Presentation of the 2019 OECD Economic Survey of Japan

2019 OECD ECONOMIC SURVEY OF JAPAN Meeting the challenges of population ageing and high government debt Tokyo, 15 April 2019

www.oecd.org/eco/surveys/economic-survey-japan.htm

OECD Economics OECD

Growth has been more robust but major challenges remain ď ą Japan has achieved faster growth during the past six years: o Real GDP growth in per capita terms has been close to the OECD area.

o Job creation has been strong, particularly among women.

ď ą Japan faces the intertwined challenges of rapid population ageing and high government debt. o A declining working-age population is creating labour shortages.

o The rising number of elderly puts upward pressure on public spending. o The government’s fiscal position remains in deficit. o Labour productivity and per capita income are well below leading OECD economies.

2

Per capita output growth has accelerated 1.8 1.6

Japan

OECD

1.4 1.2 1.0 0.8

0.6 0.4 0.2 0.0

1997-2012

2012-18

Note: Annual average percentage change in real GDP on a per capita basis.

Source: OECD Economic Outlook (database).

3

Japan’s population will still be the oldest in the OECD in 2050 Per cent 90 80 70 60 50 40 30 20 10 0 KOR

2017

USA

CAN OECD GBR

2050

FRA

DEU

ITA

JPN

Note: Population aged 65 and older as a share of the population aged 20 to 64.

Source: OECD Demography and Population database.

4

The labour force will decrease Millions 70

Millions 70 65

65

60

60

55

55

50 45 40

Observed Constant entry/exit rates Delayed retirement Closing the gender gap Delayed retirement and closing the gender gap 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

50 45 40

Note: The baseline assumes constant labour market entry and exit rates by gender for each five-year age group. In the “delayed retirement scenario”, exit rates are reduced for both men and women by 10% for each five-year age group between the ages 55 and 74. In the “closing the gender gap” scenario, the participation rates for women converge to those for men in each five-year age group.

Source: OECD projections based on data from the OECD Population and Labour Force Projections database.

5

Elderly-related spending will rise further

Per cent of GDP 25

Per cent of population 50

Elderly-related social spending (left scale) Share of the population age 65 and older (right scale) 20

40

15

30

10

20

5

10

0

2020

2025

2030

2035

2040

2045

2050

2055

2060

0

Source: Cabinet Secretariat et al. (2018); Fiscal System Council (2018); Ministry of Internal Affairs and Communications; and OECD calculations.

6

The government debt ratio is the highest in the OECD

B. G

A.Gross government debt

Per cent of GDP 250 Japan 200

United States

OECD

Greece

150

100

50

0 1990

1995

2000

2005

2010

2015

19

1990

Note: Gross government as a percentage of GDP. OECD estimates for 2018.

Source: OECD Economic Outlook database.

7

The Bank of Japan’s holdings of government bonds are large As a per cent of GDP, at the end of 2018¹ 100 80 60 40

0

LUX LVA LTU SWE IRL USA SVK FIN NLD AUT DEU BEL SVN FRA PRT GBR ITA ESP JPN

20

1. March 2019 for Japan, January 2019 for the United States and November 2018 for Sweden.

Source: OECD Economic Outlook database.

8

Fiscal consolidation beyond 2025 is necessary to stabilise government debt Per cent of GDP

Per cent of GDP

600

600

No improvement in the fiscal balance Primary balance is achieved in 2025 but no further consolidation follows Primary balance is achieved in 2025 and further consolidation of 5.0% of GDP over 2026-35

500

500

400

400

300

300

200

200

100

100

0

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

0

Source: OECD calculations based on OECD Economic Outlook No. 104 through 2020, Cabinet Office projections through 2027 (using the “Economic Growth Achieved Case�, which implies real growth of more than 2% and nominal growth of more than 3% a year in the first half of the 2020s) and government assumptions for growth, spending and interest rates through 2060.

9

Living standards and productivity are well below leading OECD countries Japan relative to the top half of OECD countriesยน Top half of OECD = 100 120

Top half of OECD = 100 120

Labour inputs

110

110

100

100

90

90

Per capita income 80

80 Labour productivity

70

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

70

1. Per capita GDP using 2010 prices and PPP exchange rates. Labour productivity equals GDP per hour of labour input.

Source: OECD Economic Outlook database.

