## 1. Gender Gaps

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### Introduction
- More gender diversity in leadership and management positions is associated with higher productivity, inclusivity, stability, and firm profitability.
- More gender-balanced boards improve a firm’s performance (funding obtained, revenues, profitability) due to different risk tolerance and skills brought by men and women.
- Gender wage gaps are smaller when there is a higher share of female managers.
- Greater representation of women in politics/government is associated with increased investment in health and education.
- Empirical approach: standard OLS and Structural Vector Autoregression (SVAR) models used to account for factors potentially driving gender gaps in leadership.

### Women Leaders and Gender Gaps: Recent Developments — Key Statistics and Findings
- Female labor-force participation rate (15-64 years old): rose from 63 percent in 2012 to 74 percent in 2022.
- Male labor-force participation: increased from 84 percent in 2012 to 87 percent in 2022.
- As of 2021, non-regular employment: 54 percent of female employment; 22 percent of male employment.
- 2021, age 25-54: 4.9 times more women employed in part-time positions than men; OECD average is 3.6.
- Japan’s gender wage gap: 22 percent (difference between median earnings of men and women relative to median earnings of men); 86 percent higher than the OECD average and highest among G7 in 2021.
- Men work 29 percent more hours than women in Japan.
- Proportion of female workers in managerial roles (private sector): 13 percent; OECD average 34 percent; government target 18 percent.
- Firms owned by women (Tokyo Shoko Research): 15 percent of all firms.
- Women in national parliament (lower house): 10 percent (Japan ranking 164th globally).
- Women in national parliament (upper house): 25.8 percent.
- Women in local parliaments: 15 percent.
- Implication: higher female labor force participation coexists with clustering in non-regular employment and underrepresentation in managerial and political positions.

### Empirical Analysis: Drivers of Female Managerial Representation
- Data period: annual data 2001–21; regressors lagged one period.
- Regressors include: gender gap in homecare, gender gap in regular employment, gender gap in tertiary education, childcare facility usage/availability, relative size of childcare allowance, and policy dummy for years 2014+ (reflecting the 2013 target).
- SVAR identification: non-recursive four-variable model with share of women managers, gender gap in regular work, gender gap in household work time, and availability of childcare facilities.
- Key empirical findings:
  - Reducing gender gaps in homecare and improving quality of employment, and increasing availability of public childcare facilities promote higher share of female managers in the private sector.
  - Setting of policy targets by government for higher female representation in managerial roles is effective in leading to a structural shift toward the objective.
  - A 1 unit increase in the gender gap in house-work (e.g., if women spend 6 times as much time in house-work relative to men, up from 5) decreases the share of women leaders and has a relatively persistent impact.
  - A 1 percentage point increase in the coverage of childcare facilities leads to an increase in the share of women leaders.
  - An increase in the relative regular employment of women vis-à-vis men has a positive impact on the share of women managers, although not statistically significant in estimates reported.
  - Robustness: impulse response magnitudes and significance are robust to alternative SVAR specifications and restrictions.

### Drivers — Detailed Evidence
- Gender Gap in Home- and Family-Care
  - Women do about 5 times the unpaid work/caregiving than men; men do about 2 times the paid work than women.
  - Paternity leave access: up to one year and two months; uptake: 17 percent of new fathers take paternity leave vs. 80 percent of women in FY2022; most men take less than one month.
  - 25.9 percent cited “company/supervisor's atmosphere discouraging paternity leave or a lack of understanding about it” as reason for not taking paternity leave (MHLW, 2020).
  - Japan’s average payment rates for paternity leave: 61 percent in 2022; G7 average 45 percent in 2022.
  - Policy announcement: raise effective parental leave payment rates to about 100 percent (if including tax/social security premium exemption, otherwise about 80 percent) in the first 180 days if both parents take parental leave; MHLW plans implementation from FY2025.

- Gender Gap in the Quality of Employment
  - Japan ranks at the top among OECD economies in terms of time spent in paid work.
  - Close to 30 percent of women (age 35-44) cite compatibility with household and care-related work as main reason for opting for non-regular employment.
  - Only 8 percent of Japanese firms have adopted flexible time arrangements for work as of 2022 (MHLW survey).
  - Tax and social welfare design for second-income earners (spousal deductions, pension contribution exemptions when income below threshold) discourages women from increasing working hours.
  - Career vs non-career tracks: limited mobility; men dominate career track with greater promotion opportunities. (Career-track variable not included in empirical analysis due to inadequate data.)

- Childcare Facilities and Allowances
  - Number of childcare facilities increased by 36 percent from FY2015 to FY2022.
  - Earlier period: facilities rose 7 percent from FY2007 to FY2014 while waitlisted children increased 19 percent.
  - Expansion since 2015 and increased budget allocation in 2017 reduced waitlists significantly.
  - Empirical finding: availability of public childcare facilities is positively associated with share of female managers.
  - Childcare allowance: not statistically significant for share of female managers; allowance introduced in 1972; amount varies by age, number of children, and income.

### Policy Recommendations — Leadership and Employment
- Increase policy focus beyond female labor force participation to ensure women obtain good jobs and careers.
- Strengthen enforcement and broaden coverage of government targets for female representation in managerial roles:
  - Current government target: women occupy at least 30 percent of executive positions in private firms by 2030 (modified from initial target by 2020).
  - Target applies only to TSE listed companies on the prime market, which employ less than 5 percent of Japan’s total labor force.
  - Nature of targets: voluntary with no strict penalties for non-compliance.
  - International evidence: OECD (2020) finds mandatory quotas produce more immediate increases on boards; top performers (Finland, France, Italy, Norway, Sweden) have implemented mandatory quotas.
- Address large gender gaps in homecare:
  - Increase paternity leave uptake by reducing workplace stigma and financial disincentives.
  - Raise effective parental leave payment rates (policy to raise to about 100 percent for first 180 days when both parents take leave scheduled from FY2025).
- Improve quality of employment and job flexibility:
  - Promote flexible working arrangements and telework adoption (only 8 percent of firms had flexible time arrangements as of 2022).
  - Reform tax and social welfare rules that create disincentives for second-income earners (spousal deductions, pension contribution exemptions).
  - Facilitate mobility between non-career and career tracks within firms.
- Expand public childcare availability:
  - Continue investments in childcare facilities given 36 percent increase from FY2015 to FY2022 and prior unmet demand.

### Employment-practice Reforms: Objectives and Recommendations
- Goals: improve women’s quality of jobs, increase productivity and wages, and advance a more equal society.
- Recommended reforms:
  - Encourage flexible working schedules and teleworking options to enable shared housework responsibilities and encourage regular employment uptake by women.
  - Link promotions to merit instead of seniority and years of service.
  - Rationalize spousal benefits in tax and social security contributions to avoid disincentivizing women from increasing labor supply.
  - Increase flexibility in career-track system to allow non-career track employees to transition to career-track positions.

### Paternity Leave: Targets, Incentives, and Cultural Barriers
- Numerical target: increase share of men taking paternity leave to 85 percent by FY2030 (modified from initial target of 30 percent by FY2025).
- Incentives introduced October 2022:
  - Fathers may take four weeks off in the first eight weeks post-childbirth with effective income substitution rate at 80 percent (100 percent from FY2025).
  - Additional financial incentives if both parents take leave.
- Other measures:
  - Mandatory employer explanation of parental leave and relevant policies to employees (April 2022).
  - Requirement for companies to annually disclose childcare leave taken (since April 2023 for companies with over 1,000 full-time employees).
  - Recommendation: introduce flexible or part-time leave arrangements for parents unwilling/unable to stop work completely.
- Cultural constraints: company atmosphere and lack of understanding are major reasons men do not take parental leave; international evidence (Spain, France) shows mandatory leave can be favorable for women’s economic participation.

### Childcare Facilities, Nursery Teachers, and Foreign Workers
- Childcare access improved since 2015, but waitlist counts may underrepresent demand because children whose parents are on parental leave are excluded.
- Bottleneck: shortage of nursery teachers driven by relatively low wages.
  - Average monthly wage of a nursery teacher is 17 percent lower than an average full-time employee.
- Recommendations:
  - Increase nursery teacher wages.
  - Attract foreign workers to address labor shortages in childcare provision.
  - Continue expanding childcare facilities given potential undercounting in waitlists.

