1. Inclusive and sustainable growth trends in Japan
Chapter 1 provides an overview of the framework used in this report. The framework elaborates on the pathways of inclusive and sustainable growth in line with Japan’s vision of a new form of capitalism. Taking into account Japan’s current socio-economic context, the framework outlines four key dimensions where monitoring and policy action should focus: i) sustainable growth and an equitable distribution of its benefits; ii) equal opportunities and foundations for future prosperity; iii) inclusive and sustainable business dynamism and innovation; and iv) enhanced trust for responsive and inclusive governance. For each dimension, key thematic issues are discussed, and a summary of main findings and policy considerations is presented.
Inequalities have been a long-standing structural challenge for Japan. Recognising this, the government has aspired to change their growth model by considering equality of opportunity as part of policy design to promote inclusiveness and growth for greater prosperity and well-being of people. Japan’s vision, aligned with their new programme “Towards a New Form of Capitalism”, aims to reduce a range of inequalities and support productivity growth simultaneously, thereby creating a virtuous cycle for inclusive and sustainable growth.
In Japan, income inequality has been slightly on the rise, with disposable income per capita stagnating, clouded by the ageing of society and decreasing population due to low fertility rates. The level of people’s concern about income disparities is nevertheless relatively modest: 59% of the Japanese consider that government has the responsibility to reduce income differences, while 80% of people believe so on average in OECD countries. Partly, this may be due to the Japanese population’s perception of society as meritocratic (OECD, 2021[1]). Unlike income inequality, wealth inequality is lower in Japan than in most OECD countries, with 47% of wealth in the hands of top 10% of Japanese compared to 79% of wealth owned by the top 10% decile in the United States in 2019, which is nonetheless the most unequal in terms of wealth among OECD countries (Balestra and Tonkin, 2018[2]).
In recent years, however, the economic model has been perceived as less effective and fair, amid insufficient growth and increasing labour market disparities. Japanese people have started perceiving to have less control over their own fate; and that hard work does not necessarily pay off to get ahead in life. Younger generations in particular are being confronted with a less dynamic growth model than previous generations and increasingly believe that socio-economic factors – such as family wealth, slow economic performance, ageing and growing dualities in the labour market – are becoming increasingly important drivers of economic success and well-being.
Inclusiveness of the Japanese growth model is not just a question of wealth and income
A range of other inequalities needs to be looked at beyond the economy averages, with due attention to specific issues that matter for different groups of the population. The relative poverty in Japan, for example, is high at 16%, particularly among the elderly and individuals living in households with at least one worker (i.e. the “in-work” poverty rate). This partially points to the inter-generational issue related to a relatively weak redistribution between, rather than within, generations (Jones and Jin, 2017[3]).
At the same time, Japan's "jobs for life" employment model has lessened the need for employers to adjust wages and retain or attract the most productive workers. The ongoing shift in the structure of employment towards non-regular jobs has negatively affected average wages and worsened income inequality and relative poverty rates, although a sign of slight improvement has been seen recently. Per hour, non-regular workers earn around 60% of the regular workers’ pay, which contributes to higher relative poverty rates of non-regular workers.
The work-life balance should work for all groups of population equally
It is therefore essential to ensure that working conditions are adapted to meet the needs of underrepresented groups. This requires balancing the job demands and the resources available to workers to meet those demands – particularly against the instance of emerging non-regular working arrangements. Working conditions, for instance, can be improved by casting a broader focus on well-being in the workplace that can benefit productivity overall. OECD research (Murtin et al., 2022[4]) shows that working conditions are significantly associated with mental health, implying that a variety of socio-economic factors that generate job strain can lead to risk of injury and weigh on mental health. In particular, long working hours in Japan have a significant effect on mental health with negative impacts increasing with the age of workers, particularly when working more than 80 hours per week.
