Fresh Ways Forward: OECD Secretary-General Mathias Cormann on Japan’s Policy Choices

The OECD’s Take on Japanese Prospects

INTERVIEWER  Welcome to Japan. I’d like to begin by asking about the main findings of the OECD’s 2024 Economic Survey on Japan, and its principal recommendations for the country.

MATHIAS CORMANN  Well, I don’t think anything we say in this report will take anyone in Japan by surprise. But the OECD is always a useful, independent “mirror” for a country—something to facilitate the conversations and policy responses necessary to address what are often longer-standing challenges.

There are four main areas in which we make recommendations. One is that Japan really needs to commit to bringing down public debt. This was already very high in Japan by international standards before the pandemic; now, it stands at around 245 percent of GDP after the pandemic and some of the events that followed. So the report focuses on the need to lock in a sustainable and sustained downward trajectory in this public debt—in order to make space to deal with some fiscal pressures domestically, but also to rebuild resilience in preparation for future shocks.

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There are opportunities on both the spending and revenue sides. One big expenditure efficiency we identify is in the healthcare financing space. Japan is an outlier when it comes to, for example, the length of hospital stays compared to the OECD average; healthcare management could be improved in a way that delivers better quality and lower costs. On the revenue side, there’s the capacity to boost numbers on the back of stronger growth—which is where we point to the need to boost productivity. But there are other revenue measures, particularly in the area of value-added taxes. Japan’s consumption tax is 10 percent, certainly well below the OECD average. Incremental, gradual increases in VAT could improve fiscal resilience in public finances.

Second, we look at productivity growth, an area where Japan needs to take steps. Big companies invest quite a bit in R&D, but you don’t see a sufficient, similar focus in the small and medium-sized business space. There’s also a lack of dynamism in business, in the sense that underperforming companies are quite protected from failure. The efficient reallocation of capital from less productive to more innovative firms would make an important contribution.

Third, growth is also related to things like the aging population, low fertility rate, and other demographic headwinds. The proportion of the population aged sixty-five and over to the working-age population will continue to increase over the coming decades. One thing we focus on is the need to boost workforce participation by women and older workers. People in Japan need to be enabled and encouraged to work longer as they remain healthier into those years—we were surprised to learn that 70 percent of Japanese businesses have a mandatory retirement age of sixty imposed on their employees, and that’s quite young really. The pension kicks in at sixty-five, and we would say the pension age should probably be increased beyond then; certainly, there needs to be much more flexibility for older workers in Japan to continue to contribute.

So Japan needs to take action in a number of areas, from measures to boost the fertility rate to those to encourage labor force participation, by women, or by older workers, and make it easier to attract foreign workers.

Finally, in relation to climate change, Japan has ambitious objectives. It’s committed to achieving carbon neutrality by 2050, but the current policy settings aren’t going to get it there. Japan needs to accelerate some of its momentum and strengthen some of its measures to achieve this 2050 goal.

Putting Recommendations into Practice

INTERVIEWER  In connection with climate change, what does the report say about energy issues?

CORMANN  Japan’s green growth strategy focuses on hydrogen and ammonia, which are not yet cost-effective, and also nuclear, which obviously faces issues of social acceptance. Doubling nuclear’s share in the energy mix by 2030 could be challenging. Japan has to be flexible and look to alternate scenarios and contingency planning as needed.

We’ve been recommending for several surveys now that Japan improve its energy grid to make it easier to boost the share of renewables in electricity generation. We appreciate that there are big plans to improve carbon pricing, and we hope that this will enable Japan to meet its carbon neutrality goals.

INTERVIEWER  As you know, Japan was a “good student” of the OECD some sixty years ago when it was preparing to join the organization. How confident are you that Japan will heed your recommendations this time?

CORMANN  I am confident that it will do just that. We also understand that elected democratic governments have to engage in political management of the speed at and extent to which policy reforms can be implemented—it’s comparatively easier for us, without direct responsibility for implementation, to explain what should be done, but the government that’s accountable to the people has to attract their support.

