The Organization for Economic Cooperation and Development urged Japan on Wednesday to implement bold structural reforms to boost economic growth and map out a “credible” plan to restore its precarious fiscal health.
Noting that the nation’s aging population is likely to weigh on economic growth in the longer term, the OECD recommended that Prime Minister Shinzo Abe’s government slow the pace of decline in the labor force by taking measures such as increasing female employment.
In its latest report, the Paris-based club of 34 wealthy nations said Japan’s economic growth “resumed” in late 2014, although it was hurt by the 3-percentage-point consumption tax hike to 8 percent in April that year — the first tax increase in 17 years.
But the rapid demographic shift toward an older population has pushed down the nation’s potential growth rate to around 0.75 percent, and gross government debt, driven by rising social spending, stands at 226 percent of gross domestic product, the highest in the OECD, it said.
“Fundamental structural reforms . . . urgently need to be stepped up to raise output growth, which is essential for fiscal consolidation and improved living standards,” the organization said.
To increase the number of female workers in a bid to sustain the labor force, the OECD said it is necessary to expand child care and reform the tax and social security systems that it says reduce work incentives for “second earners.”
In addition, the OECD said the central government should improve the entrepreneurial climate to increase investment in ventures, while reducing government financial support for small and midsize firms that are not viable to help push them out of the market.
In a bid to promote fiscal rehabilitation, the organization said, Abe’s administration should try to raise revenues by carrying out tax hikes and make efforts to curb expenditures by reforming the country’s pension and medical systems.
OECD Secretary-General Angel Gurria, who is visiting Tokyo, said after the release of the report that Japan should increase the consumption tax rate to 10 percent as scheduled in April 2017 and further afterward.
The government may face difficulties in garnering public support, but it is “so important to consolidate the fiscal situation” to avoid leaving a burden for future generations, Gurria said at the Japan National Press Club.
The central government has committed to turning the primary balance into a surplus by fiscal 2020. A deficit in the balance means the nation cannot finance government spending other than debt-servicing costs without issuing new bonds.
As improvement of the balance is viewed as a critical first step toward fiscal consolidation, the OECD called on Japan to clarify how it aims to achieve the fiscal rehabilitation goal.
On the monetary policy front, it put pressure on the Bank of Japan to maintain its aggressive credit easing until the central bank attains its 2 percent inflation target, saying: “Two decades of sluggish growth and persistent deflation have reduced Japanese living standards below the OECD average.”
Regarding whether Japan should take part in a planned Chinese-led investment bank, Gurria only said each country should decide on the issue at its own discretion.
Late last month, Tokyo decided not to join the China-led Asian Infrastructure Investment Bank by the deadline set by Beijing for accepting founding members, citing concerns about governance standards and the screening process for providing loans.
The OECD releases policy recommendations to Japan around once every two years.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.