The work-life balance factors also affect differently men and women, with a significant impact on mental health particularly for elderly women (OECD, 2019[5]). The negative impact of stress factors, such as high work intensity, intimidation and discrimination at the workplace, can hold back the productive potential of female workforce. The situation can be alleviated by work environment improvements providing adequate social support, the equal opportunity for career advancement and merit-based organisational participation.
The beneficial possibilities of digitalisation should be seized to help ensure the equality of opportunity for all
Digitalisation can aid in this regard, bringing a positive change with new forms of employment by creating opportunities for those who have been previously excluded from participation in the labour market. However, this needs to be examined carefully and with consideration of specific and non-regular employment practices in Japan. Under typical membership-type contract and job rotation practice, where it is rather common for Japanese couples to face geographically separated duty stations, and with women often opting out of regular employment. In 2022, 53.4% of female workers worked as non-regular employees. In Japan, career opportunities are on average still less favourable for women, and married women take on the largest share of housework; particularly if leaving regular for non-regular jobs. This contributes to the widening of a wage gap between non-regular and regular employees, with women earning less and spending more time on housework than men, on average.
Such dualistic practices are further exacerbated by limited horizontal mobility in a segmented Japanese labour market, in contrast with many other OECD countries where temporary work is a stepping stone to permanent employment (Jones and Jin, 2017[3]). A relative inequality of opportunity for the elderly and women does not only weigh on productivity growth but hampers Japanese people’s prospects for living meaningful lives and improving their well-being. At the same time, it risks deskilling and passing on disadvantages to younger generations.
Investing in people is paramount to bridge inter-generational gaps
Although investment in primary and secondary education in Japan went hand-in-hand with strong educational equity, it was insufficient to lead to productivity and well-being gains of the society as a whole over the life cycle (OECD, forthcoming[6]). Continuous training and upskilling, particularly to adjust to digitalisation, will be key to ensure that people have the ability and motivation to keep on working at an older age. Yet, the share of public spending on training is lower in Japan than in most OECD countries: 0.01% of GDP in Japan, which is 10-times lower than the OECD average as well as other European and OECD countries, but similar to the United Kingdom’s share. However, inclusiveness needs to be considerate of online courses that can facilitate access to training, but that require basic digital skills, appropriate devices and reliable internet infrastructure (OECD, 2022[7]).
The “New Form of Capitalism” can put equitable growth in motion with the right policy mix
Inclusive and sustainable growth is thus crucial to deliver on people’s expectations and the Japanese government’s vision for a “New Form of Capitalism”. The New Capitalism vision positions the growth strategy as a trigger for equity. At the same time, it considers equity as an essential foundation for sustainable growth. Equality of opportunity, as well as the notion of broad-based growth across the entire economy and its underlying drivers, such as innovation and productivity, are considered upfront in the conception of economic and industrial policies put forward by the government. This vision is key to ensuring that every citizen can actively contribute to value creation and, in turn, benefit from growth.
Fostering widespread innovation for a more inclusive and sustainable economy and strengthening investment in people’s well-being and are two important levers to realise the vision of a “New Form of Capitalism”. Japan’s ambition is to put in motion “a virtuous cycle of growth and distribution” for a prosperous post-COVID-19 society. In particular, the renewed growth strategy rests on industrial policy focused on the accelerated establishment of start-ups and promotion of open innovation, and targeted investment in frontier science and technology areas (such as, quantum technology, AI, biotechnology, regenerative medicine and genetic therapies). For example, the green transformation (GX) and digital transformation (DX), supported by educational reforms for greater STEM literacy of the nation. On the other hand, and as a part of the equity pillar of the government’s strategy, the government is taking action to increase the income of those working at facilities providing medical nursing, elderly care and childcare services. Additionally, the government aims to address social problems and achieve growth through new forms of private-public co-operation, for example, incentivising the private sector to pay for more equitable wages, for example, providing tax breaks for companies with more distribution allocated to labour.
