Japan’s current economic expansion is its longest of the post-war era, with per capita output growth nearly matching the OECD area since 2012. However, the expansion has peaked and global uncertainties weigh on the outlook. Growth is projected to continue at a moderate rate, supported by expansionary monetary policies and fiscal measures to offset the 2019 consumption tax rate hike.

The COVID-19 pandemic hit the economy hard, provoking a marked downturn. Economic activity tumbled as sanitary restrictions restrained consumption and investment. Workers and households with weaker attachment to employment tended to be most affected. However, robust government support and the reopening of the economy led to a partial bounce back.

Japan has navigated the dual shock of the pandemic and the energy crisis well. However, significant headwinds from weak global growth, geopolitical tensions and high inflation highlight the importance of enhancing the Japanese economy’s resilience to shocks. In a context of inflation, which has risen above target, and pressures from divergent monetary policy from peers, adjustments to monetary policy settings have commenced. Given high public debt, fiscal consolidation to rebuild fiscal buffers, underpinned by a credible medium-term fiscal framework to put the debt-to-GDP ratio on a clear downward path, is key. Longer-term sustainability also requires reducing greenhouse gas emissions in line with government targets, calling for green investment, innovation and carbon pricing. Reforms to improve the innovation framework and incentives for start-ups are key to boost productivity and address ageing pressures. Removing obstacles to the employment of women and older persons and making greater use of foreign workers are also essential to counter demographic headwinds. Strengthening the financial position of young people and policies to support families and children, such as improved parental leave, would help to reverse the downward trend in the fertility rate. SPECIAL FEATURE: ADDRESSING DEMOGRAPHIC HEADWINDS

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