METI-RIETI Symposium

Next Actions for the Japanese Economy in Recovering from the 3.11 Disaster (Summary)



About a year has passed since the Great East Japan Earthquake. While reconstruction work is fully in progress, Japan is facing significant issues including a fiscal deficit, appreciation of the yen, and the consequential hollowing-out, deflation, and restriction on electricity use. On the other hand, the international community is raising expectations for the revitalization of the Japanese economy as the reeling of the world's financial market mainly resulting from the European governments' debt crises and the decrease in external demand from emerging markets are slowing down the growth rate. This symposium--with the participation of Yukio Edano, Minister of Economy, Trade and Industry, Angel Gurria, Secretary-General of the Organisation of Economic Co-operation and Development (OECD), and four other panelists--discussed the paths Japan should take to achieve reconstruction and future economic growth from such perspectives as the development of new industries and markets utilizing innovation, public finance, and financial policies.

Address by the Minister

EDANO Yukio (Minister of Economy, Trade and Industry (METI))

Two structural stalemates in the Japanese economy have resulted in a feeling of entrapment. One is the stalemate in corporate strategy and industrial structure. Advanced countries including Japan are competing with emerging nations with standardized mass production capabilities, and Japan has now slipped into a downward spiral of continued shrinking through wage cuts and price reductions. The other stalemate is in the employment structure. With the end of consistent growth backed by population increases, the conventional employment model based on "lifelong full-time employment, placing priority on male workers" is reaching the limits of its usefulness. The sense of unfairness between regular and non-regular employees may result in less incentive to work. Last year's Great East Japan Earthquake further highlighted these stalemates and has reminded us that overcoming them is a pressing issue.

At the meeting of the Industrial Structure Council on April 23, I suggested that changing the future economic and industrial policy from "growth for the sake of growth" to "growth that ensures benefits to all people" is absolutely essential and proposed a social economic vision composed of an "economic growth vision" and a "social vision to respect individuals' abilities."

The "economic growth vision" calls for developing new types of demand--maximizing Japan's matured sensibility and technology and harnessing demand from domestic and global markets based on the pursuit of a more enriched life, rather than a quest for material wealth. Companies that have aggressively expanded their business overseas have also increased employment in Japan. Localization and differentiation are to be sought in Asia and other markets targeting their volume zones and the affluent sectors of their populations. By creating new industries, we should shift the Japanese industrial structure into a "Yatsugatake mountain range" industrial structure type, consisting of multiple profit generators.

The "social vision to respect individuals' abilities" seeks to realize an economy in which each citizen participates in value creation according to his or her respective circumstances and abilities and in which benefits can be enjoyed. If a broad middle class stratum can be formulated, the level of per capita national income can be maintained and increased even while experiencing a population decline. The keys to success include utilizing diversified human resources such as women, elderly people, and foreigners, as well as cultivating innovation. Fostering human resources which can lead to innovation and are active internationally is essential. A smooth shift in the structure of labor is also necessary. The Ministry of Economy, Trade and Industry estimates that new industries will require about 10 million workers, and that two million workers will be required to change their jobs in the coming decade. Employment of women and elderly people and continuing re-education opportunities for adults will also be expanded.

The final policy decisions will benefit from discussions in the symposium and proposals by the OECD.

Keynote Speech "Revitalizing the Japanese Economy: The way forward"

Angel GURRIA (Secretary-General of the OECD)

Currently, the global community as a whole is facing challenging times, with the economies of both developing and developed countries in fragile states. With unemployment levels being unacceptably high and inequalities increasing around the world, the need for durable and sustainable growth is becoming more critical. To realize this, we need a strong Japan.

Japan is in an especially dire situation, having experienced a massive earthquake that caused a destructive tsunami and nuclear accidents a year ago. Not only is the country dealing with the consequence of global crisis but also the tremendous reconstruction challenges resulting from the Great East Japan Earthquake.

The Organisation for Economic Co-operation and Development (OECD) welcomes and supports Prime Minister Noda's "Strategies to Revitalize Japan," of which the first component is a nationwide effort of reconstruction and the second is to achieve both economic growth and fiscal health. Changes in the social security system accompanied by tax reform such as doubling the consumption tax rate will ensure financial sustainability.

The "Strategies to Revitalize Japan" call for implementing and enhancing the New Growth Strategy that was established in 2010, particularly with regard to increasing global economic integration and green growth. Compared to other OECD countries, Japan is still relatively isolated from the global economy because of the low levels of foreign goods, capital, and people flow into the country. The New Growth Strategy aims to increase these levels by encouraging economic partnership agreements (EPAs) with key trading partners. Japan's decision last November to participate in the discussions for a Trans-Pacific Partnership (TPP) is a major step forward to an economic strategy based on the concept of "Made by Japan" rather than "Made in Japan." Another of its goals is to generate new demand that would equal 50 trillion yen, more than 10% of the GDP, through the development of green technologies.

