The Japanese economy is in its best shape in a decade thanks to buoyant external demand, the progress in restructuring the corporate sector and economic reforms. Output has increased at an annual rate of more than 2 per cent since 2002 and 3¼ per cent excluding the negative contribution from the public sector. The pace of growth has been sufficient to boost employment during the past year and reduce the unemployment rate from its record...

This chapter discusses the key challenges facing the Japanese economy. Although the current expansion is encouraging, there are a number of problems that will make it difficult to sustain growth over the medium term and ensure rising living standards. Five key challenges are addressed in this chapter: i) bringing an end to deflation, which has negative implications for growth, and further rehabilitating the banking sector to sustain the expansion; ii) ensuring fiscal sustainability in the face...

This chapter discusses the factors driving the current expansion and the economic outlook. Despite risks, such as rising oil prices and slowing demand in China, the upturn is projected to continue at a more moderate pace through 2006, helping to bring an end to deflation. The Bank of Japan should continue its quantitative easing policy until inflation is sufficiently high to make the risk of renewed deflation...

This chapter discusses the deterioration in the fiscal situation and measures needed to restore fiscal sustainability in the light of future pressures for increased spending, notably from rising interest payments and the social security system. The government’s Medium-Term Economic and Fiscal Perspective should be improved to meet these challenges. Preventing a hike in the risk premium calls for a more credible...

This chapter discusses policies to improve fiscal relations between levels of government so as to better meet the needs of citizens while increasing the fiscal discipline of local authorities. It analyses a number of problems, including regulations that limit innovation and accountability at the local level, the inefficient system of intergovernmental grants and the complex structure of local taxes. The chapter concludes that it is essential to improve local governments’ ability and incentives...

This chapter discusses problems in the labour market, particularly the factors boosting the share of non-regular workers, such as part-time and temporary employees. While this enhances employment flexibility and reduces labour costs, increasing dualism creates both efficiency and equity concerns. A comprehensive approach, including relaxing the high degree of employment protection for regular...