### Childcare Allowance and Fertility / Career Advancement Effects
- Evidence: raising childcare allowance is unlikely to encourage women’s leadership.
  - Changes in childcare allowance have limited impact on women’s career advancement and fertility (see 2024 Japan Article IV Selected Issues Paper “Japan’s Fertility: More Children Please”).
- Policy implication: pivot support from primary focus on financial assistance to addressing structural issues such as social norms and entrenched labor/employment practices.

---

### Fertility Drivers, Childcare, and Macroeconomic Context

### Stylized Facts on Fertility and Childcare
- Average number of children per married couple: "2.19 in 1977 and 1.90 in 2021".
- Mean number of children by age at marriage (IPSS survey):
  - "2.11" for women who married before 25 years old.
  - "1.87" for women marrying between 25-29 years old.
  - "1.61" for those marrying between 30-34 years old.
  - "1.03" for women marrying at 35 years old or more.
- Fertility rate about "1.26 in 2022".
- Childcare facilities: number increased by "63 percent" from 2013 to 2022; waitlisted children reduced by "87 percent" from 2013 to 2022.
- Number of waitlisted children nationwide: "2,680 as of September 2023"; "90 percent of them are concentrated in the age group of 0-2 years old."
- Usage of childcare facilities: "52 percent in 2023".
- Unayama (2023) estimate: expansion of childcare facilities since 2005 increased total fertility rate by "0.1".

### Parental Leave Generosity and Uptake
- Paid paternity leave length: "about 50 weeks" with replacement payout at "61 percent" of salary.
- Average duration of paternity leave taken in 2022: "less than 6 weeks (about 41 days)".
- 25.9 percent of fathers who did not take paternity leave cited company/supervisor atmosphere or lack of understanding (MHLW survey, 2020).

### Employment Type and the “Child Penalty”
- Return-to-work after childbirth:
  - Around "38 percent" of non-regularly employed women return to work after childbirth; "79 percent" among regularly employed women.
  - Among regularly employed women, "74 percent" return to regular employment one year after giving birth, while "5 percent" transition to non-regular employment.
- Komura (2022): reduction in earnings (“child penalty”) is more significant for mothers in non-regular positions.
- IPSS survey: mothers in regular employment show "more than double the preference to have more children" compared to non-regularly employed mothers.

### Cross-country Empirical Results on Fertility Policies
- Panel dataset: "42 OECD countries"; baseline regressions include interaction of policies with Real GDP Growth to test reduction in fertility cyclicality.
- Main cross-country regression findings (selected reported coefficients):
  - Real GDP Growth (%) coefficients: "0.559***", "0.612***", "1.238**", "0.538***", "0.03390", "0.7900", "0.742**".
  - GDP per capita (10,000 USD) examples: "0.0656", "0.135**", "0.0534", "0.0541", "0.0746", "0.286*", "0.125".
  - Real GDP Growth (%) * GDP per capita: "-0.00655*", "-0.00804*", "-0.0110**", "-0.00262", "-0.0107*", "-0.0319*", "-0.0124*".
  - GDP Growth * Children 3-5 in pre-primary = "-0.0114*".
  - GDP Growth * Children 0-2 in childcare = "-0.0111*".
  - Cash benefits for families (% of GDP): coefficient "1.512" (not significant); GDP Growth * Cash benefits = "-0.194" (not significant).
  - Total expenditure on families (% of GDP): coefficient "2.575**"; GDP Growth * Expenditure on families = "-0.160" (not significant).
  - Gender gap in unpaid work (ratio): coefficient "-65.54**"; interaction GDP Growth * G. gap in unpaid work = "-1.225" (not significant).
- Key empirical conclusions:
  - Pre-school childcare enrollment (children aged 3-5) and childcare for ages 0-2 consistently and robustly boost fertility by reducing fertility cyclicality.
  - Increasing enrollment by one percentage point in pre-school childcare is comparable to effective increase in GDP per capita by 10,000 USD.
  - Cash benefits show no significant effect on fertility in cross-country sample.
  - Parental leave duration and parental leave for men show mostly insignificant coefficients in available sample (data coverage constraints noted).

### Policy Implications to Support Fertility
- Prioritize expansion of childcare facilities (including ages 0-2 and pre-primary ages 3-5).
- Reduce time burden of childrearing for women by addressing gender gap in unpaid work and enhancing childcare accessibility.
- Encourage paternity leave uptake via “daddy quota” style policies that reserve leave for fathers to incentivize take-up and improve burden sharing.
- Cash transfers alone should not be relied upon as primary tool to boost fertility given limited cross-country evidence.

### Macroeconomic and Childcare Capacity Context for Japan
- Fertility rate growth is procyclical with respect to GDP growth; sustained economic growth is important for supporting childbirth.
- Waitlist issues:
  - Waitlist for children aged 0-2 remains relatively high; waitlist numbers may be underrepresented because children whose parents are on parental leave are excluded.
  - Parents can extend parental leave beyond one year to maximum two years.
- Nursery teacher shortage:
  - Job-to-applicants ratio of nursery teachers is 3.1 (more than double national average of 1.4) as of January 2023.
  - Average salary of nursery teachers about 17 percent lower compared with that of full-time employees.
- Policy recommendations:
  - Maintain sound macroeconomic management for continuous growth.
  - Address staff shortages and expand childcare availability, particularly for infants.
  - Attract foreign workers (e.g., nursery teachers) to complement domestic measures.
  - Consider design changes to parental leave scheme to incentivize fathers (e.g., “daddy quota”) to improve burden sharing.

---

### Inequality, Transfers, and Labor Market Dualism

### Effects of Transfers and Redistribution
- Transfers are overall equalizing because they are concentrated among lower-income households.
- In 2019, a 1 percent increase in income from transfers reduces inequality by close to 14 percent (all else equal).
- A 1 percent increase in regular wage income increases inequality by 12 percent; a 1 percent increase in capital income increases inequality by 4 percent.
- Fiscal redistribution through social transfers reduced the Gini coefficient on market income by 33 percent in 2010 and by 37 percent in 2019 (including pensions).
- Social transfers helped reduce the Gini coefficient on total gross income by 6 percent between 2010-19.
- Pensions constitute close to 40 percent of total transfers in the dataset.

### Progressivity and Concentration Coefficients (2019)
- Total concentration coefficient: Japan 0.10, OECD avg. 0.14.
- Pensioners: Japan 0.17, OECD avg. -0.06.
- Working-age: Japan 0.10, OECD avg. -0.07.
- Interpretation: Japan’s positive concentration coefficient for working-age indicates weaker distributional impact on low-income households relative to other countries.

### Sources of Change in Gross Income Inequality (2010-19)
- Four drivers:
  1. Age distribution changes (ageing) — unequalizing.
  2. Labor market structure changes (increasing dualism) — unequalizing.
  3. Increased participation/employment of females and elderly — equalizing.
  4. Changes in distributions of social transfers — equalizing.
- Aggregate effect: equalizing impacts of transfers and higher participation marginally offset negative impacts of ageing and increased dualism.

### Demographics and Labor Supply Effects
- Share of population aged above 65 increased by 10 percentage points over last decade.
- Between 2010-19 Japan added 2.9 million women and 3.5 million elderly (age 65 and above) to the labor force.
- Female and elderly labor force participation rates each rose by 6 ppt.
- Unemployment rate declined from 5 to 2.3 percent.
- Resulting impacts: reduced Gini index for market income among females by close to 5 percent between 2010-19, and among elderly by 3 percent.

### Dual Labor Market Structure and Consequences
- Wage inequality constitutes close to 80 percent of gross income inequality and 90 percent of market income inequality.
- More than half of overall income inequality associated with inequality in regular wages; its influence increased by 10 percentage points over time.
- Nonregular workers share rose from 33 percent in 2010 to 38 percent in 2019; part-time workers account for 70 percent of nonregular workers.
- On an hourly basis in 2019, part-time workers paid 57 percent of full-time workers’ hourly pay.
- 70 percent of part-time workers do not receive bonus payments; 90 percent do not receive lump-sum retirement benefit.
- Consequences: declining hours among nonregular workers and limited mobility widened income gap between regular and nonregular workers; seniority-based systems and mandatory retirement push older regular workers into nonregular status.

