This Survey is published on the responsibility of the Economic and Development Review Committee (EDRC) of the OECD, which is charged with the examination of the economic situation of member countries.The economic situation and policies of Japan were reviewed by the Committee on 4 March 2019. The draft report was then revised in the light of the discussions and given final approval as the agreed report of the whole Committee on 2 April 2019.The Secretariat’s draft report was prepared for the Committee by Randall S. Jones and Haruki Seitani, with contributions from Andrés Fuentes Hutfilter, under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel and Secretarial assistance by Sisse Nielsen.The previous Survey of Japan was issued in April 2017.

Growth has strengthened but Japan faces long-term challenges Output growth is projected to continue at a moderate paceJapan needs a detailed and concrete plan to ensure fiscal sustainabilityReducing obstacles to employmentRaising productivity is important to offset the impact of falling labour inputsBoosting well-being by improving the environment and slowing climate change

The current expansion, which began in late 2012, is now the longest in Japan’s post-war history, though not its fastest. Output growth picked up from an annual pace of 0.5% over 1997-2012 to 1.3% since Abenomics was launched (Figure 1, Panel A). At the same time, persistent deflation has been replaced with positive, albeit low, inflation, helping boost nominal growth to 1.7%. On a per capita basis, output growth has converged toward the rate for the OECD area (Panel B). Moreover, output per working-age population has risen significantly along with the employment rate. Labour productivity growth, however, remains sluggish.

This Annex reviews actions taken on recommendations from the 2017 OECD Economic Survey of Japan that are not covered in tables within the main body of the Key Policy Insights chapter. Recommendations that are new in this Survey are listed in the Key Recommendations box and at the end of the thematic chapters.

Fundamental reform of traditional Japanese labour market practices is essential to cope with rapid population ageing and the era of 100-year lives. A shift to more flexible employment and wage systems based on performance rather than age would enable Japan to better utilise its human capital. Abolishing the right of firms to set mandatory retirement – typically at age 60 – would enable employees to extend their careers and reduce the link between wages and seniority. It would also facilitate a further increase in the pension eligibility age above 65, thereby helping to reduce poverty among the elderly. Life-long learning is another key element to extending careers. It is also crucial to address a range of issues that discourage the employment of women, namely the lack of work-life balance and shortages of high quality and affordable childcare and long-term care for the elderly. Fighting discrimination and gender stereotypes is also important to allow women to assume greater leadership roles. Coping with population decline also requires pursuing recent efforts to increase the role of foreign workers in Japan. Breaking down labour market dualism is crucial to expand employment opportunities for women and older people, while reducing income inequality and relative poverty.

Japan’s fiscal situation, with gross government debt of 226% of GDP in 2018, is the highest ever recorded in the OECD area, and places the economy at risk. The government now aims to achieve a primary surplus by FY 2025. Additional fiscal consolidation, based on a detailed plan covering specific spending cuts and tax increases, is necessary to put the government debt ratio on a downward trend in the face of rapid population ageing. This is a very difficult task and a stronger fiscal framework would help keep policy on track to achieve fiscal targets. Controlling social spending requires making better use of healthcare resources, in part by reducing overinvestment in hospitals and increasing the use of generic drugs. Another priority is ensuring the sustainability of local government spending, in part by reducing costs through the joint provision of local public services and infrastructure across jurisdictions and the development of compact cities in the context of depopulation in many parts of Japan. Increased revenue should come primarily from hikes in the consumption tax rate, which is among the lowest in the OECD. In addition, disincentives to employment in the tax and benefit system should be removed, as sustained economic growth is crucial to ensure fiscal sustainability.