Japan's Digitalization Can Add Momentum for Economic Rebound

IMF News, June 1, 2022

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By Piyaporn Sodsriwiboon, Purva Khera, and Rui Xu
June 1, 2022
The Japanese economy is recovering from the pandemic as related uncertainty and supply constraints subside and consumption gradually rebounds.

Growth will accelerate to 2.4 percent this year, the fastest in 12 years, and maintain nearly the same pace next year, according to our latest economic projections in April.
Our recent assessment credits strong policy support and high vaccination levels.
Pent-up consumer demand will help support the expansion.
Near-term risks:
- The war in Ukraine following a continuing pandemic pose substantial risks to the near-term outlook.
Longer-term headwinds:
- Aging and shrinking population.
- Stagnant productivity growth.
- Major climate change risks.

Digitalization could provide additional growth momentum.
Despite being one of the world’s biggest users of industrial robots and home of a major electronics industry, Japan lags other economies in adoption of digitalization by:
- Businesses (for example, continued reliance on legacy IT systems).
- Government.
- The financial sector.
Pandemic-era weaknesses:
- Many employers struggled to shift to remote work, reducing economic output and sapping productivity.
- Paper-based procedures hindered government responses, delaying the 2020 emergency cash program that aided consumers.
- Adoption of cashless payments and e-commerce have lagged.

Lawmakers abolished most of the authorization of documents by Hanko seals (personalized ink stamps) to pivot to electronic signatures and allow digitalizing administrative procedures.
The Digital Agency was established in September under the cabinet to speed digitalization of central and local governments and the private sector.

Faster digital transformation with government support would boost productivity and growth.
Design policy support to mitigate potential harm for unskilled workers to ensure an inclusive transition.
Priorities for accelerating adoption of digital financial services:
- Enhance public trust by augmenting financial and digital literacy.
- Improve connectivity between different cashless payment platforms.
- Strengthen data privacy, consumer protection, and cybersecurity.

Digitalization will be most effective when combined with other growth-enhancing reforms to address demographic headwinds.
Labor supply and inclusion:
- Bring more female, older, and foreign workers into the labor force.
- Increase training and career opportunities for those without lifetime employment, who are mostly women, to raise productivity and wages.
Other reforms:
- Better corporate governance.
- Reduced regulation to boost productivity and investment.

The study suggests a profound economic transformation built on significant green investments and more reliance on carbon pricing would further support a recovery from the pandemic.
Japan’s commitment to achieve carbon neutrality by 2050 is an important and positive step.

Together, digitalization, labor and governance reforms, and a green transition can help Japan make the most of pandemic disruptions to lift productivity and economic growth.

International Monetary Fund