Japan must now go for growth!

Japan must now go for growth!

Its GDP per capita is stuck at 20% below that of the upper half of the advanced OECD countries. Its labor productivity remains 25% below. Its government debt is well over 200% of GDP. And it has a very rapidly aging and now-declining population.

This is why the world is waiting with bated breath for Prime Minister Abe to launch the third arrow of Abenomics!

What are some of the issues?

Japan's agricultural sector is the country's least efficient sector, with protection in the form of producer support being more than double the OECD average. Indeed, Japan is one of a few OECD countries that gives outrageous support to their agricultural sectors. Some 56% of Japanese farm receipts now come from government support, imposing enormous burdens on consumers and taxpayers -- as with Korea's 54%, Norway's 63% and Switzerland's 57%.

This is in stark contrast to OECD countries which have efficient agricultural sectors and give low support, namely, United States 7%, Australia 3%, Chile 3%, and New Zealand 1%. Even leading emerging countries give low support to agriculture, like the cases of China 17%, Indonesia 21%, Brazil 5% and South Africa 3%.

The problems of Japanese agriculture – in particular low productivity and the prevalence of part-time farmers and small plots have been evident for the past 50 years. In the absence of fundamental reform, Japanese agriculture will continue to wither, trapped in a cycle of low productivity, low earnings and dependence on subsidies and import protection. The average age of Japanese farmers is 66, which is symbolic of the sector's lack of youthful dynamism!

The time for agricultural reform is now. A more open and market-oriented sector would also facilitate participation in comprehensive regional and bilateral trade agreements, like the Trans Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP).

Japan's service sector also has very low productivity. It is weakly globalized, and receives high protection against international competition. Japan is thus not a major player in international services trade like finance, education or business services. Moreover, competition should be strengthened in key domestic service industries like retail, energy, transport, and public services such as education and healthcare.

Even Japan's world-renowned manufacturing sector is now being challenged by the rise of competitors in Korea, Taiwan and China. While Toyota still tops the global automobile league, it must now compete with Hyundai. Japan's once powerful electronics companies now struggle on international markets, having been overtaken by Apple and Samsung. Japan is now lagging in the global innovation race, and ranks well behind Hong Kong, Singapore and Korea in the Global Innovation Index, and is not very far ahead of China.

So what are the main policy requirements for Japan to "go for growth"? What should be the main elements of the third arrow of Abenomics?

Here are some of the main issues:

Doing business

It is imperative to remove all unnecessary regulations that make it difficult to do business, and that reduce competition, especially in the services sector. The World Bank ranks Japan only 24th (out of 185 economies) in the world in terms of the ease of doing business, well behind economies like Singapore (ranked 1st), Hong Kong (2nd), US (4th), Korea (8th), Australia (10th), Malaysia (12th), Taiwan (16th), and Thailand (18th). Indeed, Japan scores very poorly for starting a business (114th in the world), dealing with construction permits (72nd), and registering a property (64th). These factors are an unnecessary break on entrepreneurship.

Foreign investment

It is also necessary to open up to foreign investment and competition. Of all the advanced OECD countries, Japan has the most restrictive policies for foreign direct investment according to a recent OECD study, only exceeded by non-OECD countries like India, Jordan, Indonesia, Saudi Arabia and China! It is thus not surprising that Japan has one of the world's lowest stocks of inward foreign investment. It represents just 3% of GDP, even lower than its Asian neighbors with worse policies, like China (10% of GDP), Indonesia (22%) and India (12%).

International trade

Japan must make decisive steps towards freer trade. This means: scaling back agricultural protection and shifting its composition away from price support to direct support for farmers; and substantial deregulation of the services sector. It also means making serious efforts to join free trade agreements like the TPP, RCEP, and the much discussed possible FTA between China, Japan and Korea.

Taxation

Japan needs to improve the efficiency of its tax system. With the highest corporate tax rate among OECD countries, a narrow base and the OECD's lowest consumption tax rate, Japan's tax system lowers the country’s growth potential. The government should implement its proposal to hike the consumption tax rate as planned, while broadening the income tax bases and further reducing the corporate tax rate.

Labor markets

Japan now has a dual labor market, with some 38% of Japanese workers having an irregular job, meaning short-term or temporary contracts. This is more than double the percentage of 20 years ago. This reflects employers' need for flexibility and competitiveness in the context of globalization and rapid technological change. But it is also costly, as irregular workers receive much less training, and have lower productivity, and while most may jobs, they don't have careers that provide for development and advancement.

Japan needs a new social contract, based on a comprehensive approach. It should include improving the social insurance coverage and upgrading training programs for irregular workers, and preventing discrimination against them. It should also include reducing effective employment protection for regular workers to order to increase labor market flexibility and human capital. Such reforms would increase equity across different segments of the labor force.

Gender issues

It is critical to give Japanese women greater opportunity to participate in the world of work. They women have made great strides in education. Today, young women in Japan are more likely to have a university degree than young men: 59% of women and 52% of men aged 25-34 years have a degree, compared with 23% and 32 %, respectively, for women and men aged 45-54.

But increased female education performance has not yet led to gender equality in the labor market. The female labor force participation rate aged 25 to 54 is the sixth lowest among the OECD's 34 member countries.

The current labor force participation rates are 84% for men and 63% for women. In this regard, achieving gender parity in labor force participation would increase Japan's GDP by almost 20% over the next 20 years.

The gender pay gap at median earnings is the second highest in the OECD and increases with age. For younger workers the gender pay gap is 15%, and it increases to around 40% for those over 40. Japanese women have great difficulty to rise to the top and less than 5% of listed company board members in Japan are women, one of the lowest proportions among OECD countries.

Difficulties with reconciling work and family commitments help explain the relatively poor female labour market outcomes in Japan. Drawing more women into the labour force requires removing financial disincentives to work, creating more family-friendly workplaces and increasing the availability of childcare. Also, Japanese men do little to help their spouses with care commitments. They rarely take parental leave and the long working-hours culture helps explain why, of all men in the OECD, Japanese men spend the least time in unpaid housework (just 59 minutes per day).

Migration

Japan is in desperate need of increased migration. Its current migrant population is only 2.2 million (1.7% of total population), much lower than Australia 28%, Canada 21%, and the US 14%, and even lower than France, Germany and the UK which each have 12%.

Experience shows that a well-designed and -managed selective migration policy can fill gaps in the labor market, boost innovation through social diversity, and be an important source of entrepreneurship.

English language proficiency

Japan must make much greater efforts to improve its English language proficiency, which, according to a 2005/2006 TOEFL test, is the worst in Asia -- even worse than in North Korea! The costs of Japan's inability to communicate in the global language are enormous -- from being a handicap in international business, making it a difficult destination for international students and tourists, and cutting it out of the global conversation in the physical and social sciences.

Concluding comments

The quest for economic growth has been going out of fashion, as many economists and other commentators focus on the manifold dimensions of well-being and happiness. But growth is still very important, especially as poverty and inequality are rising in all of our societies. Economic growth also provides the means to address environmental and social problems. And in Japan, the quest for growth is even more important in light of its very rapidly aging and now-declining population.

Prime Minister Abe, the world is waiting for you!

AUTHOR

John West
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com