10

Sustaining labour inputs in the face of rapid population ageing

11

Fundamental reform of Japan’s traditional labour market practices is needed • Around 80% of firms set a mandatory retirement age of 60: abolish the right of firms to set mandatory retirement.

• Wages are closely linked to seniority: increase the importance of job position and performance in wage setting.

• Lifetime (or long-term) employment is still prevalent: facilitate mid-career mobility.

In sum, a shift to more flexible employment and wage systems based on performance rather than age would enable Japan to better utilise its human capital, including women and older persons.

12

Most firms have kept their mandatory retirement age at 60 The mandatory retirement age set by companies Per cent 100

Per cent 100

80

80

60

60

61 to 64

60

65 and over

40

40

20

20

0

0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Ministry of Health, Labour and Welfare, General Survey on Working Conditions, 2017.

13

Japan’s wage system remains closely linked to seniority Wage profile for male lifetime employees, 20-24 age group = 100 A. Large firms

B. Medium firms

C. Small firms

300

280

280

260

260

260

240

240

240

220

220

220

200

200

200

180

180

180

160

160

160

140

140

140

120

120

120

100

100

100

300 2016

280

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

2006

20-24 25-29 30-34 35-39 40-44 50-54 55-59 60-64

20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

300

Source: Japanese Ministry of Health, Labour and Welfare, Basic Survey on Wage Structure (2006, 2016).

14

Raising the pension eligibility age would increase pension benefits and reduce poverty among the elderly Per cent

Future pension benefits as a percentage of pre-retirement income

100

Per cent 100

80

60

60

40

40

20

20

0

0

GBR MEX POL AUS CHL IRL JPN SVN DEU USA KOR NZL CAN CHE NOR CZE BEL LVA EST OECD GRC SWE FIN HUN FRA SVK ISR ISL TUR ESP PRT LUX AUT ITA DNK NLD

80

Note: For full-career average-workers under current legislation.

Source: OECD (2017), Pensions at a Glance 2017: OECD and G20 Indicators.

15

Skills of older workers are well below those of younger workers Index of literacy skills (30-34 age group = 100)

Index 105 Japan

Germany

OECD

United States

Index 105 United Kingdom

100

100

95

95

90

90

85

85

30-34

35-39

40-44

45-49

50-54

55-59

60-65

Source: OECD (2018), Working Better with Age.

16

30 20

0

TUR GRC MEX ITA CHL ESP KOR OECD POL SVK BEL FRA HUN LUX IRL USA ISR PRT SVN CZE AUT AUS JPN GBR FIN LVA CAN EST DEU DNK NOR NLD NZL SWE CHE ISL

10

The gender employment gap is close to the OECD average

B. The gender gap in employment rates in Japan has narrowed to the OECD average Male employment minus female employment rate in 2018Q3ยน Male employment raterate minus female employment rate in 2018

Percentage points 40

Percentage points

35 30 25 20 15 10

0

SWE FIN NOR LVA ISL ISR EST CAN DNK PRT BEL FRA LUX SVN DEU CHE NLD NZL GBR AUT AUS USA IRL ESP POL SVK CZE HUN JPN OECD ITA KOR CHL GRC MEX TUR

5

C. The share of women working part-time in Japan is relatively high

Source: OECD Gender database.

Per cent 60

Percentage of women 15-64 in labour force in 2017 17

50

The gender wage gap is the third highest in the OECD Difference between median earnings of men and women divided by median earnings of men who are full-time employees Per cent 35

30 25 20 15 10

0

LUX BEL GRC SVN ITA DNK TUR NOR NZL HUN POL FRA ISL IRL MEX ESP LTU SWE OECD NLD AUS PRT CHE SVK DEU CZE AUT FIN GBR CAN USA ISR CHL LVA JPN EST KOR

5

Source: OECD Gender database.

