Policy Options for Japan’s Revival

Hoshi, Takeo; Kashyap, Anil

In this report, we identify some specific concrete steps Japan can take to jump start growth. Our recommendations are organized around three broad themes: regulatory reform, opening up the Japanese economy, and improving macroeconomic policies. Section 2 identifies four types of regulatory relief that would improve growth in Japan. One set of changes show how to reduce the cost of conducting business in Japan. Each of these is achievable and together they would modestly improve business conditions and the efficiency of doing business in Japan. We also explain how to stop the protection of zombie firms, and identify several other government regulations that also discourage productivity growth, especially in the non-manufacturing parts of the economy. An approach that Koizumi government tried for deregulation was the creation of structural reform special zones. As our earlier report found, these special zones had mixed results, so we also explain the conditions that a special zone should satisfy to be growth enhancing. Section 3 examines the gains that can be achieved by opening up the Japanese economy. One avenue for doing this is via the Trans-Pacific Partnership (TPP), which Japan has finally decided to join the negotiation. We explain why participating in this deal is desirable. A perpetual road block to trade negotiations in Japan has been the pressure from agricultural interests to protect that sector from competition. Productivity gains in the Japanese agricultural sector have been dismal and we also discuss policies that could help improve that situation. A third path to openness is through increased immigration. We sketch immigration reforms that would be growth enhancing. Section 4 explores the growth impediments resulting from poor macroeconomic policies. The threat of a debt crisis that could cripple Japanese growth is real. We explain why a credible plan for fiscal consolidation is necessary and propose some principles that should be part of such a plan. Monetary policy has also been bad since the Bank of Japan’s legal independence. We identify the type of monetary policy framework that is necessary to end more than a decade long deflationary period. Section 5 offers some brief conclusions.

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More About This Work

Academic Units
Center on Japanese Economy and Business
Center on Japanese Economy and Business, Columbia University
Center on Japanese Economy and Business Working Papers, 308
Published Here
January 17, 2013