It’s still important to reassess and restate these recommendations on a regular basis as appropriate. Our contributions are an important part of the public conversation, which we hope will help the Government of Japan build the necessary public support it needs for the reforms Japan needs. For governments to be able to successfully implement important reforms, they need public support—and that public support relies on a proper conversation based on evidence, based on data, and based on rational arguments about why certain reforms are necessary. That is what we are trying to contribute to.

INTERVIEWER  In Japan, of course, people loathe the idea of tax hikes. There’s understanding that the 10 percent consumption tax is a relatively low rate, but to increase it will be difficult.

CORMANN  There are no easy choices. With public debt at 245 percent of GDP, with interest rates likely to go up, and the cost of servicing that debt going up, if there’s no commitment to bringing that debt down over time servicing the debt will become a larger part of the budget, meaning there will be less money available for health, education, transport, defense, and so on. There’s no magic to this. There are three ways to improve the fiscal position of the budget: You increase revenue through stronger growth, you increase revenue through higher taxation, or you reduce expenditures. And reducing expenditures is not politically easy, either.

We believe there’s scope in the Japanese budget to increase the efficiency of expenditures, letting the resources that are available go further and deliver better outcomes at a lower cost. In the end, though, in order to get back to a balanced budget, if not a budget surplus that can reduce the debt load, somewhere along the way revenue has to go up. Consumption tax is an efficient, nondistorting way to raise additional revenue, and it can be done in small increments. But the longer you wait to seriously tackle them, the harder the problems will be to resolve.

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INTERVIEWER  In terms of monetary policy, you don’t recommend rushing to tighten the policy stance.

CORMANN  Well, we would never recommend hasty policy. [Laughs] But we see evidence that Japan has reached a turning point when it comes to the inflation outlook, after several decades of very low inflation or even deflation. We see inflation as likely to settle in around 2 percent, which opens the scope for the slow, steady tightening of monetary policy.

Japan’s Tasks in the Coming Year

INTERVIEWER  Japan is going to chair the OECD Ministerial Council Meeting this year. What are your expectations of the Japanese government in this role?

CORMANN  Japan had a very successful G7 presidency in 2023, so we’re very excited about the country chairing our meeting this year. There’s a great opportunity to build on some of those achievements of the G7 process. The world needs more international cooperation, more multilateralism. There are a lot of uncertainty and geopolitical tensions, and we face significant structural challenges like climate change, or how best to deal with the accelerating digital transformation, seizing the benefits while better managing the downside risks disruptions, including when it comes to artificial intelligence. That is something Prime Minister Kishida Fumio has taken a strong interest in.

We’re looking across the broad economic, environmental, and social policy spectrum at advancing solutions to the evolving challenges of our time. Helping to optimize emissions reduction outcomes through good policy and better coordination, helping to ensure that we have sensible policy settings in relation to digital and AI, facilitating efficient global markets with resilient supply chains—something that the G7 presidency of Japan was focused on and which we will focus on at our Ministerial Council Meeting—and of course strengthening our engagement with the Indo-Pacific. One significant development has been Indonesia’s request to begin accession discussions.

This is the sixtieth anniversary of Japan’s membership in the OECD, but it’s also the tenth anniversary of the Southeast Asia Regional Program, which was launched in 2014 by former Prime Minister Abe Shinzō. It’s a very exciting development to see Indonesia put its hand up for membership at this time, and something I hope we can focus on at the Ministerial Council Meeting.

INTERVIEWER  Do you expect other countries, like Singapore, Malaysia, or Vietnam, to follow suit?

CORMANN  Well, I’m meeting with the deputy prime minister of Thailand at the World Economic Forum in Davos next week, and this will be one of our items for discussion. Singapore and Vietnam are other examples, but it’s up to them to determine the speed at which they’ll pursue this opportunity.

INTERVIEWER  We hope to see the OECD continue to play an important role in the full spectrum of international agendas.

CORMANN  Thank you. We’ll do our best!

(Originally written in English based on a January 11, 2024, interview in Tokyo. Interviewer Akasaka Kiyotaka is president of the Nippon Communications Foundation. All photos © Nippon.com.)