18

Japanese women are under-represented in leadership positions and certain professions Per cent 50

A. Female share of managerial employment All ages, 2019

B. The share of doctors who are women in Japan is the lowest in the OECD 2017 or latest year available

Per cent 80

45

70

40

60

35 30

50

25

40

20

30

15

20

10

10 0 JPN KOR USA LUX TUR ISL AUS CHL CHE ISR BEL ITA CAN GRC IRL MEX NZL FRA DEU AUT GBR OECD SWE NOR DNK NLD ESP CZE PRT HUN POL SVK FIN SVN LTU EST LVA

0

KOR JPN TUR LUX CZE CHL DNK NLD ITA DEU GRC FIN ESP AUT ISL OECD FRA SVK BEL ISR PRT CHE CAN IRL GBR AUS MEX EST NOR HUN LTU SWE NZL POL SVN USA LVA

5

Source: OECD Gender database.

19

10

10

5

5

Japanese women spend much more time in household work than men

LTU LVA EST HUN NOR SWE SVK LUX CHE DNK SVN FIN NLD DEU CZE ESP CAN USA ITA PRT AUT POL FRA GBR BEL IRL ISR AUS OECD NZL CHL ISL JPN KOR GRC MEX TUR

0

0

B. Japanese women spend much more time in household work than men Gender gap in minutes spent per day on unpaid work, female minus male, 15-64 year-olds

Gender gap in minutes spent per day on unpaid work, female minus male, 15-64 year-olds Difference in minutes spent Difference in minutes spent 250 250 200

150

150

100

100

50

50

0

0

SWE DNK NOR CAN FIN BEL EST FRA DEU USA GBR SVN NLD NZL LVA POL OECD AUT AUS HUN ESP GRC IRL ITA KOR JPN TUR PRT MEX

200

C. The share of Japanese men taking parental leave is lowยน

Source: OECD Gender database.

Per cent 90 80 70

Per cent 90 Women

80 70

20

Non-regular employment is concentrated among women B. Per cent of women aged 15 and above

A. Per cent of men aged 15 and above 100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0 15-24

25-34

35-44

45-54

55-64

65 and above

Regular Non-regular Self-employed and other

0

15-24

25-34

35-44

45-54

55-64

65 and above

Source: Ministry of Internal Affairs and Communications, Labour Force Survey, Basic Tabulation, 2017.

21

Japan needs to make greater use of foreign workers % of total population 50

Share of the foreign-born population

40

30

20

10

0

Source: OECD (2018), Education Policy in Japan: Building Bridges towards 2030.

22

Policy recommendations to make the most of Japan’s human resources •

Abolish the right of firms to set a mandatory retirement age and reinforce legislation against age discrimination.

•

Break down dualism through a comprehensive strategy to reduce employment protection for regular workers, in part by setting clear rules on dismissal of workers, and expanding social insurance coverage and training for non-regular workers.

•

Flatten the seniority wage curve by enforcing the equal pay for equal work provision in the work style reform.

•

Raise the pension eligibility age above 65 and expand employment opportunities for older persons to reduce elderly poverty.

•

Improve lifelong learning by making it more relevant, including for older workers, and addressing the time and financial constraints that limit participation.

•

Strictly enforce the new 360-hour annual limit on overtime hours and raise penalties on firms that exceed it to improve work-life balance.

•

Focus on reducing the waiting list for childcare so that mothers are not forced to leave the work force.

•

Strengthen measures to prevent discrimination against women in education and employment.

•

Reform tax-benefit systems so that both parents have broadly similar financial incentives to work.

•

Provide programmes to help foreign nationals adjust to Japan, including through education.

23

Policies to ensure fiscal sustainability in the face of a shrinking and ageing population

24

A primary deficit is projected to continue through FY 2025 under current polices Per cent of GDP 1.0 Baseline (around 1½ per cent annual nominal growth rate) 0.5 High growth (more than 3% annual nominal growth rate)

Per cent of GDP 1.0 0.5

0.0

0.0

-0.5

-0.5

-1.0

-1.0

-1.5

-1.5

-2.0

-2.0

-2.5

-2.5

-3.0

-3.0

-3.5

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

-3.5

Note: Government projections in January 2019. It assumes that the hike in the consumption tax rate from 8% to 10% is implemented as planned in 2019. The primary balance is central and local governments, as a percentage of GDP on a fiscal year basis.

Source: Cabinet Office (2019).

