Japan Needs Labor Reforms, Faster Wage Growth

The Bank of Japan should maintain quantitative easing until inflation exceeds its price target but it must be alert to the risks posed to asset prices and the financial sector, the Organization for Economic Cooperation and Development said.

The OECD raised Japan's 2017 economic growth forecast to 1.2%, from 1% in November, because of an expected pickup in consumer spending, exports and capital expenditure, news outlets reported.

However, the Paris-based think tank maintained its forecast growth will slow to 0.8% in 2018, highlighting the difficulty Japan faces achieving sustainable growth.

To improve this situation, Japan should raise the minimum wage further and improve productivity at small- and medium-sized enterprises, the OECD said in its latest economic assessment.

It called for Japan to promote labor reforms by imposing a binding cap on overtime work and removing obstacles to women’s employment as the country’s jobs market is tight.

"Achieving the 2% inflation target should remain a top priority, while monitoring the potential costs and side effects," the OECD said, Reuters said.

The BoJ currently applies a negative 0.1% interest rate on a small portion of commercial banks' excess reserves. It also buys government debt to keep the 10-year bond yield near zero and buys exchange-traded funds to lower risk premiums.

The BoJ's holdings of government debt now total around 40% of all outstanding debt, which could hurt liquidity and lead to market instability when the central bank exits the policy, the OECD said.

The central bank's policy mix could push up asset prices by encouraging excessive risk-taking, the OECD said. Negative interest rates could hurt bank earnings and make asset management more difficult for pension funds and life insurers, the report said.

Exiting quantitative easing is still far away given that inflation is around zero, the OECD acknowledged. It called on the government to promote consumption by raising the minimum wage to half the level of median wages. Currently Japan's minimum wage is around 40% of the median, one of the lowest among OECD member countries.

Japan's public debt burden, which is the worst among advanced nations at more than twice the size of its economy, needs to be brought down with spending cuts and gradual increases in the sales tax, the OECD said.

Sales Tax

Japan's government has twice delayed a plan to raise the nationwide sales tax to 10% from 8%. The tax hikes are needed to pay for rising welfare costs, but the government has backed away after a hike to 8% from 5% in 2014 hurt consumer spending.

Speaking at a press conference in Tokyo, OECD Secretary General Angel Gurria said: "I am on record for supporting the original date for raising the sales tax to 10% from 8%," Kyodo reported.

“There is room (for further hikes) in the case of Japan,” Gurria said, adding that the consumption tax could be raised above 15%. He floated the idea of gradually raising the sales tax, by 1% every year for instance, so the economy can deal with the impact.

The graying of Japan’s society has made securing stable revenue to cover ballooning social security costs an imperative. The Abe administration is attempting to oversee fiscal reconstruction and economic growth at the same time.

The Japanese economy has benefited from recovering exports, mainly to other parts of Asia, although economists say uncertainty about the economic and trade policies of the new US administration pose a risk.

US President Donald Trump has pulled the United States out of the Trans-Pacific Partnership, a setback for Abe who had hoped the free trade agreement would become a key growth driver.

“What is lost is, of course, US participation, not necessarily the participation of all the other countries,” Gurria said. He called for continued efforts to realize the TPP that he described as “positive” for growth.