IMF Survey : Reforms Needed to Restore High Growth in Japan

February 11, 2013

  • Comprehensive strategy needed to reduce public debt, restore high growth
  • Japan needs to be better integrated into Asian growth
  • Implementation likely to prove challenging

Despite robust per capita GDP growth in Japan in recent years, the world’s third largest economy must pursue a comprehensive package of reforms if high growth is to be restored, a top level seminar in Tokyo has heard.

Japanese women at work.   Japan needs measures to encourage greater labor participation especially by women and the elderly, suggest experts (photo: Karen Kasmauski/Corbis)

Japanese women at work. Japan needs measures to encourage greater labor participation especially by women and the elderly, suggest experts (photo: Karen Kasmauski/Corbis)


The measures proposed include deeper integration with global markets, more risk-based allocation of capital, and an increased labor supply.

The gathering, which took place on February 7th, and which was organized by the Asia Pacific Department of the International Monetary Fund and the Regional Office for Asia and the Pacific provided an opportunity for high level government officials and IMF officers, as well as academics, and private sector analysts to discuss Tokyo’s proposed growth strategy.

The elements of Abenomics

The government of Prime Minister Shinzo Abe has already announced plans to overcome deflation and restore growth with a three-pronged approach—the “Three Arrows for Growth”. This plan includes a bold monetary policy through the institution of a 2 percent inflation target, flexible fiscal policy combining short-term stimulus with a medium-term objective to achieve a primary surplus by 2020, and a medium-term growth strategy.

“With the growth strategy expected to be finalized by the government by mid-2013, this seminar provides a timely opportunity to discuss ideas for the ‘third arrow’ of Abenomics”, said Jerald Schiff, the IMF’s mission chief for Japan.

Japan needs to pursue faster growth to bring down its large public debt, said IMF division chief for Japan, Stephan Danninger, who suggested that any proposed strategy needed to include a number of key elements:

• Further Japanese integration with Asia, including participation in the Trans-Pacific Partnership.

• Measures to encourage higher labor participation—especially by women and the elderly, but also through immigration.

• Domestic market reforms aimed at increasing competition and productivity, including through the promotion of inward foreign direct investment.

Danninger added that the promotion of more risk-based allocation of credit was essential to encourage sustainable growth. This would involve the gradual phasing out of credit guarantees which were originally introduced to be a “painkiller” in difficult times. But these guarantees had ended up becoming “sleeping pills” which prevented both firms and banks from directing economic resources towards profitable projects, said Danninger.

Potential increase in long-term growth

According to estimates by the IMF Japan team, implementation of a comprehensive package of measures to promote growth could increase long-term real growth by about 1 percentage point.

In his presentation, Fujitsu Research Institute Senior Research Fellow Martin Schulz said “the success of Abenomics, and the revival of growth will depend on better integrating Japan in the Asian growth process, and deregulating dormant service markets.”

He said this would allow Japanese firms to increase their profit potential by developing new products and expanding into overseas markets.

Tokyo University Economics Professor Takatoshi Ito and JP Morgan Japan Head of Equity Research Jesper Koll said encouraging domestic deregulation could raise growth by increasing competition, and they identified agriculture, health, and energy sectors as the most promising candidates for this.

Increased foreign investment

Former IMF Deputy Managing Director and current President of the Japan Center for International Finance, Takatoshi Kato, said that foreign direct investment from Japan to Thailand and Korea had more than doubled in the last year.

Kato said it was essential to encourage further outward foreign investment, which would result in higher corporate profits, boost innovation, and investment in new products.

While most of the reforms needed to boost Japan’s growth potential will require bold action by the government, voluntary changes in labor practices in the private sector will also be essential.

President of Keio University and Professor of Labor Economics Atsushi Seike agreed that in order to increase labor participation by the elderly, and achieve a “lifelong active society”, the seniority-based wage system—which is still the norm in Japan’s large corporations—would need to be revised.

Challenges to reform implementation

Seminar participants agreed that the proposed reforms could substantially increase potential growth in Japan. But implementation was likely to be difficult, said Ito who pointed to many previous structural reform plans that failed to be implemented.

“We all know what to do, we just don’t know how to get re-elected after we’ve done it,” said Schulz, quoting Luxembourg Prime Minister Jean-Claude Juncker.

Whether Japan is able to raise its growth potential is likely to depend ultimately on overcoming the political obstacles facing implementation. But many participants said they were optimistic because, said Tokyo bureau chief of The Economist, Henry Tricks, throughout its long history, Japan had shown itself to be a country very capable of change.

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