OECD Economic Outlook May 2019, Country Notes: Japan

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Japan Economic growth is projected to remain close to only 0.7% in 2019-20, with wage and investment growth sustained by labour and capacity shortages. The temporary effect of the October 2019 consumption tax increase will be mitigated by fiscal measures. Sustained growth is projected to gradually push up headline inflation to 1% (excluding the impact of the tax increase) by 2020. Government debt relative to GDP is the highest ever recorded in the OECD area, posing serious risks. Achieving fiscal sustainability requires a detailed consolidation programme that includes gradual increases in the consumption tax rate beyond the 2019 increase, and measures to control spending in the face of rapid population ageing. With a declining working-age population, structural reforms to boost productivity and employment are key to achieve fiscal sustainability and improve well-being. The Bank of Japan should maintain its expansionary monetary policy until the 2% inflation target is achieved. Labour and capacity shortages sustain wages and business investment After peaking at 1.9% in 2017, economic growth slowed to 0.8% in 2018, reflecting weaker export momentum as world trade decelerated. Nevertheless, the current expansion, which began in late 2012, is now the longest in Japan’s post-war history, supported by a moderate recovery of consumption and robust business investment. The expansion faltered in early 2019, with declines in industrial production and exports, though labour market conditions remain tight.

Japan 1 Firms have shortages of capacity and labour

Exports are stagnant due to a decline in shipments to China²

Diffusion index, %pts¹ 10 5

Firms' perception of their own capacity situation

Exports to the United States

Firms' perception of their own labour situation

Exports to China

0

Index 2014 = 100 135 130

Total exports

125

-5

120

-10 -15

0

0

115

-20

110

-25

105

-30

100

-35 -40

2013

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

95

1. The diffusion indices show the number of firms responding they had an excess number of workers minus those reporting a shortage and the number responding that they had excess capacity minus those with a capacity shortage. A negative number thus indicates an overall shortage of labour and capacity. 2. Seasonally-adjusted data (three-month moving average). Source: Bank of Japan. StatLink 2 https://doi.org/10.1787/888933934641

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019


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