking labor force and slower productivity growth, Japan’s potential growth rate is only 0.4%. “This is not an economy that at present can grow 2% year in and year out,” says Jones, highlighting that Japan needs faster growth, preferably 2% in accordance with government targets.

The government’s medium-term fiscal target aims to put the public debt ratio on a downward trend after 2020. That might be possible if all three arrows of Abenomics were firing simultaneously. Wider and deeper ‘third arrow’ reforms are needed to double labor productivity growth from the present rate of 1% to 2%.

  Economic Dynamism

To achieve that, Jones argues the workforce must become more efficient. Low labor productivity holds back Japan’s per capita GDP, which ranks only average among OECD countries. One cause of lower productivity is that Japanese work long hours. Shorter work time could boost productivity while improving work-life balance. Another is that technological advances fail to filter into the general economy.

Citing evidence of a dual techno-speed global economy, he says that technological advances driving big global firms are not being adequately diffused into other companies—a problem which exists throughout the OECD area. These ‘frontier companies’ enjoy strong productivity growth, while the rest languish.

Global productivity growth is trending downwards, in part because of a lack of creative destruction. The same problem exists in Japan, where only 29% of the nation’s 300 largest firms (by market capitalization) have been created since the 1960s, compared to 79% in the US. In fact, most big companies in the US were established in the 1980s, 1990s and 2000s.

Japan, he says, lacks the economic dynamism of the US where small startups can more easily grow into big efficient companies. Such companies lower production costs and drive economic growth.

  Dual Labor Market

Labor market reforms he says are needed to speed up creative destruction. A key objective is to end Japan’s dual labor market, now split between regular workers with permanent contracts and non-regular workers holding mostly temporary jobs. Firms hire non-regular workers in part to enhance employment flexibility, allowing them to adjust their labor forces to better compete in global markets. However, this creates poverty in society as non-regular workers earn about 40% less per hour. With few chances to move into regular jobs, they also suffer from reduced social mobility.

Private consumption, which currently accounts for 60% of Japan’s economy, remains weak. ‘Rush demand’ increased consumption in the run-up to the 2014 VAT tax hike, before it returned to 2012 levels. Are Japanese consumers satiated? Do they have everything they need? Jones rejects such notions. Nevertheless, he worries there will be another case of ‘rush demand’ in the run up to the next tax hike in 2017, followed by a similar retreat, if there are not enough wage gains before then. Without increased private consumption, he predicts that “growth is going to continue to be weak.”