IMF proposes mutually reinforcing policies to help restore Japan's economic vitality

Thursday, August 02, 2012
Washington/Tokyo: There is a Japanese proverb that has it: "Knocked down seven times, get up eight."  

In a display of its resilience, Japan is getting up once again after the devastating earthquake and tsunami of a year ago.  But the world's third largest economy still faces multiple challenges, and in latest assessment of the country's economy, the Japanese mission team at the International Monetary Fund has proposed a range of mutually reinforcing policies to strengthen confidence, raise growth and help restore Japan's economic vitality. 

A year and four months ago, Japan was reeling from the Great East Japan earthquake and accompanying devastation.  As well as the tragic loss of life, the economy was badly shaken.  Supply chain disruptions brought production in parts of Japan to a virtual halt. Yet, since then, the country has shown its resilience, with reconstruction contributing to strong first quarter growth of 4¾ percent.

But despite this hopeful sign, all is not well. A contentious debate over how to address the large and growing public debt has occupied the political center stage. Deflation continues to affect economic activity, euro Area turmoil is casting clouds on growth prospects, and the appearance of an army of office workers in "cool biz" attire is a reminder of continuing energy shortages. Against this backdrop, the IMF conducted its regular health check of the world's third largest economy.

Following that annual checkup, and in response, Fund staff are proposing a virtuous circle of positive, integrated policies: well-designed fiscal adjustment plans to strengthen confidence, and structural reforms to raise growth and support central bank actions to end deflation. Indeed, an end to deflation would help fill fiscal coffers and support activity, and so on.

The first order of business is to put Japan's fiscal house in order. Net debt has increased ten-fold since 1990 and—at 130 percent of GDP—is the highest of any advanced economy. Over the same period, social security spending has risen from 10 to 22 percent of GDP while associated revenues have remained flat.

Jerald Shiff
Deputy Director, IMF Asia-Pacific 
Jerald Shiff, Deputy Director of the IMF Asia and Pacific Department, who is also Mission Chief for Japan, says "the fiscal reform in Japan needs to deliver a very large adjustment over the next decade of about 10 percent of GDP and it needs to do that in a way that's supportive of growth and also seen as fair by the Japanese population."

To address that, Schiff said "there's a lot of room for increases in the consumption tax even beyond what's being currently contemplated," and "a lot needs to be done to reform the pension system."

Increased debt and social security spending threaten fiscal sustainability, but also place an enormous burden on the young. 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.

Economic impact of the country's demographic change is a concern too. Schiff says: "Japan has the most rapidly aging population in the world and that will have profound implications on the economy for years to come.  The aging population and the declining birthrate are leading to a smaller labor force, and that tends to depress growth even when productivity is rising."

"That's why we think it's important for Japan to do more to get women into the labor force and get older workers into the labor force," he added.
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