### Policy Recommendations on Inequality and Labor Markets
- Reduce labor market dualism and improve labor mobility:
  - Laws such as ‘equal pay for equal work’ (implemented in 2020) are welcome but insufficient.
  - Consider a Single Open-Ended Contract for newly hired workers combined with a model balancing flexibility and security.
  - Implement programs to increase skill training for nonregular workers.
- Continue boosting labor participation of females and elderly and remove disincentives:
  - Advance work-style reforms including flexible work arrangements such as telework.
  - Eliminate tax and social security distortions related to dependent spouses.
- Better target existing social benefit programs to increase share received by low-income households given fiscal constraints.

---

### Startup Ecosystem, Equity Funding, and Firm Dynamism

### Overview and Stylized Facts
- Japan’s startup ecosystem has grown gradually but scope for expansion remains.
- Number of unicorns in Japan: 7 in 2023 (U.S.: 653 in 2023).
- Valuation of unicorns in Japan: about US$9.8 billion in 2023 (U.S.: US$2 trillion).
- Tokyo accounts for about 80% of total startup funding in Japan.
- Industry composition: IT sector largest, followed by health care and B2B; CleanTech less prevalent.
- Investor origin: U.S. investors ~50 percent of investments in Japan between 2010 and 2023; U.K. ~10 percent; Japanese investors’ share declined to ~5 percent recently.
- Corporate venture capital (CVC) invested in at least half of VC deals between 2015 and 2022; peaked 62 percent in 2020.

### Aggregate and Firm-level Empirical Findings
- Cross-country aggregate database: 30 large advanced and emerging market economies, 2000–2022.
- Panel regression using Arellano-Bover/Blundell-Bond estimator.
- Country-level findings:
  - Higher share of entrepreneurship (self-employed who are employers) associated with higher capital investment and higher valuations.
  - Better firm dynamism (higher entry and exit rates) associated with higher capital investment and valuations.
- Firm-level (PitchBook) main results:
  - Well-funded startups have higher patent counts, are larger, and have higher exit probabilities.
  - Predicted magnitudes (global sample):
    - Well-funded startups predicted to have 1.5 times more employees than non-well-funded startups.
    - Well-funded startups have a 43 percentage points higher probability of exit compared to non-well-funded startups.
  - Global table sample details:
    - Well-Funded coefficient on log(patent docs) = 0.744* (0.408).
    - Well-Funded on log(# employees) = 1.540*** (0.171).
    - Exit probability = 43.848*** (1.774).
    - Observations: global sample 1,854.
  - Japan-specific table:
    - Well-Funded coefficient on log(patent docs) = 3.443*** (0.283).
    - Well-Funded on log(# employees) = 0.848*** (0.173).
    - Exit probability = 51.863*** (3.026).
    - Observations: Japan sample 302.
- Risk-taking culture heterogeneity:
  - Country cultural proxies (Hofstede): uncertainty avoidance and power distance interact with Well-Funded effects.
  - Being Well-Funded strongly associated with Successful Exit: coefficients reported (e.g., Well-Funded 46.022*** (1.484) for Uncertainty Avoidance specification).
  - Interaction Well-Funded * Country Characteristic shows heterogeneous effects (some negative and significant), indicating cultural differences in how funding translates into exits.

### Caveats and Data Limitations
- Cross-sectional data as of end-2023 prevents tracking dynamic performance after funding rounds.
- Survivorship bias: surviving startups as of end-2023 observed; firms that exited earlier not observed.
- Analysis focuses on availability of funding, not cost, conditionality, or investor-type heterogeneity.
- Identification relies on within country-industry variation.

### Policy Implications for Startups and Funding
- Strengthen entrepreneurship and firm dynamism to support higher capital investment and valuations.
- Support later-stage financing to foster larger startups and potential unicorn creation (e.g., 200-billion-yen venture growth fund launched in 2023).
- Encourage diverse investor participation and international investor engagement.
- Consider cultural and institutional reforms to encourage risk-taking (lower uncertainty avoidance, lower power distance).
- Leverage corporate VCs while promoting a balanced mix of funding stages.

*Source: 1jpnea2024011 (excerpts from IMF chapter/paper content provided).*

### 1. Gender Gaps _________________________________________________________________________ 6

### WHY SUCH FEW WOMEN IN LEADERSHIP POSITIONS IN JAPAN?

### A. Introduction
- More gender diversity in leadership and management positions is associated with higher productivity, inclusivity, stability, and firm profitability.
- More gender-balanced boards improve a firm’s performance, such as funding obtained, revenues, and profitability due to different risk tolerance and skills brought by men and women, respectively (Peterson Institute for International Economics, 2016; Kim and Starks, 2016).
- Gender wage gaps are smaller when there is a higher share of female managers (Theodoropoulos and others, 2022).
- Greater representation of women in politics and government organizations has been associated with positive policy outcomes, such as an increase of investment in health and education (Comunale and others, 2023; Hessami and Lopes da Fonseca, 2020).
- Japanese companies with a greater ratio of female managers to total female employees are found to have higher levels of productivity (Nishihata and Yamamoto, 2021), and tend to achieve higher return on equity and return on assets (Ito and Monoe, 2016).
- Empirical approach: standard OLS and Structural Vector Autoregression (SVAR) models used to account for various factors potentially driving gender gaps in leadership.

### B. Women Leaders and Gender Gaps: Recent Developments
Findings and statistics:
- Female labor-force participation rate (15-64 years old) rose from 63 percent in 2012 to 74 percent in 2022.
- Male labor-force participation increased from 84 percent in 2012 to 87 percent in 2022.
- As of 2021, 54 percent of female employment is in non-regular jobs; 22 percent of male employment is in non-regular jobs.
- In 2021, among the 25-54 age group, there were 4.9 times more women employed in part-time positions than men; OECD average is 3.6.
- Japan’s gender wage gap is 22 percent (difference between median earnings of men and women relative to median earnings of men), which is 86 percent higher than the OECD average and was the highest among G7 countries in 2021.
- Men work 29 percent more hours than women in Japan.
- Proportion of female workers in managerial roles in the private sector is 13 percent; OECD average is 34 percent; government target is 18 percent.
- Tokyo Shoko Research survey: 15 percent of all firms in Japan are owned by women.
- Women in national parliament (lower house): 10 percent (Japan ranking 164th globally).
- Women in national parliament (upper house): 25.8 percent.
- Women in local parliaments: 15 percent.

Implications:
- Despite higher female labor force participation, persistent clustering in non-regular employment and underrepresentation in managerial and political positions remain major constraints.

### C. Empirical Analysis: Key Drivers of Gender Gaps in Leadership
Summary of empirical strategy:
- Annex contains empirical strategy; Annex Table 2 discusses data; Annex Table 1 reports OLS; Figure 3 shows SVAR impulse responses.
- Key result: reducing gender gaps in homecare and improving quality of employment, and increasing availability of public childcare facilities promote higher share of female managers in the private sector.
- Setting of policy targets by government for higher female representation in managerial roles is found to be effective in leading to a structural shift towards the intended objective.

Findings by driver:

- Gender Gap in Home- and Family-Care
  - Cultural norms: strong persistence of traditional division of labor; women do about 5 times the unpaid work/caregiving than men, while men do about 2 times the paid work than women.
  - Limited paternity leave usage: men have access to up to one year and two months of paternity leave, but only 17 percent of new fathers take paternity leave in comparison to 80 percent of women in FY2022; most men take less than one month leave.
  - Survey finding: second most common reason (25.9 percent) cited for not taking paternity leave is “the company/supervisor's atmosphere discouraging paternity leave or a lack of understanding about it” (survey by MHLW, 2020).
  - OECD data: Japan’s average payment rates for paternity leave is 61 percent, higher than the G7 average at 45 percent in 2022.
  - Policy announcement: Prime Minister Kishida announced to raise the effective parental leave payment rates to about 100 percent (if we include the effect of tax/social security premium exemption, otherwise about 80 percent) in the first 180 days if both parents take parental leave; MHLW plans to implement this measure from FY2025.

