Japan’s Growth Challenge–Special Case or Herald for the Future

Opening Remarks by David Lipton
First Deputy Managing Director, International Monetary Fund
Seminar, IMF, Washington D.C., September 26, 2012

As prepared for delivery

Good morning. It is my great pleasure to welcome you to today’s seminar on “Japan’s Growth Challenge – Special Case or Herald for the Future”.

With policy makers around the world discussing ways to revive a sputtering global economy, a seminar on how to raise growth in Japan is a deserving topic.

Japan has struggled for the better half of the last two decades to boost economic activity. After years of real growth rates of 4 percent and above, growth slumped in the 1990s, during Japan’s lost decade, and since then never reached the previous high levels.

This year marks a special point in Japan’s quest to raise growth for two reasons:

  • First, a swift recovery from the earthquake is important to revive business and consumer confidence, which was badly shaken. On this account Japan has done well. Growth is expected to exceed 2 percent, although indicators point to a weakening in the second half of this year as a result of the global slowdown.


  • But maybe more importantly, higher long-term growth has become an essential part of the success of Japan’s fiscal reforms. These took an important step forward this summer with new legislation to double the consumption tax rate to 10 percent by 2015. Higher trend growth will be key to bring down Japan’s high public debt ratio.

So, what sort of structural reforms can Japan implement to raise growth? In recent reports we have laid out a number of potentially fruitful avenues:

  • Japan’s declining population places a premium on raising women’s labor force participation, which is among the lowest in advanced economies. Here, an expansion of child and elder care services—including through deregulation— as well as better incentives to work through income tax reform would help. A continued relaxation of immigration policy could also be considered as a means of addressing the declining work force.


  • Japan can also benefit from increasingly integrating into the fast-growing Asia region. Many businesses have succeeded in growing through their engagement overseas—examples are new auto facilities in Indonesia and expanded financial services throughout Asia. But more can be done. In particular, participation in the Trans Pacific Partnership or economic partnership agreements would further strengthen ties within Asia and raise both inward and outward FDI.


  • Finally, the Japanese financial system, while sound, could do more to support growth. Venture capital and other financing for start-ups lag badly, while less dynamic SMEs receive guaranteed loans. A reorientation of public policy is needed to ensure that more risk capital is available for new and innovative businesses.

These are just some examples of how growth could be raised in Japan.

But today’s discussion has also an important global dimension. Japan is no longer an outlier. Its growth challenge mirrors that of many other developed countries: fiscal policy room has been exhausted, policy rates are near zero, and the effects of population aging are becoming more tangible, especially in Europe.

Generating a robust recovery in this environment has become a shared challenge. Governments in many developed countries are pressed to find the right balance between reining in large fiscal deficits to reassure markets and supporting growth. At the same time, the effectiveness of monetary policy has been blunted at the zero-interest bound. And efforts to reform labor markets and protected sectors have to be mindful of their effects on income inequality.

These common challenges raise a broader set of questions, which today’s distinguished panel should discuss:

First, what can countries in a low–interest low-growth environment do to raise growth? What is the right macroeconomic policy mix, if both fiscal and monetary policy are constrained? What can be said about the sequencing of policies, and is there a common structural reform agenda, especially for aging economies?

Another set of questions relates to distributional concerns. The income gap between the current young and old is rising. How should countries deal with an increase in intergenerational inequity? What can countries do to keep the young people productive and motivated, even though they have to bear the brunt of coming fiscal adjustment?

Finally, how well do we understand the economic implications of aging? Growth models tell us not to worry about changes in the labor force as per capita income can still go up. But there may be other important changes. In particular, is Japan’s struggle with deflation a special case, or is it part of its demographic transition, and what does the latest research tell us about the effects of aging on growth and inflation?

In less than three weeks, global leaders will convene in Japan, as Tokyo hosts this year’s IMF and World Bank Annual meetings. The meeting will be the first such gathering in Japan in almost four decades and will provide an opportunity to see first-hand how Japan has fared after the global crisis and the devastating earthquake from last year.

It is with this in mind that I feel especially vested in today’s seminar.

Thank you very much, and I look forward to what promises to be a fascinating exchange of ideas.



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