While the growth and equity pillars are thought of as complementary, it will be important to design and implement respective policy instruments in a co-ordinated and synergistic manner. For instance, as the government advances its new industrial strategy in frontier science and technology, efforts should be made to promote diffusion of technology and R&D investment across all companies and sectors, whereby specific SDG-oriented industrial policies (including innovation and general business framework policies) could foster the contribution of firms towards equity-related SDGs through their core business, most commonly towards gender parity under SDG 5 (OECD, 2021[8]).
The OECD can support Japan to monitor contribution of economic and industrial policies to sustainable and inclusive growth
The objective of combining growth and equity is well enshrined in the OECD’s Framework for Policy Action on Inclusive Growth (OECD, 2018[9]),1 informed by research conducted as part of the OECD Productivity-Inclusiveness Nexus (OECD, 2018[10]), which shows that productivity-inequality trade-offs are evitable. In particular, the OECD Framework (Box 1.1) advocates for the monitoring of policy efforts and outcomes towards sustainable growth along four dimensions:
Sustainable growth and equitable sharing of benefits from growth: This dimension explores the pace and distribution of growth. It is contextualised by taking into account the current socio-economic situation in the light of both short-term challenges (e.g. the post COVID-19 recovery) and long-term ones (e.g. population ageing, digitalisation and climate change).
Equal opportunities and foundations of future prosperity: This dimension looks at the key investments in people’s well-being that make prosperity sustainable over time. It is focused on the quality of human capital, broadly defined, and takes into account different dimensions of material and non-material well-being such as diversity and inclusion in the workplace, wage gaps, education, training, health and workers’ life balance and satisfaction.
Inclusive and sustainable business and innovation: This dimension examines the dynamism of markets and underlying drivers of growth and productivity, with a focus on labour productivity, environmentally related and inclusive innovation, business dynamism, trade and value chains.
Enhanced trust for responsive and inclusive governance: This dimension looks at broader factors that matter for inclusivity, including the empowerment of women in political and business decision-making, as well as across different cohorts of population. It takes into account Japan’s specific demographic structure skewed towards middle-age and elderly groups of population.
These four dimensions are analysed in more detail in the rest of this Chapter and in Chapter 2. They provide the empirical basis that underpins the recommendations of this report.
Box 1.1. A framework for examining inclusive and sustainable growth in Japan
Endorsed by the OECD Ministers in 2018, the Framework for Policy Action on Inclusive Growth (OECD, 2018[9]) aims to achieve growth in an economy where the sharing of its benefits is emphasised, through three key dynamics:
Investing in people and places through i) targeted quality childcare, early education and life-long acquisition of skills; ii) effective access to quality healthcare services, education, justice, housing and infrastructure; and iii) optimal natural resource management for sustainable growth.
Supporting business dynamism and inclusive labour markets through: i) broad-based innovation, rapid and comprehensive technology diffusion; ii) strong competition and vibrant entrepreneurship; iii) access to good quality jobs, especially for women and under-represented groups; and iv) resilience and adaptation to the future of work.
Building efficient and responsive governments through: i) aligned policy packages across the whole of government; ii) integration of equity aspects upfront in the design of policy; and iii) inclusive policy-making, integrity, accountability and international co-ordination.
The Framework is supported by indicators and evidence-based analysis to understand how a country can address the inequalities and mitigate their costs to spur strong economic and inclusive growth.
Source: OECD (2018[9]), Opportunities for All: A Framework for Policy Action on Inclusive Growth, OECD Publishing, Paris, https://doi.org/10.1787/9789264301665-en.
The pandemic has made a lasting mark on economies and societies across the world. As of January 2023, the cumulative number of global confirmed cases exceeded 660 million people, and the global death toll had passed 6.7 million people. Recent declines in COVID-19 mortality suggest that vaccines are delivering on their promise of allowing OECD societies and economies to return to a new normal. In Japan, approximately 82% of the population has been fully vaccinated (104 million persons as of January 2023). The number of reported new deaths (60 000 as of January 2023) has been mostly contained below the OECD average.
