Overview: Oecd Economic Surveys

OECD Economic Surveys

JAPAN

APRIL 2013

OVERVIEW[pic 1]

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Summary

© OECD 2013                                                                                                                                                                                                                                               1

Main findings

After two severe shocks – the 2008  global financial crisis and the 2011  Great East  Japan Earthquake – Japan fell  into recession for the third time in five  years. The public debt ratio has risen steadily for  two decades, to over 200% of GDP. Strong and protracted consolidation is therefore necessary to restore fiscal sustainability, which is Japan's paramount  policy challenge. However, this  will   slow nominal  GDP growth, making fiscal adjustment  still more difficult. Hence, exiting deflation and  boosting Japan’s growth potential are key   to addressing the fiscal predicament. In  this light, the new government’s resolve to revitalise the economy through a three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy, is most encouraging.

Stopping and reversing the rise in the debt-to-GDP ratio is  crucial. Stabilising the public debt ratio by

2020  may require, depending on the evolution of GDP and interest rates, an improvement of the primary fiscal balance from a deficit of  9%  of  GDP  in 2012  to a surplus as high as 4%  by  2020.   Controlling expenditures, particularly for social security in the face of  rapid population ageing, is key.  Substantial tax increases will  be  needed as well, although this will  also have a negative impact on growth. Given the size and  duration  of  fiscal consolidation,  Japan faces  the  risk of  a marked rise in interest  rates, threatening a banking system that is highly exposed to Japanese government debt.