Briefing Notes for the Launch in Tokyo, March 2008
Japan's economic performance
- Japan’s economy expanded by 2.1% in 2007 , after growth of 2.4% in 2006. Business investment and solid export demand supported the growth.
- The problem facing credit markets in United States did not slow investment demand growth during 2007 but did increasingly began to erode business confidence towards the end of the year.
- Private investment suffered a major setback after new construction standards law took effect in June 2007. Construction starts faced a sharp decline which for example, non-residential construction falling by 54% and housing construction dropped by 44% in September 2007.
- Increased production costs were progressively squeezing profits in the business sector, in particular of SMEs.
- Household consumption growth remained modest. Employment increased on the one hand, but sluggish wage growth and high oil prices discouraged consumer confidence.
- Despite the growing signs of labour shortage, wage pressures remained low, reflecting the retirement of expensive labour force (baby boomers) and recruitment of cheaper labour force (part-timers) to respond to the labour shortage.
- Corporate price inflation, which tracks changes in wholesale prices, grew much faster than consumer price inflation at about 2% due to;
- High oil prices,
- Increased commodity prices
- A weaker exchange rate at the beginning of the year
- Increase in hourly wages of part-time workers
- Price increases in producers level were passed on to consumers only very slowly, due to strong market competition
- Consumer price inflation remained around 0%
- Trade surplus expanded. Export growth was supported by the continued strength of demand from Asian countries, while import growth slowed due to rising import prices and subdued growth in domestic demand.
- Weakness in U.S. export demand has been offset by the solid demand from the other parts of the world. It is partly because the relative importance of other trading partners has increased in recent years, in particular of Asian countries;
- Almost half of Japan's exports are to Asia
- The share of export demand from China has increased. As of 2006, 20% of Japan’s export goes to China and Hong Kong, China, almost equal to 22% share of exports going to the United States.
- The sources of export growth have more diversified compared to several years ago. In 2000, almost 30% of Japan’s export growth was attributed to the U.S. demand growth. It had declined to less than 10% in 2006 as other export partners’ demand grew and expanded market share.
- A U.S. economic slowdown would reduce U.S. demand for Asian products, which may eventually lead to a reduction in Asia’s demand on Japanese export products.
- Growth is expected to slow in the coming year as external demand softens. Construction starts are expected to grow in 2008 as the delayed plans in 2007 are gradually implemented. The economy is expected to grow by 1.4% in 2008 and 1.3% in 2009.
- Considerable uncertainties remain over the magnitude of US economy slowdown. While the relative importance of US economy as a trading partner has reduced in recent years, whether and to what extent the economy has decoupled from US economy is not clear.
Unequal benefits of growth – agriculture left behind
- Land productivity in Japan is far ahead of other countries in Asia.
- China’s land productivity has increased 87-fold since 1961, partly due to land reforms, mechanization and higher input use. Its fertilizer use is on a par with Japan and New Zealand.
- Potential benefit of Doha is significant. ESCAP estimates of the aggregate welfare effects under Doha show modest annual gains of $4.6 billion globally in the short run, increasing to $5.2 billion in the long. Two-thirds of the total gains would accrue to Asia, with Japan gaining the most. Under Doha reforms, Japan is estimated to gain $1.5 billion in the short-term and $2.1 billion in the long term.
- Under comprehensive agricultural trade reforms, both regional and global welfare gains increase several times. Global welfare gains exceed $23 billion in the short run, increasing to $37 billion in the long run. Developed economies in Asia and the Pacific as a group – Japan, Australia and New Zealand – gain the most under Doha and comprehensive reforms. Under comprehensive reforms, short-term gain for Japan is estimated at $8 billion, long term gain $17.6 billion.
Policy research feature: how secure is retirement in Japan?
- Despite massive public debt, Japan faces the major challenge of making its social security system work.
- Socio-economic change has increasingly eroded the traditional family support system. Many elderly people live alone or with their spouses, and they live longer. Thus they need to support themselves or rely on institutional support system long after retirement.
- On one hand, elderly people are considered to be relatively better-off, but other hand there have been reports on the “poverty” of elderly people on the and disaggregated data suggest possibly a large pool of elderly population having hardship.
Income, consumption and savings
- Many elderly people belong to low income group. 45% of elderly households belong to the lowest income quartile. In 2002, 20% of elderly people had income below the poverty line. (Measured as relative poverty rate, which is a proportion of population under 50% of median income).
- Elderly people are not particularly worse off in disposable income. On average they have about 80% of the work-age disposable income. However, a disproportionate share of single households belongs to the low-income group.
- Consumption level of older couples are similar to that of younger couples, as many of them own their home and thus need to spend less on housing. However, almost 30% of elderly single-person households do not own a home and expenditure is about the half the elderly average – suggesting financial constraints on consumption.
- At aggregated level, savings of elderly people are much higher than younger generations but distribution is uneven among them. One third of elderly households have savings over 20 million yen ($165,300) but another quarter have less than 7.5 million yen ($62,000), which is less than twice the average annual earnings of regular workers. As much as 20% of people older than 60 may have no savings. And on average they have two decades to live after retirement.
Labour and pensions
- Elderly people in Japan continue to work long after retirement – until age 69 on average – to supplement old-age pensions. More than 70% of men age 65-69 are employed or willing to work, after they have retired from the main occupation. Labour income is a major determinant of income inequality among the elderly.
- When they get older and stop working, many of them depend solely on pension benefits, regardless of the type of pension
- Low pension earners tend to have low levels of savings. Some data shows that more than 30% of the lowest public pension earners have no savings, while over 40% of high public pension earners have savings of more than 20 million yen.
Public pension system
- Pension system has two tiers
- The employee pension insurance scheme (DPI):
- Mainly private sector employees (Public sector employees have similar but separate scheme called mutual aid pension scheme)
- Contribution: earnings related
- Benefits: earnings related component + flat rate basic pension component
- On average pension benefits are equivalent to 59% of pre-retirement earnings
- National pension system (basic pension)
- Mostly self-employed people, farmers, many of the non-regular workers who are not covered under the EPI
- Universal scheme: cover all residents over 20 years old
- Contribution: flat rate
- Benefits: flat rate component paid from age 65 with a minimum of 25 years of contribution
- 14% of average earnings
- The public pension system is not very progressive (due to a large earning-related component) and income distribution function is limited.
- Basic pension scheme does not guarantee a minimum living standard (referring to the eligibility criteria under the social safety net programme) but does contribute to poverty reduction among households. Single-persons households may find it particularly difficult to live on the basic pension.
- For very low income people, there is livelihood assistance programme under the social safety net. Yet stringent eligibility criteria and stigma tend to keep elderly people away from it – even when they are living below the threshold income which is considered minimum living standard.
- Basic pension scheme requires a minimum of 25 years of contribution to be qualified to receive the pay-out. Thus the system contains the risk of creating a pool of population who do not receive any pension at their old age. Those who are granted exemption or default the contribution run the risk of having little or no entitlement to a basic pension benefit on retirement.
The need to define the role of social insurance
- Lessons can be drawn from the experience in Japan – in its challenges in developing a coherent and effective, and financially viable social insurance scheme.
- A clear definition is needed – e.g. the role and the target group of the public pension system for poverty reduction, income redistribution and compulsory old-age savings
- Current system has created pockets of people who are wholly or partly excluded.