- Gender Gap in the Quality of Employment
  - Culture of long working hours: Japan ranks at the top among OECD economies in terms of time spent in paid work.
  - Compatibility with household and care-related work cited by close to 30 percent of women (age 35-44) as main reason for opting for non-regular employment (MHLW survey).
  - Limited flexibility: only 8 percent of Japanese firms have adopted flexible time arrangements for work as of 2022 (MHLW survey).
  - Policy distortions: design of tax and social welfare benefits for second-income earners (e.g., spousal deductions and exemption of pension contributions when income is below a threshold) discourages women from increasing working hours.
  - Career vs non-career tracks: employees typically choose career track or non-career (clerical) track with limited mobility; men dominate the career track with greater promotion opportunities.
  - Note: the career-track variable was not included in empirical analysis due to inadequate data availability.

- Childcare Facilities and Allowances
  - Childcare facilities expansion: number of childcare facilities increased by 36 percent from FY2015 to FY2022; number of waitlisted children declined significantly after authorities expanded availability starting in 2015 and increased budget allocation in 2017.
  - Earlier period: waitlisted children increased by 19 percent from FY2007 to FY2014 while number of facilities rose by 7 percent.
  - Empirical finding: availability of public childcare facilities is positively associated with the share of female managers.
  - Childcare allowance: found to not have a statistically significant impact on share of female managers.
  - Note: childcare allowance introduced in 1972; amount varies based on age and number of children and income level.

### D. Policy Recommendations
- Increase policy focus beyond female labor force participation to ensure women obtain good jobs and careers.
- Strengthen enforcement and broaden coverage of government targets for female representation in managerial roles:
  - Current government target: women occupy at least 30 percent of executive positions in private firms by 2030 (modified from initial target by 2020).
  - Coverage limitation: target applies only to TSE listed companies on the prime market, which employ less than 5 percent of Japan’s total labor force.
  - Nature of targets: voluntary with no strict penalties for non-compliance.
  - International evidence: OECD (2020) finds mandatory quotas produce more immediate increases in women on boards; top performers (Finland, France, Italy, Norway, Sweden) have implemented mandatory quotas.
- Address large gender gaps in homecare:
  - Increase paternity leave uptake through measures that reduce workplace stigma and financial disincentives.
  - Implement policies to raise effective parental leave payment rates (policy to raise to about 100 percent for first 180 days when both parents take leave scheduled from FY2025).
- Improve quality of employment and job flexibility:
  - Promote flexible working arrangements and telework adoption (only 8 percent of firms had flexible time arrangements as of 2022).
  - Reform tax and social welfare rules that create disincentives for second-income earners to increase working hours (e.g., spousal deductions, pension contribution exemptions).
  - Facilitate mobility between non-career and career tracks within firms to enable promotions for women.
- Expand public childcare availability:
  - Continue and sustain investments in childcare facilities, noting a 36 percent increase in facilities from FY2015 to FY2022 and prior high unmet demand.

*Prepared by Kohei Asao (APD), Purva Khera (APD) and Mahima Vasishth (Bocconi University).*

### 13.      Reforming current employment practices and policies are essential for improving

### 13.      Reforming current employment practices and policies are essential for improving

### Employment-practice reforms: objectives and recommendations
- Goal: improve women’s quality of jobs, increase productivity and wages, and advance a more equal society.
- Recommended reforms:
  - Encourage use of flexible working schedules and teleworking options to allow men and women to better share housework responsibilities and to encourage more women to work in regular employment.
  - Link promotions to merit instead of seniority and years of service to enable women to achieve better career advancement even if work commitment temporarily slows due to family reasons; this also reduces men’s disincentives to take childcare leave.
  - Rationalize spousal benefits in tax and social security contributions to avoid disincentivizing women from increasing labor supply.
  - Increase flexibility in the career track system to allow those initially employed in non-career tracks the option to transition to career-track positions.

### Paternity leave: targets, incentives, and cultural barriers
- Numerical target: increase the share of men taking paternity leave to 85 percent by FY2030 (modified from the initial target of 30 percent by FY2025).
- Incentives introduced in October 2022:
  - Fathers may take four weeks off in the first eight weeks post-childbirth with effective income substitution rate at 80 percent (100 percent from FY2025).
  - Additional financial incentives if both parents take leave.
- Other policy measures:
  - Mandatory employer explanation of parental leave and relevant policies to employees (April 2022).
  - Requirement for companies to annually disclose the status of childcare leave taken (since April 2023 for companies with over 1,000 full-time employees).
  - Recommendation: introduce flexible or part-time leave arrangements for parents unwilling or unable to stop work completely.
- Cultural constraints:
  - Cultural pressure and lack of understanding are major reasons men do not take parental leave; measures to encourage cultural shift are essential.
  - International evidence: Spain and France have made paternity leave “mandatory,” which proved favorable for women’s economic participation (Farré and González, 2017).

### Childcare facilities, nursery teachers, and foreign workers
- Finding: access to childcare facilities has improved since 2015, but waitlist numbers may be underrepresented because children whose parents are on parental leave are excluded from waitlist counts.
- Current bottleneck: shortage of nursery teachers driven by relatively low wages.
  - Statistic: the average monthly wage of a nursery teacher is 17 percent lower than an average full-time employee.
- Policy recommendations:
  - Persist in efforts to increase nursery teacher wages.
  - Attract foreign workers to help address labor shortages in childcare provision.
  - Continue efforts to expand childcare facilities, given potential undercounting in waitlist statistics.

### Childcare allowance and fertility / career advancement effects
- Evidence: raising childcare allowance is unlikely to encourage women’s leadership.
  - Changes in the childcare allowance have demonstrated limited impact on women’s career advancement and on the fertility rate (see 2024 Japan Article IV Selected Issues Paper “Japan’s Fertility: More Children Please”).
- Policy implication: pivot policy support from a primary focus on strengthening financial assistance to addressing structural issues such as social norms and entrenched labor/employment practices.

### Context on fertility and government initiatives (related policy background)
- Japan’s fertility rate:
  - Declined since the 1990s; fertility rate about 1.26 in 2022.
- Government initiatives:
  - “Children's Future Strategy” (2023): increase children-related spending by 3.6 trillion yen (approximately 0.6 percent of GDP) per year by FY2028.
  - Plan to double the budget allocation for the Children's Agency by early 2030s.
  - Strategy includes promoting co-parenting and strengthening support for child-rearing households including expansion of childcare facilities.
- Empirical literature summary:
  - Policies that reduce education costs and opportunity costs for mothers (notably widely available, accessible, high-quality childcare for ages 0-2) have the most positive effect on fertility.

### Empirical evidence on drivers of female managerial representation
- OLS and SVAR approaches examined drivers of the share of female middle/senior managers in Japan using annual data 2001–21.
- Regressors included (lagged one period): gender gap in homecare, gender gap in regular employment, gender gap in tertiary education, usage/availability of childcare facilities, relative size of childcare allowance, and a policy dummy for years 2014+ reflecting the 2013 target.
- SVAR identification: non-recursive four-variable model with share of women managers, gender gap in regular work, gender gap in time spent in household work, and availability of childcare facilities.
- Empirical findings:
  - A 1 unit increase in the gender gap in house-work (e.g., if women spend 6 times as much time in house-work relative to men, up from 5) decreases the share of women leaders and has a relatively persistent impact.
  - A 1 percentage point increase in the coverage of childcare facilities leads to an increase in the share of women leaders.
  - An increase in the relative regular employment of women vis-à-vis men has a positive impact on the share of women managers, although it is not statistically significant in the estimates.
- Robustness: magnitude and statistical significance of impulse responses are robust to alternative specifications and restrictions of the SVAR model.

