IMF: Japan must boost wages and productivity

1 Aug 17

Japan must press ahead with reforms to boost wages and productivity as its workforce ages and shrinks, the IMF has stated.

The international organisation’s annual review of the Japanese economy reveals that the country had a “relatively good” 2016. 

And growth for the country is projected at 1.3% this year because of high exports and a fiscal support package, which was passed in August 2016, the IMF said.

But the global body also found domestic private consumption and investment remained “moderate”, and inflation was “stubbornly low”. These present risks to sustaining medium-term growth, the IMF concluded. 

Todd Schneider, who led the work on the report, noted that wage growth was not growing fast enough to boost consumer spending.

He said: “Unemployment has fallen to a 25-year low and the job-to-applicant ratio is at an all-time high, but we are still not seeing higher pressure for wages from ‘regular’ workers, those in full-time employment.

“This matters because higher wages translate into higher household income, which then promotes more consumption and inflation.”

The report noted in 2016 the Japanese population shrunk by 0.1%, in 2017 by 0.3% and is expected to decrease again by 0.4% in 2018.

It also pointed out the old-age dependency ratio to working-age population in 2016 was 44.9% in 2016, rising to 46.2% in 2017 and is expected to hit 47.2% next year.

Schneider said Japan’s poor wage growth was driven by structural factors such as limited labour mobility, lifetime employment and preference for job security, as well as base pay negotiations guided by current inflation, which did not increase much this year.

IMF suggests the Japanese government should:

·      act to mitigate the demographic challenges facing the country

·      make labour more efficient and inclusive by encouraging more women into full-time work

·      the implementation of the consumption tax increase, a measure which has been postponed twice.

Schneider highlighted Japan’s public debt stands at 240% of GDP, highest among the G7 by some distance, which he described as “unsustainable”.

He urged an increase in consumption tax to stabilise and eventually reduce the debt, which will in turn help pay for increased demands on social security expenditure, such as healthcare as Japan’s population ages.

“Expenditure reform will be needed to curb these costs, but additional revenue will also be needed to finance this important area of public spending,” he said.

Adding: “Japan’s consumption tax rate is also low relative to peer countries, but the efficiency of collection is high—suggesting large potential gains.

“The gradual increases we are proposing to the Japanese authorities should be part of a broader package of fiscal adjustment measures.”

According to the IMF, reform of income tax is also needed but simply raising it could be “counter productive”. 

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