OECD Survey: Reforms Important to Create New Drivers of Growth for Japan

For Japan to continue its recovery, economic reforms must be put in place to create new drivers of growth, states the Organisation for Economic Cooperation and Development (OECD) following the release of its “Economic Survey of Japan 2009” yesterday.


The OECD says that, in the context of the global economic crisis, the Japanese economy has fallen into its deepest recession of the post-war era. According to the organisation, output is projected to contract by around 6% in 2009, reflecting a plunge in exports and tighter financial conditions. Prompt action by the authorities to stabilise financial markets, cut the policy interest rate and implement large-scale fiscal stimulus is cushioning the blow and sets the stage for a mild recovery, against the backdrop of a projected sluggish rebound in world trade. With deflation entrenched, the Bank of Japan should keep the policy interest rate close to zero, says the OECD.


In the survey's executive summary, OECD notes that as the stimulus packages fade and fiscal consolidation begins, sustaining the expansion will depend increasingly on private domestic demand, which requires economic reforms to create new drivers of growth. The organisation stresses that reforms in the labour market, where rising dualism has constrained wages and private consumption, and the non-manufacturing sector, where productivity gains lag far behind manufacturing, are especially important.


According to the survey, policy reforms in the following areas are also needed for robust and sustainable growth:


Stabilising the financial market and improving its efficiency. According to the OECD survey, emergency measures to steady the financial market and promote credit flows are proving effective. OECD says that as an economic recovery takes hold, these measures should be phased out to limit their distortioning effects while improving the regulatory architecture to further reduce banks’ equity holdings, enhance the transparency of securitised products and markets and improve the quality and fairness in the rating process of credit rating agencies. “Reforms to increase efficiency and overcome chronic problems, notably the low profitability in the banking sector, particularly in regional institutions, are a priority to support Japan’s growth potential,” notes the OECD.


Achieving progress in fiscal consolidation. The crisis and the stimulus packages are projected to boost the budget deficit to 10% of GDP in 2010 and gross public debt to 200%, calling for a detailed and credible medium-term fiscal consolidation plan to sustain the confidence of financial markets. Once a recovery is in place, such a plan should be implemented to put the public debt ratio on a downward path, says the OECD. This will require reversing the upward trend in spending, focusing on cuts in public investment. “Additional revenues are also necessary, in part to finance the planned improvement in social welfare programmes. Revenue should be increased through a comprehensive tax reform that also limits the negative impact on economic growth,” stresses the OECD.


Reforming health and long-term care. The health-care system has contributed to outstanding health outcomes in Japan while keeping expenditures below the OECD average. However, rapid population ageing and the plan to improve social welfare programmes will put upward pressure on health spending, says the OECD survey. Thus, the OECD stresses, it is important, particularly in light of the difficult fiscal situation, to introduce efficiency-enhancing reforms to shift long-term care out of hospitals to less expensive institutions and home-based care, expand the use of generic drugs and promote healthy ageing.


Addressing global warming. Despite the launch of a wide range of policies, greenhouse gas emission have risen, indicating the need to introduce more binding, market-based mechanisms to achieve its targets for 2020 and 2050 in a cost-effective manner. OECD says that Japan should shift from its voluntary emissions trading system to a mandatory system that covers the entire economy, including transport, drawing on the lessons from other countries and Japan’s voluntary system. In addition, the emissions trading system should be linked to those in other countries and Japan should make greater use of a well-functioning Clean Development Mechanism as it is already relatively energy-efficient. Policies to promote the development of renewable energy sources in the short run should be based on transparent and efficient instruments.

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