Our "Skills Strategy" to be released in May shows that human capital is a key for innovation and productivity. Japanese productivity per hour as a whole is about 30% below that of the average of the top half of OECD countries. There should not be such a discrepancy, given that approximately 43% of the total population has a higher education degree, which is second highest among OECD countries. What Japan needs to do is refine its education system and, more importantly, use its demographics to its advantage.

Although education in Japan is outstanding as it is, there are always things that can be done to make it even better. For example, an investment in early childhood education pays off because better educational outcomes earlier in life lead to improved performance later on. Also, stronger competition and greater internationalization in universities should be encouraged more. In addition, the cooperation among universities, the government, and research institutes needs to be strengthened. This would result in a greater contribution to innovation by higher education.

The last element that can contribute remarkably to the revitalization of Japan is an increased participation of women in the workforce. Because of the rapid aging of the population, the number of working-age individuals will drop by nearly 40% by 2050. Right now, of the non-regular workers in Japan, 70% are women. Thus, one objective of the New Growth Strategy is to increase the employment rate of women in the 25-44 age bracket from 66% in 2010 to 73% by 2020.

But how can Japan make employment more attractive to women? To start, the income inequality needs to be addressed. Of the OECD countries, Japan has the second largest wage gap between men and women of equal competencies and skills, behind only Korea. Greater efforts should also be made to introduce policies that will enable women to balance work with family life, and childcare should be improved and made more affordable. Furthermore, the tax and social security systems that discourage secondary wage earners in families have to be reformed.

Women though are not the only segment of the population who are being under-utilized; older workers, too, should be used to their full potential. This can be done through more flexible employment and wage systems that allow the elderly to continue working.Attracting highly skilled foreign workers could be another way to limit the impact of a shrinking Japanese labor force on the country's long-term growth potential. However, before turning to very active immigration policies, use the talent and the capacities of every able hand in Japan.

By optimizing its key strengths, including its position as a global leader in research and development, Japan can turn today's challenges into opportunities for a better tomorrow. Japan should not look at this time as one in which it is overcoming problems, but rather as a time in which it is changing its course, making the necessary adjustments, and increasing its speed in order to continue growing in medium and long term. We the OECD look forward to joining forces with Japan in this historic moment.

Panel Discussion

Moderator: NAKAJIMA Atsushi (Chairman, RIETI)

Increasing Interest Payments

FUKAO Mitsuhiro (Program Director, RIETI/ Professor, Faculty of Business and Commerce, Keio University)

The current interest cost of the national debt amounts to some seven trillion yen, which is equivalent to 1.5% of GDP. Despite the increasing net government debt, interest payments have remained relatively stable for a long time as a result of declining interest rates on public debt. In the future, nevertheless, as the effect of refinancing at lower interest rates has finished and the government debt is expected to increase further, the interest cost will grow rapidly. With the long-term interest rate expected to rise to approximately 1.5% from the economic recovery in a few years, Japan's interest payments will increase to nearly 15 trillion yen, equivalent to 3% of GDP, in 10 years. This additional interest cost corresponds to the revenue expected from a three percentage point increase in the consumption tax rate. Even with the planned rise in the consumption tax rate from the current 5% to 10%, 60% of the change would be wiped out by this.

Even assuming a stable government spending-to-GDP ratio excluding the interest payments, achieving a surplus in the fiscal balance would require the consumption tax rate to be at least 25%. Therefore, it is necessary to consider other funding sources such as an environment tax.

Another important issue for Japan is to respond to the declining potential growth rate due to the decreasing population. It is desirable to accept the greater presence of foreigners who are fluent in the Japanese language and understand Japanese culture. A model example is the response being taken by the Nihon Sumo Kyokai (Japan sumo association) where highly successful foreign wrestlers who speak Japanese actively participate in sumo.

Considering the Management of Fiscal Risks

KOBAYASHI Keiichiro (Senior Fellow, RIETI/ Professor, Institute of Economic Research, Hitotsubashi University)

Mr. Nakajima mentioned that fiscal reconstruction would require a consumption tax rate of 25%. Another estimate states that a 35% consumption tax rate is required (Hansen and Imrohoroglu). Applying this estimate to the income tax, it would translate into a required rate of 60%. Neither of these figures is realistically feasible, but they demonstrate that fiscal reconstruction cannot be achieved without a drastic reform of the taxation system.

Hansen and Imrohoroglu (2011)
Tax on Labor Income Necessary for Fiscal Sustainability
Tax on Labor Income Necessary for Fiscal Sustainability

We are moving into a situation in which financial catastrophe crisis management scenarios must be seriously considered. At the same time, to realize long-term economic growth, we need such measures as the public sector's support for overseas investment and absorption of foreign exchange fluctuation risks. We should also consider possibly developing an insurance system for countries facing financial catastrophe risks to manage debt collectively.

The population is aging regardless of the fiscal situation. Apart from the immigration policy, if the nursing care services industry is made more capital-intensive through technological innovations (for example, introducing nursing robots), it would initiate development of a new advanced industry in Japan.