*Source: 1jpnea2024011 - 13.      Reforming current employment practices and policies are essential for improving*

### 4.      This paper examines drivers of fertility based on cross-country regression analysis and

### 4.      This paper examines drivers of fertility based on cross-country regression analysis and

### Stylized Facts
- Marriage and childbirth timing
  - The average number of children per married couple: "2.19 in 1977 and 1.90 in 2021".
  - Mean number of children by age at marriage (IPSS survey):
    - "2.11" for women who married before 25 years old.
    - "1.87" for women marrying between 25-29 years old.
    - "1.61" for those marrying between 30-34 years old.
    - "1.03" for women marrying at 35 years old or more.
  - Mean age of women at first childbirth in Japan is "relatively high compared to peer economies".
  - Later marriages and later childbirth contribute to the decline in the fertility rate.

- Childcare facility expansion and utilization
  - Number of childcare facilities increased by "63 percent" from 2013 to 2022.
  - Waitlisted children reduced by "87 percent" from 2013 to 2022.
  - Number of waitlisted children nationwide is "2,680 as of September 2023"; "90 percent of them are concentrated in the age group of 0-2 years old."
  - Usage of childcare facilities: "52 percent in 2023".
  - Unayama (2023) estimate: expansion of childcare facilities since 2005 increased the total fertility rate by "0.1".

- Parental leave generosity and uptake
  - Paid paternity leave length: "about 50 weeks" with replacement payout at "61 percent" of salary.
  - Average duration of paternity leave taken in 2022: "less than 6 weeks (about 41 days)".
  - A 2020 MHLW survey: "25.9 percent" of fathers who did not take paternity leave attributed it to "the company/supervisor’s atmosphere discouraging paternity leave or a lack of understanding about it".

- Gender division of unpaid and paid work
  - Japanese women engage in "over five times more unpaid work" than men.
  - Men perform "166 percent of paid work compared to women".
  - IPSS survey: about "half of the women who have fewer children than their preferred number" cite reasons related to work management difficulty, psychological/physical burden, or lack of husband support for unpaid household/childcare duties.

- Employment type and the “child penalty”
  - Only around "38 percent" of non-regularly employed women return to work after childbirth; "79 percent" among regularly employed women.
  - Among regularly employed women, "74 percent" return to regular employment one year after giving birth, while "5 percent" transition to non-regular employment.
  - Komura (2022): reduction in earnings (the “child penalty”) is more significant for mothers in non-regular positions.
  - IPSS survey: mothers in regular employment show "more than double the preference to have more children" compared to non-regularly employed mothers.

- Cash transfers
  - Cross-country data (34 countries in the OECD family database) suggest "no evident correlation between cash transfers and fertility rates."
  - Bauernschuster, Hener, and Rainer (2016): expenditures on childcare facilities have a "five-time greater impact on the fertility rate than cash transfers."

### Case Studies: Sweden and Germany (Box 1)
- Norway and Sweden: "daddy quota" introduced in 1993 and 1995 respectively
  - Policy reserves part of paid parental leave for fathers; family loses the leave if father does not take it.
  - Norway: usage rate of paternity leave rose from "4 percent to above 90 percent from 1995 to 2003".
  - Sweden: usage rate near "90 percent".

- Germany: expansion of childcare facilities and parental leave reforms
  - Daycare Expansion Act (2004) and Childcare Expansion Act (2007) introduced all-day schools and childcare for children aged 0-2.
  - Since 2013 parents can request institutional childcare from the first birthday onwards.
  - UNFPA (2019): "over 90 percent of children between the ages of three and six spend at least part of the day in kindergarten."
  - In 2017, "45 percent" of parents with children under age 3 wanted childcare but only "33 percent" secured enrollment.
  - 2007 parental leave reform similar to Swedish "daddy quota"; flexible part-time leave up to "36 months" since 2015.
  - Research suggests policy reforms contributed to a rise in fertility rates among highly educated women at later stages of childbearing.

### Data and Methodology
- Panel dataset: "42 OECD countries".
- Structural indicators included: fertility rate, social policies, socioeconomic conditions (gender gap in unpaid work, average duration of taken parental leave).
- Business cycle controls: GDP-per-capita, real GDP growth, CPI inflation.
- Regression controls: linear and quadratic trends in country-level fertility rates, country fixed effects, year and year^2.
- Baseline linear regression reported in Table 1 links fertility (lead) to policies and controls; lead of fertility rate used.
- Endogeneity concern: countries with low fertility are more likely to adopt policies, biasing simple regressions.
- Identification strategy:
  - Two assumptions:
    1. Rise in female labor force participation reduces fertility level and increases fertility cyclicality with business cycles (drawing on Coskun and Dalgic (2024) calibrated to US data).
    2. Children-related policies are perceived as permanent by households and affect fertility decisions permanently.
  - Use faster-moving real GDP growth as exogenous variation to identify policies that reduce fertility cyclicality; successful policies should dampen the responsiveness of fertility to GDP fluctuations.
- Baseline specification for empirical tests regresses one-year ahead growth in the fertility rate on real GDP growth, GDP per capita (in tens of thousands of US dollars), controls (fertility level, average age at childbirth, marriage rate, CPI), country fixed effects, and country-specific quadratic time trends.

### Empirical Results
- Fertility procyclicality
  - Fertility rate growth is procyclical with respect to lags of GDP growth (Table 2).
  - Interaction: the positive relationship between fertility growth and GDP growth declines with higher GDP per capita (negative coefficient on Real GDP Growth (%) * GDP per capita).

- Policy effectiveness via cyclicality reduction
  - A successful fertility-boosting policy should produce a negative coefficient on the interaction between the policy measure and GDP growth (i.e., dampen fertility cyclicality).
  - Coefficients on policy levels alone are not the primary identification device; interaction with GDP growth is crucial.

- Main cross-country regression findings (Table 3)
  - Real GDP Growth (%) coefficients (various specifications): "0.559***", "0.612***", "1.238**", "0.538***", "0.03390", "0.7900", "0.742**".
  - GDP per capita (10,000 USD) coefficients vary across specifications (examples): "0.0656", "0.135**", "0.0534", "0.0541", "0.0746", "0.286*", "0.125".
  - Real GDP Growth (%) * GDP per capita shows negative and often significant coefficients (examples): "-0.00655*", "-0.00804*", "-0.0110**", "-0.00262", "-0.0107*", "-0.0319*", "-0.0124*".
  - Children aged 3-5 in pre-primary: interaction with GDP growth "GDP Growth * Children 3-5 in pre-primary" = "-0.0114*" (t statistic in parentheses indicates significance).
  - Children aged 0-2 in formal childcare: "GDP Growth * Children 0-2 in childcare" = "-0.0111*" (significant).
  - Cash benefits for families (% of GDP): coefficient "1.512" (not significant); "GDP Growth * Cash benefits" = "-0.194" (not significant).
  - Total expenditure on families (% of GDP): coefficient "2.575**" (significant); interaction "GDP Growth * Expenditure on families" = "-0.160" (not significant).
  - Parental leave duration (days) and parental leave for men show mostly insignificant coefficients and interactions in the available sample.
  - Gender gap in unpaid work (ratio): coefficient "-65.54**" (significant); interaction "GDP Growth * G. gap in unpaid work" = "-1.225" (not significant).

- Key empirical conclusions
  - The only policy that consistently and robustly boosts fertility in these cross-country regressions is pre-school childcare enrollment (children aged 3-5 in pre-primary and childcare for ages 0-2 via interaction with GDP growth show significant negative interactions, indicating reduced cyclicality and effectiveness).
  - Increasing enrollment by one percentage point in pre-school childcare is "comparable to the effective increase in GDP per capita by 10,000 USD."
  - Cash benefits have "no significant effect on fertility" in the cross-country sample.
  - Dataset length/coverage varies by policy variable; insignificant coefficients for some policies (e.g., parental leave duration, gender gap in unpaid work) may reflect short datasets rather than lack of effect.

### Policy Implications
- Most effective measures (based on cross-country regression and case studies):
  - Expand childcare facilities, including for children aged 0-2 and pre-primary enrollment for ages 3-5.
  - Reduce the time burden of childrearing for women by addressing the gender gap in unpaid work and enhancing childcare accessibility.
  - Encourage paternity leave uptake (e.g., "daddy quota" style policies that reserve leave for fathers) to alleviate the burden on mothers and promote more equal sharing of unpaid work.