25

Health and long-term care spending has increased Health and long-term care spending increase between FY 2000 and FY 2016 Trillion yen 16

Trillion yen 16 14 12 10

14

Total

12

Ageing

10

8

Total

6 4

6 Increase in cost per person

2 0 -2

-4

8

Revision in medical fees

Increase in recipients

4

Increase in cost per recipient

0

2

-2 Healthcare

-4 Long-term care

Source: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; and OECD calculations.

Long-term care spending increase between FY 2000 and FY 2016

26

There is room for healthcare cost savings In 2017 or latest year available Number of doctor consultations per capita per year

Share of private expenditure on outpatient care (%)

Average total hospital stay1

Average hospital stay for acute care1

Total number of hospital beds2

Number of acute-care beds2,3

Number of long-term care beds2,3

Number of beds in long-term care facilities2

Japan

12.8

16.9

28.5

16.3

13.1

7.8

2.7

6.5

OECD average

7.4

31.7

8.4

6.6

4.9

3.7

0.7

7.6

Highest country

17.0

59.7

28.5

16.3

13.1

7.8

4.8

12.9

Lowest country

2.8

12.4

3.8

4.0

1.5

1.5

0.0

0.7

1. In days.

2. Per 1 000 population.

3. In hospitals.

Source: OECD Health Statistics database.

27

Excess hospital beds leads to higher hospitalisation costs Per capita hospitalisation cost by prefecture, 2016ยน Thousand yen 12.4

Thousand yen 12.4

12.2

12.2

12.0

12.0

11.8

11.8

11.6

11.6

11.4 -20

-10

0

10

20

11.4 30 40 50 Hospital beds in excess of FY 2025 benchmark (%)

1. The vertical axis shows the natural log of a thousand yen. A gap of one unit corresponds to 100% difference.

Source: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; and OECD calculations. .

28

The use of generic drugs is low Share of generics in 2017 or latest year available in volume terms1 Per cent of the total phamaceutical market 90

Per cent of the total pharmaceutical market 90

GBR²

CHL³

USA³

DEU²

NZL²

CAN

LVA

NLD

SVK

CZE

TUR

0

DNK³

0

AUT²

10

OECD

10

SVN³

20

NOR

20

ESP²

30

PRT

30

FIN

40

IRL²

40

JPN

50

EST³

50

BEL²

60

FRA²

60

GRC²

70

CHE

70

ITA

80

LUX²

80

1. Including medical non-durables.

2. Reimbursed pharmaceutical market.

3. Community pharmacy market.

Source: OECD Health Statistics database.

29

The public capital stock is ageing rapidly Years 25

Years 25

20

20

15

15

10

10

5

1970

1975

1980

1985

1990

1995

2000

2005

2010

2014

5

Note: A weighted average of 18 sectors, such as water supply, flood control and agriculture.

Source: Cabinet Office; Ministry of Internal Affairs and Communications; and OECD calculations.

30

Maintenance costs vary widely across regions In FY 2014

Per capita maintenance cost, thousand yen 3.5

Per capita maintenance cost, thousand yen 3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0 8.2

8.4

8.6

8.8

9.0

9.2

9.4 9.6 9.8 Per capita public capital stock, million yen

Source: Cabinet Office; Ministry of Internal Affairs and Communications; and OECD calculations.

31

The tax and social security burden is relatively low Total tax and social security revenue as a per cent of GDP in 2017 or latest year available Per cent 50

Per cent 50

40

30

30

20

20

10

10

0

0

MEX CHL IRL TUR KOR USA AUS CHE LTU LVA JPN NZL CAN ISR SVK EST GBR ESP POL OECD PRT CZE SVN DEU ISL HUN NOR LUX NLD GRC AUT ITA FIN SWE BEL DNK FRA

40

Source: OECD Revenue Statistics database.

32

The share of consumption and personal taxes in tax revenues is relatively low Per cent

As a per cent of total tax and social security revenue in 2017 or latest year available

Per cent

60

60

50

50

JPN

40

30

40

OECD

30 OECD OECD

20

JPN

20

JPN JPN OECD

10

0

Consumption tax

Personal income tax

Social security contribution

Corporate income tax

JPN OECD Property tax

10

0

Source: OECD Revenue Statistics database.