Ahead of Russia’s war against Ukraine, the OECD projected that most Members would return to their pre-pandemic GDP level by 2023, but with subdued underlying growth potential. In Japan, however, modest economic growth prospects need to be also interpreted against its ongoing demographic changes tilted towards ageing and shrinking population. The total population in Japan is projected to decrease from 127 million inhabitants in 2015 to less than 90 million by 2065, while the share of the population over 65 years old is projected to increase from around one-quarter to almost 40% by 2065. This rapid population ageing, and the associated shrinking labour force, is among the most salient challenges for achieving further improvements in Japan’s living standards and ensuring the financial sustainability of its public social expenditures.
In Japan, like in many other OECD countries, the pandemic has exposed pre-existing inequalities between different groups of population. Looking beyond income and wealth inequalities, the impacts of the pandemic on people’s well-being were both wide-ranging and profound. For instance, the prevalence of depression more than doubled to 17% in 2020 from 2019 in Japan. The pandemic unveiled that mental health issues need to be carefully looked at in Japan as in many other OECD countries – about one-quarter of people were at risk of depression or anxiety in 2020, as shown by the data from 15 OECD countries.
While the pandemic has underscored the importance of economic and social resilience, the recovery also provides an opportunity to catalyse the green transition in a way that can be socially acceptable and politically feasible. On the climate front, Japan has made progress in decoupling greenhouse gas emissions from population and GDP growth, as well as keeping material consumption below the OECD average. Still, more efforts are needed to pace the trend and meet Japan's Nationally Determined Contributions under the Paris Agreement. Implementing the “New Form of Capitalism”, Japan’s growth ambitions will need to align well its social and environmental ramifications to ensure an equitable green transformation of the economy.
Continuous improvement of human capital is key to realise Japan’s ambition of stronger growth that is environmentally sustainable and can provide the equality of opportunity on merit-based principles for all. Improving the investment in people means that various aspects of well-being need to be considered, spanning across material and non-material dimensions of people’s lives. However, this requires revision of some of the approaches that have contributed to strong labour market performance in the past, but no longer suit the challenges faced by Japan today. For example, life-time employment practice has contributed to stable employment patterns for male workers with regular contracts and low unemployment rates. In the current context, such employment practices, however, widen gender inequalities and negatively affect the well-being of workers, including their ability to reconcile work and life.
By international standards, Japan performs less well in terms of the quality of working conditions than most other OECD countries. A relatively high share of workers experience job strain and suffer from excessively long hours of work, which can have a negative impact on their health. The situation has nevertheless improved for regular workers, as their average annual hours worked in Japan have declined since 1990, but the share of non-regular workers has increased especially among female and older workers. Non-regular workers tend to earn less than regular workers and further policy efforts are needed to adapt existing social protection systems for them to provide more equal work opportunities and job conditions.
The overall quality of human capital, as defined by educational outcomes and skills of both youth and adults, is rather high in Japan. However, there remains scope for increasing the participation of women while allowing for more regular education and trainings for adults. Women’s labour force participation has risen from 63% to 72.5% from 2010 to 2020, while the gender pay gap remains pronounced at around 23% in 2020, though falling from 28.7% in 2010. During the pandemic, labour underutilisation was aggravated due to the contraction of economic activities.
Overall, public expenditure on education per student is slightly below the OECD average and decreasing. In addition, the intensity of spending varies significantly depending on the education level; in particular, public expenditure for tertiary education is much lower. At the university level, relatively few students study STEM disciplines and women less than men. Disparities among socio-economic and gender groups continue to persist in terms of education outcomes and the participation rate of adults in formal education and training remains very limited despite the fact that these will be key to making the most of digitalisation and other structural changes. In addition, public spending on labour markets for training is well below what can be observed in other OECD countries. The Survey of Adult Skills estimated that in the early 2010s, 35% of adults in Japan engaged in work-related training in a given year, somewhat below the 39% OECD average.
