Reforms Needed to Restore High Growth in Japan

Comprehensive strategy needed to reduce public debt, restore high growth

Japan needs to be better integrated into Asian growth

Implementation likely to prove challenging

The measures proposed include deeper integration with global markets, more risk-based allocation of capital, and an increased labor supply.

The gathering, which took place on February 7th, and which was organized by the Asia Pacific Department of the International Monetary Fund and the Regional Office for Asia and the Pacific provided an opportunity for high level government officials and IMF officers, as well as academics, and private sector analysts to discuss Tokyo’s proposed growth strategy.

The elements of Abenomics

The government of Prime Minister Shinzo Abe has already announced plans to overcome deflation and restore growth with a three-pronged approach—the “Three Arrows for Growth”. This plan includes a bold monetary policy through the institution of a 2 percent inflation target, flexible fiscal policy combining short-term stimulus with a medium-term objective to achieve a primary surplus by 2020, and a medium-term growth strategy.

“With the growth strategy expected to be finalized by the government by mid-2013, this seminar provides a timely opportunity to discuss ideas for the ‘third arrow’ of Abenomics”, said Jerald Schiff, the IMF’s mission chief for Japan.

Japan needs to pursue faster growth to bring down its large public debt, said IMF division chief for Japan, Stephan Danninger, who suggested that any proposed strategy needed to include a number of key elements:

• Further Japanese integration with Asia, including participation in the Trans-Pacific Partnership.

• Measures to encourage higher labor participation—especially by women and the elderly, but also through immigration.

• Domestic market reforms aimed at increasing competition and productivity, including through the promotion of inward foreign direct investment.

Danninger added that the promotion of more risk-based allocation of credit was essential to encourage sustainable growth. This would involve the gradual phasing out of credit guarantees which were originally introduced to be a “painkiller” in difficult times. But these guarantees had ended up becoming “sleeping pills” which prevented both firms and banks from directing economic resources towards profitable projects, said Danninger.

Potential increase in long-term growth

According to estimates by the IMF Japan team, implementation of a...