Japan Stands Up
IMF Blog, August 1, 2012
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- Authors: Jerry Schiff
- Published: August 1, 2012
Resilience and recent performance
- Japan showed resilience after the Great East Japan earthquake and tsunami of a year ago; reconstruction contributed to strong first quarter growth of 4¾ percent.
- Challenges remain: large and growing public debt, persistent deflation, euro Area turmoil affecting growth prospects, and energy shortages affecting behavior (e.g., “cool biz” attire).
Rising debt and fiscal challenges
- Net debt has increased ten-fold since 1990 and—at 130 percent of GDP—is the highest of any advanced economy.
- Social security spending has risen from 10 to 22 percent of GDP while associated revenues have remained flat.
- Demographic burden on younger households: a typical household with head aged between 20 and 29 can expect to make net resource transfers to the government of 16 years of their income over a lifetime.
- Fund staff view putting Japan’s fiscal house in order as the first order of business to restore confidence and fiscal sustainability.
Lessons from Europe and the need for credible adjustment
- Once investor confidence is lost, regaining it is difficult; even with low bond yields and no imminent crisis, a credible medium-term adjustment plan is critical.
- The recent passage by the lower house of parliament of a doubling of the consumption tax to 10 percent by 2015 is an important step and a strong statement of purpose.
- Adjustment without growth is unlikely to succeed; Japan’s potential growth has been depressed by a shrinking labor force and weak investment, and adjustment may weigh on near-term growth.
Policies to raise potential growth — “A more dynamic Japan”
- Fiscal adjustment can be designed to encourage growth by enhancing incentives to work and invest. Possible measures include:
- Combining a higher consumption tax rate with a rise in the retirement age—in line with increased longevity.
- Corporate and payroll tax cuts.
- Elimination of distorting tax deductions.
- Increasing women’s labor force participation:
- Japan’s women’s labor force participation is currently among the lowest in advanced economies.
- Policy levers include tax reform and deregulation of day and long-term care.
- Increasing integration with regional markets:
- Japan lags in inward and outward FDI but is increasingly integrated into the region (examples: new auto facilities in Indonesia; expanded financial activity throughout Asia).
- Participation in the Trans-Pacific Partnership and other free trade agreements would strengthen integration and provide positive spillovers to Asia (as noted in a forthcoming 2012 IMF Spillover Report).
- Financing growth and reorienting the financial system:
- The financial system is sound but could better support growth.
- Venture capital and financing for start-ups lag badly, while less dynamic SMEs receive guaranteed loans.
- A reorientation of public policy is needed to channel financing toward dynamic firms and start-ups.
Integrated policy strategy and outlook
- Fund staff propose a virtuous circle of positive, integrated policies:
- Well-designed fiscal adjustment plans to strengthen confidence.
- Structural reforms to raise growth.
- Central bank actions to end deflation.
- Ending deflation would help fill fiscal coffers and support activity, reinforcing fiscal and growth objectives.
- Japan has historical capacity to reinvent and revitalize itself and can do so again.
Source: Japan Stands Up, Jerry Schiff, August 1, 2012.
Content in this bundle
- 立ち上がる日本; ジェラルド・シフ; iMFdirect ブログ 2012年8月1日掲載
- Country Report
- Country Report