Attention needs to be paid to the development of youth and children, building up the stock of quality human capital on the equitable basis. Early estimates suggest that the pandemic could lead to significant rises in child poverty across the OECD.2 Available evidence also points to higher prevalence of mental distress among young people, which has at least doubled since the onset of the pandemic. Young people have faced higher risks of job and income loss than others during this time.
Japan has long been a front-runner in technological developments; however, it is steadily losing its edge to other OECD countries in different areas. First, R&D expenditures per capita has been stagnating over the past decade and the intensity of R&D expenditure has been lacklustre; though with pronounced differences across industries with services generally lagging behind, in the construction and transportation industries, for example. Sustaining efficient investment towards human capital improvements is crucial especially in the context of digital transformation, where coordinated public and private investment efforts are needed. For example, while Japan’s young adults are getting ready to use technology for problem solving, performing above the OECD average, there are important digital divides between the age groups that need bridging.
Second, while Japan has more researchers per thousand workers in the labour force than OECD average, the situation hasn’t changed over the past decade. Moreover, the share of female researchers in enterprises’ internal R&D personnel was at 10% in 2019, that is, the second lowest among OECD countries. Women, in addition, also face challenges to found and run enterprises as they generally find it more difficult than men to pursue networking and learning opportunities. Female entrepreneurs are further more likely to be part-time entrepreneurs than male entrepreneurs: 40% of part-time entrepreneurs are women.
Third, a relatively weak technological prowess in Japan compared to previous years as well as other OECD countries, has broader implications for labour productivity that shows signs of stagnation in the business sector. A dynamic business environment is crucial for realising the potential of Japan to seize the gains from industrial restructuring, ensuring that these gains are shared in a way that supports the long-term economic growth that provides the equal opportunity for all while delivering on climate objectives of the Paris Agreement.
An efficient reallocation of activity between firms and sectors can contribute towards these ends, providing sustainable growth and employment. At the same time, the modest wage growth in Japan is partly accounted for by growing wage inequality within and between firms, amid lower wages in SMEs and a declining wage premium for low-skilled workers in large firms against a growing wage premium for corporate executives. The latter may partly explain the decoupling observed between real median wage growth and aggregate labour productivity growth, which suggests that productivity gains are not always delivering wage gains for all workers in Japan – however, observed also in other OECD countries.
Against this background, there is scope to improve business dynamism in Japan. The entry and exit of firms has been weak, implying little job creation by small and new companies, keeping old and low-productive enterprises in business. Over the period of 2000-2014, small and new companies created less than half of the jobs lost in small and old companies. During the most acute phase of the pandemic, government support has helped to keep firms and households afloat across the OECD. Bankruptcies were effectively reduced and stood at a level 26 percent lower at the end of 2020 as compared to the previous year (OECD, 2020[11]). However, firms could manage to survive without adopting improved practices to increase productivity growth, with uneven uptake of new technologies particularly by small and medium-sized enterprises (SMEs).
In addition, there is a gap between high-productivity firms and lagging firms in Japan, which is larger than in many other OECD countries, particularly between the services and manufacturing firms, and between SMEs and large firms. Between 2013 and 2019, the productivity growth in terms of value added per person has been virtually nil and even declined in the primary industry and services sectors (OECD, 2020[12]).
While trust and transparency are critical for society’s capacity to absorb and bounce back from shocks, in Japan, people’s confidence in government has been below the OECD average. This may be partly explained by increasingly high levels of inequality that increase the risk that specific demographic groups and narrow interest groups influence the policy-making process and capture its benefits. In turn, lower trust in government and institutions may reduce the political space for reform.
Therefore, it is key to sustain high representation and participation in the political process of all groups of population across demographic and socio-economic cohorts. However, women are underrepresented with the gender gap particularly large in the House of Representatives. The situation is nevertheless improving in the House of Councillors, which is gradually becoming more gender inclusive than in past. At the same time, it is worrying that in Japan, the participation rate in the national elections has been consistently low in the last decade as compared to other OECD countries, in particular among youth.
