OECD’s Tough Love For Abenomics


Abenomics can still succeed, but Japan faces an uphill struggle in reversing two decades of falling living standards. That was the verdict from the OECD’s latest economic survey of Japan released Wednesday, which had some familiar themes for Pacific Money readers.

Launching the survey in Tokyo, OECD Secretary General Angel Gurria said Japanese Prime Minister Shinzo Abe’s administration had succeeded in restoring economic growth, with the Paris-based economic organization forecasting expansion in the nation’s gross domestic product (GDP) of 1 percent this year and 1.4 percent in 2016 – similar to the International Monetary Fund’s (IMF’s) latest forecasts of 1 percent and 1.2 percent growth, respectively.

Gurria said the three arrows of Abenomics – expansionary monetary and fiscal policy along with structural reform – were “bearing fruit,” with GDP rebounding after the “tough but necessary step” in 2014 of hiking the consumption tax. Wages for 2,000 large firms increased by an average of 2.3 percent in the latest labor-management negotiations, and aided by falling oil prices, Japanese households should enjoy “significant gains” in disposable incomes due to low inflation.

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However, with the world still struggling to recover from the global financial crisis and trade growth “yet to reach cruising speed,” Gurria said there was “no room for complacency” in reviving the world’s third-biggest economy.

“Domestically, Japan needs to raise productivity to spur growth, to ensure better living standards and to make the government debt burden sustainable,” he said.

In 2013, nominal GDP was about 6 percent below its mid-1990s level, with relative per capita income now 14 percent lower than the average for the top half of OECD nations. From over 3 percent in the early 1990s, Japan’s potential growth rate has slowed to an estimated 0.75 percent last year, requiring a major lift in productivity.

“Ambitious structural reform – the third arrow of Abenomics – remains crucial if real GDP growth is to move towards the government’s target of 2 percent during the coming decade,” he said.

“Since 1990, labor productivity in Japan has been stuck at less than three quarters, when compared to the average of the top half of OECD countries…such a large gap is surprising in a country with so much innovation potential and such rich human capital,” he added, noting Japan’s high educational rankings and large research and development investment.

According to a recent McKinsey study, doubling productivity growth could expand GDP growth to around 3 percent, giving the economy a potential $1.4 trillion boost by 2025.

Womenomics’ ‘Triple-Win’

But with forecasts showing Japan’s working-age population could drop nearly 40 percent by 2050, Gurria said Tokyo should do more to support female workers.

“For example, the female labor participation rate is still 20 percent below that of men, one of the biggest gender gaps in the OECD. The gender pay gap at median earnings is 27 percent, the third highest in the OECD, and only 2.1 percent of listed company board members are women, the second lowest in the OECD,” he said.

“Helping more women have careers can be a ‘triple-win’: stronger growth, less inequality, and a more manageable government debt burden.”

Should the female participation rate be boosted to match that of men, Japan’s labor supply would only decline by 5 percent by 2030, according to the OECD, which also called for measures to attack more foreign workers.

Gurria backed Abe’s “Womenomics” initiative, which targets women occupying 30 percent of leadership positions by 2020, as well as increasing childcare places. Japan’s current spending on after-school care is only about a third as much as such countries as Britain and Sweden as a share of GDP, with only 38 percent of women staying in the labor force after giving birth.

But he also called for measures to tackle labor market “dualism,” in which women make up 70 percent of “non-regular” workers, which are paid around 60 percent less than their “regular” counterparts.

As well as an increased labor force, Gurria said Japan could also benefit from the birth of more enterprises.

“OECD analysis shows that firms less than five years old accounted for less than a fifth of total non-financial business employment, but they generated half of all new jobs in the OECD over the decade to 2011. In Japan, however, the firm birth rate is so low that three-quarters of small firms are more than 10 years old, compared to less than half in most OECD countries,” he said.

He called for greater encouragement for entrepreneurship and innovation, as well as measures to enhance corporate governance, promote labor market flexibility and foster more venture capital.

The secretary general had a warning though for Abe, saying a “detailed and credible fiscal plan is essential to maintain market confidence” in the face of an expanding budget deficit, currently around 8 percent of GDP, with net public debt at 129 percent. As well as measures to curb welfare spending, such as increasing the pension eligibility age and shortening hospital stays, Gurria called for tax hikes to aid government coffers.

“The hike in the consumption tax to 10 percent, which was postponed until 2017, should be implemented as planned. Even at 10 percent, the rate will remain about half the OECD average! Further revenues could come from raising the consumption tax closer to the OECD average, as well as broadening the personal and corporate income tax bases and increasing environmental taxes,” he said.

The OECD also supported the Bank of Japan’s war against deflation, stating that falling prices had been a headwind to growth and had exacerbated the fiscal situation by reducing nominal GDP.

In a recent IMF research article, the fund’s Asia-Pacific director Changyong Rhee said Abenomics could still succeed if it made “steadfast progress on all three of its arrows equally and simultaneously. Otherwise, it could face “an undue weakening of the yen” and potentially negative spillovers to Japan’s neighbors and the world economy.

Rhee attributed three key structural changes to Japan’s recent challenges, comprising an aging population, production offshoring at the expense of domestic investment and exports, and a fragmented labor market. By firing all three arrows of Abenomics, Tokyo could overcome these negative structural headwinds, thereby helping to “rekindle animal spirits and stimulate productivity growth.”

However, “as we have seen recently in Europe, fiscal consolidation without faster growth is unlikely to succeed,” he warned, stating that the third arrow of structural reforms “are pivotal for both the near-term and longer-lasting success of Abenomics.”

But with Japan analysts such as Naomi Fink giving the third arrow just a 40 percent chance of success, Abe’s administration has its work cut out for itself. As Japan prepares to assume the G7 presidency in 2016, Gurria said he hoped to support a “fruitful relationship” as Abenomics tackled its long list of targets.

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