- Measures with limited empirical support in cross-country analysis:
  - Cash transfers: cross-country evidence indicates "no evident correlation between cash transfers and fertility rates" and limited treatment effects in prior studies.
  - Parental leave generosity alone: Japan's generous paid paternity leave (about "50 weeks" at "61 percent" replacement) has low uptake ("less than 6 weeks (about 41 days)" average taken), suggesting that design and workplace culture matter for effectiveness.

- Labor market policy implications
  - Facilitate transitions from non-regular to regular employment for women to reduce the "child penalty" and support sustained careers for mothers; regular employment is associated with higher return-to-work rates and greater preference for additional children.

- Practical policy takeaway drawn from cross-country evidence and case studies
  - Prioritize expansion of childcare facilities (including availability for ages 0-2) and policies that increase fathers’ uptake of parental leave, as these interventions appear most effective in raising fertility levels and reducing fertility cyclicality. Cash transfers should not be relied upon as a primary tool to boost fertility given limited cross-country evidence of effectiveness.

*International Monetary Fund (excerpt from content unit 1jpnea2024011)*

### 19.      Sustained economic growth is fundamentally important for supporting childbirth.  Our

### 1jpnea2024011 - 19.      Sustained economic growth is fundamentally important for supporting childbirth.  Our

### Fertility, economic growth, and childcare capacity
- Empirical analysis indicates that fertility rate growth is procyclical with respect to GDP growth, i.e., sustained economic growth plays a fundamental role in raising fertility rate.
- Expansion of childcare facilities for infants can help improve Japan’s fertility rate:
  - Availability of childcare facilities has improved in the past decade, but the waitlist remains relatively high for children aged 0-2.
  - Waitlist numbers may be underrepresented because children whose parents are on parental leave are excluded from the waitlist count; parents can extend parental leave beyond the standard one year to the maximum period of two years.
- A bottleneck to expanding childcare facilities is the shortage of nursery teachers:
  - Job-to-applicants ratio of nursery teachers is 3.1, which is more than double the national average of 1.4 as of January 2023.
  - Average salary of nursery teachers is about 17 percent lower compared with that of full-time employees.

### Policy recommendations to support childbirth through childcare and labor
- Maintain sound macroeconomic management to support continuous economic growth alongside policies targeted at raising fertility rates.
- Address staff shortages and expand availability of childcare facilities, particularly for infants, to:
  - Help mothers return to the workplace with limited impact on employment, career, and income prospects.
  - Alleviate women’s concerns about having children by providing reliable childcare options after birth.
- Attracting foreign workers (e.g., nursery teachers) could complement domestic measures to address labor shortages in childcare.

### Parental leave and incentivizing fathers’ involvement
- Recent policy actions:
  - In April 2022, authorities made it mandatory for employers to individually explain parental leave and relevant policies to employees.
  - In April 2023, a new requirement was set for companies (with over 1,000 full-time employees) to annually disclose the status of childcare leave.
- Current scheme features and limitations:
  - Japan’s “papa-mama parental leave plus” scheme expands the window for paid parental leave from one year to one year and two months if both parents take parental leave, but incentives for fathers to take paternity leave are limited because mothers can take paid leave for up to two years under certain conditions, regardless of the length of the father’s leave.
- Recommended design change:
  - Introduce a “daddy quota” or similar mechanism (as in Norway and Sweden) where the total household paid leave can be extended only when fathers take paternity leave, thereby incentivizing fathers to take longer paternity leaves and improve burden sharing of childcare and housework.

### Workstyle and labor market reforms to support fertility
- Workstyle reforms:
  - Further progress on workstyle reforms, including teleworking and flexible working hour arrangements, could support fertility and childcare arrangements by providing more flexible work for women and allowing men to share more housework.
  - Since 2013, work-style reforms and childcare service improvements have boosted female labor force participation, but many women opt for part-time jobs that under-utilize their skills due to inflexible full-time schedules and long working hours.
- Labor market reforms:
  - Reducing labor market dualism is essential. A substantial gender gap remains with a large share of female workers in non-regular and non-career track positions that have lower wages and limited career advancement.
  - Evidence from the IPSS survey:
    - Women under regular employment have a higher likelihood of returning to employment compared to those under non-regular employment.
    - Women in regular employment are more willing to have more children.
  - Policies encouraging more regular employment would help women continue career development, reduce financial concerns about having children, and contribute to raising the fertility rate.

### Data, methodology, and inequality context (selected findings)
- Data and scope:
  - Analysis uses Japan Household Panel Survey and Keio Household Panel Survey (JHPS/KHPS).
  - Survey is representative, conducted every year since 2004, with a total sample size of about 5,000 households.
  - Analysis focuses on data from 2010-19 (corresponding to survey waves 2011-20).
- Income composition and inequality metrics:
  - Wage income constitutes on average 70 percent of household income (S_w), followed by transfers which account for 20 percent in 2019.
  - Within wage income, regular wage income constitutes two thirds of wage income; the share of regular wage income in total income has increased over time while the share of nonregular wage income has remained broadly unchanged.
  - For the elderly population, transfers and capital income form relatively larger shares of income; regular wage income as a share of gross income is less than 8 percent.
- Trends in inequality:
  - On aggregate, household-level findings are consistent with macro indicators; household survey data provide a reliable representation of population trends.
  - Overall gross income inequality has marginally declined, with gross income inequality declining by 1.3 percent over the pre-COVID decade.
  - Market income inequality has increased by 1.7 percent over the same period.
- Income-source distribution:
  - Capital income is the most unequally distributed income component, followed by self-employment income (based on source Gini indices G_w).
  - Regular wage income and capital income are more concentrated among richer households (based on concentration coefficients C_w); transfers and nonregular employment are relatively more concentrated among lower-income groups and have somewhat redistributive effects.

*Source: Excerpt from the IMF chapter/paper text provided in the content unit.*

### 17.       T ransfers contribute to lowering

### 17.       Transfers contribute to lowering

### The Effects of Transfers
- Transfers are equalizing overall because, although unequally distributed (their respective Gini index is close to that of regular wage income), they are mostly concentrated amongst lower-income households; a marginal increase in transfers all else equal has an equalizing effect.
- In 2019, a 1 percent increase in income from transfers, all else equal, reduces inequality by close to 14 percent.
- In contrast, a 1 percent increase in regular wage income increases inequality by 12 percent, and a 1 percent increase in capital income increases inequality by 4 percent.
- The unequalizing effects of regular employment income and the equalizing effects of transfers have increased considerably over the years.
- Fiscal redistribution through social transfers reduced the Gini coefficient on market income by 33 percent in 2010 and by 37 percent in 2019 (this includes the impact of pension benefits).  
- Social transfers helped reduce the Gini coefficient on total gross income by 6 percent between 2010-19, largely because transfers became relatively more concentrated among lower-income groups over time.
- Pensions constitute close to 40 percent of the total transfers in the dataset.

- Progressivity of Transfers — Concentration Coefficients in 2019 (Japan vs OECD avg):
  - Total: Japan 0.10, OECD avg. 0.14
  - Pensioners: Japan 0.17, OECD avg. -0.06
  - Working-age: Japan 0.10, OECD avg. -0.07
- Interpretation: For the elderly the concentration coefficient is positive (including pension benefits linked to past income); for the working-age population most OECD countries have negative coefficients (progressive transfers), but Japan’s positive coefficient for working-age indicates weaker distributional impact on low-income households relative to other countries.

### Sources of Change in Gross Income Inequality (2010-19)
- Four key drivers identified:
  1. Changes in the age distribution (ageing of the population) — unequalizing.
  2. Changes in the labor market structure (increasing dualism) — unequalizing.
  3. Increase in labor force participation/employment of females and elderly — equalizing.
  4. Changes in the distributions of social transfers — equalizing.
- Aggregate effect: the equalizing impact of transfers and higher participation/employment of females and elderly marginally offset the negative impact of population ageing and increased labor market dualism.

### The Effects of Demographics
- Ageing increased overall income inequality:
  - The share of the population aged above 65 has increased by 10 percentage points over the last decade.
  - Elderly incomes are lower than average in part because many have no labor income; growing numbers widen income differentials between old and young.
  - Wage distribution is more unequal for older workers.
- Some of the ageing effect was offset by redistributive transfers and increasing labor force participation/employment of the elderly.