33

Japan’s consumption tax rate is one of the lowest in the OECD Per cent 30

Standard tax rate in 2018

Per cent 30 25

20

20

15

15

10

10

5

5

0

0

CAN¹ CHE JPN AUS KOR NZL MEX ISR LUX TUR CHL DEU OECD AUT EST FRA SVK GBR BEL CZE LVA NLD ESP ITA SVN IRL POL PRT FIN GRC ISL DNK NOR SWE HUN

25

1. In Canada, the provinces can levy a consumption tax on top of the federal tax, making it higher than Japan’s 8%.

Source: OECD Consumption Tax Trends 2018.

34

There is scope to raise environmental taxes In 2016

Per cent of GDP 4.0

Per cent of GDP 4.0

3.5

3.5 Energy

Motor vehicles

Other

DNK

SVN

LVA

ITA

NLD

TUR

FIN

EST

AUT

HUN

PRT

GBR

NOR

SWE

BEL

CZE

POL

SVK

LTU

0.0

ISL

0.0

DEU

0.5 ESP

0.5 AUS

1.0

LUX

1.0

OECD

1.5

MEX

1.5

CHE

2.0

IRL

2.0

JPN

2.5

NZL

2.5

CHL

3.0

USA

3.0

Source: OECD (2018), Taxing Energy Use.

35

Policy recommendations to ensure fiscal sustainability •

Develop a comprehensive fiscal consolidation plan covering specific spending cuts and tax increases, including a further gradual rise of the consumption tax, to ensure fiscal sustainability.

•

Take long-term care out of hospitals and shift its focus to home-based care.

•

Reduce long-term care insurance coverage by focusing preventive care on effective programmes and removing unnecessary services for those with less severe care needs.

•

Promote greater use of generic drugs by making them the standard for reimbursement by health insurance.

•

Raise the co-payment rate of the elderly by establishing the ability-to-pay principle through an effective system for assessing income and assets.

•

Improve the effectiveness of health check-ups and health guidance to lengthen the healthy life span.

•

Promote the joint provision of local public services and infrastructure across jurisdictions and the development of compact cities.

•

Raise the pension eligibility age above 65 to maintain a sufficiently high replacement rate, while taking measures to expand the employment of older persons.

•

Shift the tax mix by reducing the share of social security contributions and increase the share of taxes on consumption and personal income.

•

Remove distortions in tax and social benefit systems, such as the spousal deduction, that discourage labour force participation.

•

Increase the coverage of firm-based social insurance and ensure better compliance with the public pension schemes.

•

Improve the fiscal framework, including taking measures to insulate assessment of macroeconomic and fiscal forecasts and the monitoring of fiscal plans from normative policy-making responsibility.

36

Narrowing the productivity gap with leading OECD countries 37

The productivity gap between large firms and SMEs is increasing Million yen 15

Large enterprises in manufacturing

Million yen 15

12

12

9

9 SMEs in manufacturing

6 3

0

6 3

2003

2005

2007

2009

2011

Source: Ministry of Finance, Financial Statement Statistics of Corporations by Industry.

2013

2015

2017 FY

0

38

The firm entry rate in Japan is rising, but remains below other major economies Rate

Rate

20

20 Japan United States Germany

18 16

France United Kingdom

18 16

14

14

12

12

10

10

8

8

6

6

4

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

4

Source: Ministry of Economy, Trade and Industry, 2017 White Paper on Small Enterprises in Japan.

39

The share of firms with two or more independent directors has risen sharply Per cent 100

Among companies listed in the first section of the Tokyo Stock Exchange

Per cent 100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

2010

2011

2012

2013

2014

2015

2016

2017

2018

0

Source: Japan Exchange Group.

40

Improved corporate governance may help reduce the cash holdings of companies

Per cent

Per cent 90

A.Perception Perceptionofofcompanies companies and levels of cash onon hand andinvestors investorsabout aboutthe companies’ cash hand

80 70 Companies

60

Investors

50 40 30 20 10 0

Levels are excessive

Levels are appropriate

Levels are insufficient

No answer

Source: Japan Exchange Group.

Per cent 80

B. Different priorities of companies and investors 41

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