Recent research also argues that trust in government can help to predict the extent of demand for redistribution; however, the research is largely inconclusive on the systematic linkages between the two depending on specific circumstances. In Japan, this is arguably driven considerably by the strong faith of the Japanese in the merit-based system of getting ahead in life. There is a considerably higher share of people in Japan, relative to other OECD countries, who do not support a progressively high taxation in the upper income cohorts (Kambayashi, 2022[13]). However, hard work is regarded as an increasingly less important factor to get ahead in life than before in Japan, which is particularly the case among younger cohorts (OECD, 2021[1]).These new findings may reflect individuals’ specific situations such as income, wealth and social beliefs, as well as historical, institutional or cultural backgrounds that determine preferences of Japanese people for redistributive policy.
References
[2] Balestra, C. and R. Tonkin (2018), “Inequalities in household wealth across OECD countries: Evidence from the OECD Wealth Distribution Database”, OECD Statistics Working Papers, No. 2018/01, OECD Publishing, Paris, https://doi.org/10.1787/7e1bf673-en.
[3] Jones, R. and Y. Jin (2017), “Boosting productivity for inclusive growth in Japan”, OECD Economics Department Working Papers, No. 1414, OECD Publishing, Paris, https://doi.org/10.1787/0748e0bc-en.
[13] Kambayashi, R. (2022), Why do Redistributive Policies Differ Across Countries? Analyzing the Multiple Dimensions of Preferences for Redistribution, Review of Income and Wealth, https://doi.org/10.1111/roiw.12541.
[4] Murtin, F. et al. (2022), “The relationship between quality of the working environment, workers’ health and well-being : Evidence from 28 OECD countries”, OECD Papers on Well-being and Inequalities, No. 04, OECD Publishing, Paris, https://doi.org/10.1787/c3be1162-en.
[7] OECD (2022), The New Workplace in Japan: Skills for a Strong Recovery, OECD Publishing, Paris, https://doi.org/10.1787/7c897f52-en.
[1] OECD (2021), Does Inequality Matter?: How People Perceive Economic Disparities and Social Mobility, OECD Publishing, https://doi.org/10.1787/3023ed40-en.
[8] OECD (2021), Industrial Policy for the Sustainable Development Goals: Increasing the Private Sector’s Contribution, OECD Publishing, Paris, https://doi.org/10.1787/2cad899f-en.
[14] OECD (2021), “Securing the recovery, ambition, and resilience for the well-being of children in the post-COVID-19 decade”, OECD Policy Responses to Coronavirus (COVID-19), OECD Publishing, Paris, https://doi.org/10.1787/0f02237a-en.
[11] OECD (2020), Japan: Business Dynamics, OECD Insights on Productivity and Business Dynamics, OECD Publishing, Paris, https://www.oecd.org/sti/ind/oecd-business-dynamics-insights-japan.pdf.
[12] OECD (2020), Japan: Productivity, OECD Insights on Productivity and Business Dynamics, OECD Publishing, Paris, https://www.oecd.org/sti/ind/oecd-productivity-insights-japan.pdf.
[5] OECD (2019), “Better job quality for longer working lives in Japan”, in Working Better with Age: Japan, OECD Publishing, Paris, https://doi.org/10.1787/9789264201996-8-en.
[9] OECD (2018), Opportunities for All: A Framework for Policy Action on Inclusive Growth, OECD Publishing, Paris, https://doi.org/10.1787/9789264301665-en.
[10] OECD (2018), The Productivity-Inclusiveness Nexus, OECD Publishing, Paris, https://doi.org/10.1787/9789264292932-en.
[6] OECD (forthcoming), What drives preferences for redistribution? Disentangling the roles of social, economic and political factors, OECD Publishing.
← 1. See for instance the address by Prime-Minister Kishida the World Economic Forum in Davos on 18th January 2022: https://www.mofa.go.jp/ecm/ec/page1e_000371.html.
← 2. See the OECD Child Well-being Data Portal, https://www.oecd.org/els/family/child-well-being/data/ and (OECD, 2021[14]).