### The Effects of Female and Elderly Labor Supply
- Increased labor participation of females and elderly is equalizing.
- Between 2010-19 Japan added 2.9 million women and 3.5 million elderly (age 65 and above) to the labor force.
- Female and elderly labor force participation rates each rose by 6 ppt.
- Unemployment rate declined from 5 to 2.3 percent.
- These shifts increased employment income for previously non-participating groups and increased incidence of dual/multi-income households, making labor income more equally distributed.
- Resulting impacts: reduced the Gini index for market income among females by close to 5 percent between 2010-19, and among the elderly by 3 percent.

### The Effects of the Dual Labor Market Structure
- Increasing duality and barriers to full-time employment worsened market income inequality:
  - Overall wage inequality constitutes close to 80 percent of gross income inequality and 90 percent of market income inequality.
  - More than half of overall income inequality is associated with inequality in regular wages; its influence increased by 10 percentage points over time.
  - The average share of regular wage income in total gross income has grown and increasingly benefited higher-income households.
- Nonregular worker trends:
  - Share of nonregular workers rose from 33 percent in 2010 to 38 percent in 2019.
  - Part-time workers account for 70 percent of nonregular workers.
  - On an hourly basis in 2019, part-time workers were paid only 57 percent as much as full-time workers.
  - 70 percent of part-time workers do not receive bonus payments and 90 percent do not receive the lump-sum retirement benefit paid by firms.
- Consequences:
  - Declining hours of work among nonregular workers (partly driven by tax and social security benefit distortions that force second earners to reduce hours) and limited mobility widened the income gap between regular and nonregular workers.
  - Opportunities for career progression and training for nonregular workers are limited, enlarging the wage gap over time.
  - Dual labor market weakened the equalizing effects of higher female and elderly participation: 70 percent of employed females and 85 percent of employed elderly in 2010-19 worked in nonregular jobs.
  - Seniority-based wage systems and mandatory retirement push older regular workers into nonregular status, discouraging continued work and lowering productivity among those who stay.

### Alternative Data Findings
- Results may vary by dataset: some analyses (e.g., using Japan’s Family Income and Expenditure Survey) find capital gains (price of financial assets) benefiting richer households as a key driver of rising inequality.

### Policy Recommendations
- Reduce labor market dualism and improve labor mobility:
  - Laws to end discrimination such as ‘equal pay for equal work’ (implemented in 2020) are welcome but insufficient.
  - Address incentives for firms to hire non-regular workers (lower labor costs and greater flexibility).
  - Consider reforms such as a Single Open-Ended Contract for all newly hired workers combined with a model that balances flexibility and security.
  - Implement programs to increase skill training to enhance career prospects and mobility for nonregular workers.
- Continue boosting labor participation of females and the elderly and remove disincentives in social benefit policies:
  - Advance work-style reforms including flexible work arrangements such as telework to increase full-time employment among women and elderly.
  - Eliminate social security and tax distortions related to dependent spouses to allow voluntary increases in working hours.
- Better target existing social benefit programs to improve equality:
  - Given fiscal constraints, shift allocation of social spending to increase the share received by low-income households to help lower income inequality.

### Data and Methodology Notes
- The analysis uses a household-survey database (JHPS/KHPS) with 11 income categories (including segregation of annual employment income by type of employment, public and private pensions, interest and dividends, and others); household income is adjusted by household size.
- Decomposition methodology follows Shorrocks (1982), Lerman and Yitzhaki (1985), and Stark, Taylor, and Yitzhaki (1986): total Gini is expressed as the sum over components of share times concentration index; marginal effects of exogenous proportional changes in components are computed as described in the methodology box.

*International Monetary Fund — Japan country analysis (chapter excerpt).*

### 1.       Japan’s startup ecosystem has grown gradually in recent years, but with scope for

### 1jpnea2024011 - 1.       Japan’s startup ecosystem has grown gradually in recent years, but with scope for further expansion

### Overview
- Startups in Japan tend to be smaller compared with those in the United States (U.S.), China, and the United Kingdom, with a relatively lower number of unicorns with valuation above US$1 billion.
  - The number of unicorns in Japan stood at 7 in 2023, compared with 653 in the U.S.
  - The valuation of unicorns in Japan was about US$9.8 billion in 2023, compared with US$2 trillion in the U.S.
- Tokyo has emerged as a top 20 location for the VC ecosystem globally, with the largest share of startup funding in deep-tech research and development sectors.
- At the national level, Japan’s venture capital equity funding remains relatively small as a share of GDP compared with peers.
- The government supports startups through the “Startup Development Five-Year Plan” with three pillars:
  1. building human resources and networks for creating startups;
  2. strengthening funding for startups and diversifying exit strategies;
  3. promoting open innovation.
- The Japan Investment Corporation launched a 200-billion-yen venture growth fund in 2023 to support later stage startups and target early-stage startups beyond deep tech and life sciences.

### Stylized Facts: structure and funding patterns
- Geographic concentration:
  - Funding for startups in Japan tends to concentrate in the Tokyo metro area, accounting for about 80% of total funding.
  - Tokyo ranks as the third city in terms of fund value and relatively high in terms of deal value in PitchBook rankings.
- Industry composition:
  - Most startups operate in the information technology (IT) sector, followed by health care, and business products and services (B2B).
  - The share of startups in IT or SaaS appears somewhat higher in Japan than the global average.
  - CleanTech startups seem to be less prevalent in Japan than in the global sample.
- Investor origin and sector focus:
  - U.S. investors account for about 50 percent of investments in Japan’s startups between 2010 and 2023.
  - U.K. investors account for about 10 percent.
  - Japanese investors’ share declined to about 5 percent in recent years.
  - By sector, most capital is invested in IT and health care; recently there is a rise in capital in B2B and B2C startups.
- Corporate venture capital (CVC) prevalence:
  - Between 2015 and 2022, Japanese CVCs invested in at least half of all VC deals in Japan, peaking at 62 percent in 2020.
  - Most deals are in seed and early-stage VC, though the share of later-stage VC funding has increased in recent years.

### Aggregate country-level analysis: data and empirical strategy
- Data and coverage:
  - Constructed a cross-country aggregate database for 30 large advanced and emerging market economies.
  - Time coverage of the database is from 2000 to 2022.
  - Firm performance relies on PitchBook covering capital investment and firm valuations.
  - Macro and structural variables include GDP growth, inflation, firm dynamics, and entrepreneurship (share of self-employed who are employers).
  - Japan has a relatively low exit rate and low share of self-employed (who are employers) compared with other OECD countries.
- Estimation approach:
  - Panel regression with capital investment (mean) and valuations (mean) of firms (millions of U.S. dollars) as dependent variables.
  - Arellano-Bover/Blundell-Bond linear dynamic panel data estimator with robust standard errors.
  - Specification: Y_k,t = α + υ_k + δ Y_k,t-1 + φ' X_k,t-1 + ε_k,t.
- Key empirical findings:
  - A higher share of entrepreneurship (share of self-employed who are employers) is associated with higher capital investment in firms.
  - Better firm dynamism (higher entry rate) is associated with higher capital investment.
  - A higher share of entrepreneurship is associated with higher valuation of firms at the country level.
  - Better firm dynamism (higher entry and exit rates) are associated with higher valuation.
- Selected numeric/statistical details (as reported in tables):
  - Dependent variables: valuation (mean) and capital invested (mean).
  - Observations reported in tables: 1705, 01214334418 (as shown in source tables).
  - Coefficients and standard errors are reported in the source tables (see Table 1 and Table 2 in text).

