The Journal The Authority on Global Business in Japan

In late February, economist Randall Jones, of the Organisation for Economic Co-operation and Development (OECD), addressed a luncheon held by the Japan Structural Reform Task Force of the American Chamber of Commerce in Japan.

Jones, who is head of the Japan/Korea Desk at the OECD, touched on Japan’s economic prospects for 2016, the future of Abenomics, and the importance of structural reform for Japan’s long-term economic viability.

First came a whirlwind summary of the state of the global economy, in which Jones noted that global growth projections had been revised down 0.3 percentage points this year, in part due to a weak recovery in advanced economies. He then turned his attention to Japan.

Following exchange rate depreciation under Abenomics, Japanese exports were quite strong between the first quarter of fiscal 2013 and the fourth quarter of fiscal 2015.

This was promising, he said, particularly in light of the previous 20 years through 2012, when Japanese exports had been losing global market share. Industrial production had peaked in 2014, he added, and since had shown no increase.

What should drive economic growth this year, Jones continued, are record high profits and company cash holdings—in addition to labor shortages.

“You would expect companies to invest more and increase pay for their employees, while trying to get more labor by offering higher wages to attract people from outside the workforce,” he explained.

However, in part due to a lack of wage growth in Japan, private consumption during the first quarter of calendar year 2016 was at about the same level as it had been in 2012. “Last year, we had wage growth of 1 percent in real terms, and minus 1.2 percent in consumption,” Jones noted.

This meant households spent less than they earned, and therefore should be in a position to spend more in 2016. The consumption tax hike proposed for April 2017, moreover, should cause demand for consumer durables—the intended target—to increase before it comes into effect.

Business investment is also expected to be strong this year, he added.

Over the long term, Jones said the major challenges facing Japan were how to promote faster growth and ensure fiscal sustainability. At its peak in the early 1990s, Jones noted, Japan’s potential growth rate was around 3 percent.

But that had fallen to less than 1 percent in 2014, which was due to aging, he said. Labor productivity had likewise fallen—from 2 percent to 1 percent over the same period.

As for productivity, Jones recalled a well-known saying by the 2008 winner of the Nobel Prize in Economics and prolific writer Paul Krugman: “Productivity isn’t everything, but in the long run, it is almost everything.”

While Japan is often thought of as being high-tech, productivity here, Jones said, was about 25 percent less than that of the top 17 OECD countries between 1991 and 2013.

An influx of new innovative firms and a comparable exit of non-viable ones—in addition to a diffusion of cutting-edge tech from large corporations to small and medium enterprises—should drive productivity, he added.

Jones touched on a number of other structural changes that ought to be implemented here, such as enhancing the role of entrepreneurship, venture capital financing, and inward foreign direct investment.

He also proposed reform of the services industry and effective implementation of Abenomics’s third arrow, which would boost productivity.

Speaking to The Journal after the event, Jones said the key takeaway was that, when examined in per capita terms, and taking into account population change, Japan still holds vast promise.

Through enacting key reforms and better use of the country’s assets—which include a highly educated workforce—Japan has great potential that is yet to be realized.

John Amari is a writer and editor from the UK who specialises in articles on startups, entrepreneurs, science and tech and business.
The major challenges facing Japan [are] how to promote faster growth and ensure fiscal sustainability.