From Economic Growth to Better Lives: Diversification and multipolarization of sources of economic growth

HARAYAMA Yuko (Deputy Director for Science, Technology and Industry, OECD)

The OECD, which commemorated its 50th Anniversary last year, has a new vision: Better Policies for Better Lives. In the future, not only economic growth but also the improvement of the quality of life will be our core emphasis. In the background of this shift is the recognition that the conventional economic and social system or model is reaching its limitations--that of the division of roles between public and private sectors or between center and periphery, that of the government's vertically-segmented administrative system, and that of conventional policy tools or fiscal and financial policies seeking economic growth. With this recognition as a starting point, we need to consider what we should be doing from now on. This is an issue not only for Japan but also commonly for OECD countries.

Sources of economic growth are becoming diversified and multipolarized. It is also necessary to consider value creation through global value chains, and not country by country within their national borders. To consider where to position our country and how to do the steering are part of the "new" industrial policies.

We not only need to review our existing policies but also reexamine the production and consumption structure, on which rest the current policy tools, to find ways for institutional and structural reform.

What I would like to suggest as a step forward is the introduction of social experiments and diversified decision making. Another issue is to seek how to improve social welfare at the national and eventually international levels. A smart city is an attempt of such social experiments. In any case, we should not be inward-looking.

Moving out of the Vicious Cycle

KADONO Nario (Director, Industrial Structure Policy Division, Economic and Industrial Policy Bureau, METI)

The Japanese economy had already been in a crisis situation prior to the Great East Japan Earthquake. While the surge in the prices of natural resources is driving up import prices, export prices are stagnating, tossing Japan about from the price competition with other Asian countries. Companies without value-creating capability have no other choice than to conduct "business management based on patience." Declining wages are negatively affecting the household sector and causing sluggish consumption, thereby accelerating deflation. The vicious cycle of a shrinking economy is continuing.

The Great East Japan Earthquake redeveloped the awareness of the two stalemates of traditional corporate strategies and industrial structure and of employment structure. I would like to propose two approaches to break these stalemates.

The first approach is to transform corporate strategies and realize products that "sell even with high prices" and a model to create value. Important perspectives in this approach are developing markets for growing areas including healthcare, new energy, and creative industries, and enhancing value-creating capability of value chains.

The second approach is the reinforcement of human resources. In addition to utilizing women, the elderly, and the young in new growing industries, shifting professions from the production process and labor positions to specialized engineering, management, and services positions will be necessary. Keeping such challenges in mind, we must make progress with policy issues including the fostering of entrepreneurs and the global human workforce, smooth transfer of human resources, and promotion of diversity.

Structural Factors of the "Shrinking Economy" Structural Factors of the "Shrinking Economy"


Nakajima: Japan's fiscal deficit problem is associated with the issue of social security expenditure. How should we deal with it?

Fukao: We have to restrict social security expenditure because there is concern that public finance might lose public confidence at some point as a result of possible perpetuation of trade deficits and, in some circumstances, current-account deficits due to the aging population. We need to curb the social security expenditures by taking such measures as raising the pension eligibility age and introducing income tests for social security benefits.

Nakajima: What should be the approaches to recovery from the earthquake that can lead to revitalization of the Japanese economy as a whole?

Kobayashi: We have no other choice but to expand the potential for growth with technological innovations. Green innovation to solve the energy issue and gerontechnology in response to the aging society will lead to development of new growth industries. In considering recovery from the earthquake, we should focus on reconstructing "human lives" rather than "things and localities." Recovering the localities of the Tohoku region, which had long been depopulated, to their previous states would not necessarily be the best approach.

Nakajima: What kind of structural reform does Japan need?

Harayama: Japan is plagued with a host of challenges. From an alternative perspective, Japan is in a position to utilize such issues for developing next-generation social models and exporting business models worldwide. Also, while innovation is certainly important, systems or services that utilize the technologies also need to be considered together with people at work sites. Furthermore, we need to match the technological innovation with public needs.

Nakajima: What are the specific measures to develop human resources for innovation and high value-added services?

Kadono: In addition to regulation reform and promotion of model businesses, support of private-sector businesses responding to social issues and needs such as healthcare, nursing care, and welfare as well as childcare support. We just submitted a bill reflecting such ideas to the Diet.

Nakajima: What is the priority measure for Japan to take?

Fukao: We need to raise taxes in a way that will not weaken the economy. One option is to raise the indirect taxes such as the consumption tax and the carbon tax gradually while decreasing the payroll tax for social security contributions.

Kobayashi: We should ask not only people who will receive pensions in the future but also those who are already receiving them to share the burden. There is an estimate that by raising the elderly's medical copayment to 30%, the same proportion as that of the younger people, the required consumption tax rate can be lowered from 30% to 20%. Speaking of nuclear power technology, regardless of the issue of maintaining or abolishing nuclear power generation, we need to maintain the technology from the perspective of contributing to global nuclear security.

Harayama: It is important to identify and visualize specific examples and promote them worldwide.

Kadono: Diversity will become extremely important. Collaborations between diverse individuals will provide sources for innovation.