### Firm-level analysis: sample, identification, and results
- Sample definition and coverage:
  - PitchBook provides detailed information on nearly 4 million companies globally, over 2 million deals, and 5,000 investors (as of end-2023).
  - Startups defined as companies less than 10 years old and backed by any early-stage funding at least once.
  - Final sample includes startups from 12 countries with largest coverage: Australia, Canada, France, Germany, India, Italy, Japan, Korea, Singapore, Spain, Sweden, and United Kingdom. (The U.S. is excluded due to data limitations.)
  - Data is cross-sectional as of end-2023.
- Empirical strategy:
  - Outcome variables (O_i): log of total patent documents, log of number of employees, and exit probability (via IPO or M&A) as reported by PitchBook.
  - Treatment variable (W_i): dummy = 1 if total capital raised per employee by startup i is above the country-industry median, 0 otherwise.
  - Controls (X_i): firm age and number of employees (number of employees omitted when it is the outcome).
  - Endogeneity handling: treat W_i as endogenous; instrument with Z_i = (i) total number of active investors, (ii) years since first funding, (iii) years since last funding.
  - Matching: coarsened exact matching by country, industry, age, and number of employees.
- Main firm-level results (global sample):
  - Well-funded startups have higher total patent documents, are larger, and have higher exit probabilities (via IPO or M&A).
  - Predicted magnitudes:
    - Well-funded startups are predicted to have 1.5 times more employees compared to non-well-funded startups.
    - Well-funded startups have a 43 percentage points higher probability of exit compared to non-well-funded startups.
  - Evidence of endogeneity: p-value of the χ2 statistic for cov(ε_i, O_i) = 0 is strongly rejected in most specifications.
  - Auxiliary regression: number of active investors, years since first funding, and years since last funding significantly predict whether a startup is well-funded.
- Japan-specific findings:
  - Results hold qualitatively for the Japan sample.
  - For Japan, the impact of availability of funding on the number of patents is larger and more precisely estimated.
  - Estimated impacts on other outcome variables for Japan do not seem materially different from the global sample.
- Selected numeric results from tables (as reported):
  - Global table: Well-Funded coefficient on log(patent docs) = 0.744* (standard error 0.408); on log(# employees) = 1.540*** (0.171); exit probability = 43.848*** (1.774).
  - Japan table (treatment variable = Well-Funded): Well-Funded coefficient on log(patent docs) = 3.443*** (0.283); on log(# employees) = 0.848*** (0.173); exit probability = 51.863*** (3.026).
  - Auxiliary regressions: # Active Investors coefficients (global) statistically significant (for example, 0.033*** on log(patent docs)); Years since first funding and Years since last funding show significant effects with reported signs and standard errors in source tables.
  - Observations: global sample 1,854; Japan sample 302 (as shown in tables).
  - Chi2 p-values for rho=0 reported as 0.3280000 (global) and 0 (Japan) in source tables.

### Risk-taking culture and heterogeneity
- Augmented model includes country-level cultural proxies from Hofstede (2013):
  - Uncertainty avoidance: a society’s tolerance for uncertainty and ambiguity.
  - Power distance: how much a society delegates power to authority and accepts unequal power distribution.
- Findings:
  - The positive impact of availability of funding on startup exit is higher in countries that reward risk-taking behavior.
  - Specifically:
    - The predicted impact on IPO exit is higher in countries with less uncertainty avoidance.
    - The predicted impact on M&A exit is higher in countries with less power distance.
- Table 5 in source provides detailed estimates relating risk culture to exits.

### Caveats and data limitations
- Cross-sectional data as of end-2023 prevents tracking startup performance following specific funding rounds.
- Survivorship bias: data includes surviving startups as of end-2023; firms that exited before end-2023 are not observed.
- The analysis focuses on availability of funding and does not assess cost, conditionality, or investor type heterogeneity due to data limitations.
- Identification relies on within country-industry variation, which sharpens identification but may overlook cross-country or cross-industry variation.
- The analysis does not determine whether private equity funding complements or substitutes other financing types (e.g., debt).

### Policy implications (summary of implications discussed)
- Strengthen entrepreneurship and firm dynamism to support higher capital investment and valuations:
  - Policies that increase the share of self-employed who are employers (entrepreneurship) are associated with higher capital invested and valuations.
  - Policies that raise firm entry and exit rates (firm dynamism) are associated with higher capital invested and valuations.
- Support later-stage financing to foster larger startups and potential unicorn creation:
  - Public funds and targeted initiatives (for example, the 200-billion-yen venture growth fund launched in 2023) can support later-stage startups to scale.
- Encourage diverse investor participation and international investor engagement:
  - U.S. and U.K. investors have played large roles; evolving the domestic investor base could change funding dynamics.
- Consider cultural and institutional reforms that encourage risk-taking:
  - Countries with lower uncertainty avoidance and lower power distance see larger impacts of funding on successful exits.
- Leverage corporate VCs while promoting a balanced mix of funding stages:
  - Corporate VCs (CVCs) are important in Japan (at least half of VC deals between 2015 and 2022; peak 62 percent in 2020), especially in seed and early stages; expanding later-stage funding may help startups grow larger.

*International Monetary Fund (chapter content as provided in source PDF).*

### 19.      In line with international experience, our results highlight the importance of equity

### 1jpnea2024011 - 19.      In line with international experience, our results highlight the importance of equity

### Equity funding and startup exits
- Key message: Better access to equity funding is crucial for startups to grow, innovate, and exit successfully. Angel or venture capital investment provides private equity financing at early stages and offers value-added services (for example, operational and market insights).
- Regression results (preserving layout and values as reported):
  - Country Characteristic: Uncertainty Avoidance | Power Distance
    - Dependent Variable: Successful Exit
      - Well-Funded 46.022*** 48.184***
        - (1.484) (1.412)
      - Well-Funded * Country Characteristic -1.617 -4.376***
        - (1.671) (1.138)
      - log (# employees) 11.999*** 12.090***
        - (0.459) (0.428)
      - log(age) -3.198** -3.230**
        - (1.452) (1.463)
      - Observations 1,854 1,854
      - chi2 - p-value (rho=0) 00
    - Dependent Variable: MA Exit
      - Well-Funded 16.574*** 11.204***
        - (4.084) (2.660)
      - Well-Funded * Country Characteristic -5.241** 2.344
        - (2.178) (1.957)
      - log (# employees) 4.293*** 4.221***
        - (0.446) (0.459)
      - log(age) -3.943*** -4.065***
        - (1.266) (1.388)
      - Observations 1,854 1,854
      - chi2 - p-value (rho=0) 0.003600 .00285
    - Dependent Variable: IPO Exit
      - Well-Funded 40.367*** 48.153***
        - (3.285) (2.244)
      - Well-Funded * Country Characteristic 2.514 -7.293***
        - (3.479) (1.496)
      - log (# employees) 8.005*** 8.158***
        - (0.755) (0.706)
      - log(age) -0.920 -0.680
        - (2.123) (2.072)
      - Observations 1,854 1,854
      - chi2 - p-value (rho=0) 00

- Interpretation points drawn from the results:
  - Being "Well-Funded" is strongly and positively associated with Successful Exit, MA Exit, and IPO Exit across specifications (coefficients reported above are statistically significant at conventional levels as indicated by asterisks).
  - Interaction terms (Well-Funded * Country Characteristic) show heterogeneous effects by cultural dimensions (Uncertainty Avoidance, Power Distance), with some interactions negative and statistically significant and others positive or not significant, indicating country-characteristic-specific variation in how equity funding translates into exits.
  - Firm size (log (# employees)) positively correlates with exit outcomes; firm age (log(age)) tends to correlate negatively with exit outcomes in several specifications.

### Labor market flexibility and entrepreneurship
- Findings and recommendations:
  - A more flexible labor market is crucial for entrepreneurship and innovation.
  - A gradual shift away from the lifelong employment system could encourage talented individuals to set up startups and to have a second chance in case they fail.
  - Reducing labor-market dualism, encouraging merit-based promotions, and facilitating more job mobility can encourage entrepreneurship, which is associated with higher capital investment and firm valuations at the country level.

### Firm dynamism and resource reallocation
- Findings and recommendations:
  - Greater firm dynamism—dynamic firm entry and exit and reduced personal liabilities—can encourage entrepreneurship, innovation, and more efficient allocation of resources.
  - A gradual reduction of zombie firms could help improve the allocation of capital and labor to more productive ventures, boosting productivity and growth.

*International Monetary Fund — JAPAN (chapter excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1jpnea2024011.pdf_