Annual Report on the Japanese

Economy and Public Finance


- No Gains without Reforms II -

November 2002

Cabinet Office

Government of Japan

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Chapter 3

   Issues for Vitalizing Japan' s Economy

   More than 10 years have passed since the collapse of the bubble economy in Japan. During that period, Japan has repeated an economic cycle and has seen three economic recovery phases. But each recovery phase was short-lived. Annual average real economic growth for the past decade has been limited to only 1%. Japan' s excellent economic performance, which had continued until the 1980s and had been called a miracle, has been reversed. Japan now lags behind many industrial countries and is cited as one of major risk factors for the world economy.
   Consumers and companies are seriously concerned about the future of the Japan' s economy. Indicating this is the growing concern over the "hollowing out of industry" in Japan. Behind the hollowing out of industry are a rapid increase in imports from China, the shrinking goods and services trade surplus, and industry' s structural shift to services. An analysis of these phenomena leads us to find that the Japan' s economy is structurally inefficient and should be restructured in order to overcome the current stagnation and achieve sustained growth.
   Japan' s economic restructuring should give basic priority to accelerating productivity growth and increasing return on assets. To this end, Japan should improve the efficiency of business management, allow productive factors to promptly move from low-productivity sectors to high-productivity ones, and implement efficient research and development to promote technological progress.
   Japan' s economic restructuring, though accompanied by abundant difficulties, should be implemented urgently. In order to allow each economic agent to positively address these agenda, we may have to present a new direction for the Japan' s economy going through structural reforms.
   From this viewpoint, we deal with Japan' s structural problems and the issues to be addressed for economic vitalization in this chapter. In Section 1, we will discuss the concern over the hollowing out of industry and specify Japan' s structural problems and issues for economic vitalization. This will reveal how inefficient the Japan' s economy is and how important productivity-boosting efforts are for solving the inefficiency. In Section 2, we will put in order major economic vitalization measures that Japan should implement in order to boost productivity. Based on these measures, we will analyze the current state of restructuring and future issues to be addressed. In Section 3, we will map out a picture of the Japan' s economy that will emerge through these economic vitalization measures.

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