Economic Sustainability
#20Key Findings
Japan falls into the sample’s lower-middle ranks (rank 20) with regard to economic sustainability.
Japan was one of the first countries to adopt circular economy policies, obliging businesses to reduce waste and enhance product durability. Because the country lies in an earthquake zone, state institutions have put substantial emphasis on preparing for emergency situations. Fossil fuel reliance is high. Observers say policy is insufficient to reach Paris Agreement goals.
Unemployment rates are extremely low. Women’s labor-force participation rate has increased rapidly in recent years, but 90% of all part time workers are women. The gap between regular and non-regular workers, particularly regarding training and benefits, remains a major concern. Spending on active labor market policies is comparatively low.
Corporate taxes are high, but the tax burden is otherwise fairly distributed. Public debt levels are very high, at more than 255% of GDP in 2023, with most debt held by domestic investors. Rising spending has complicated debt-reduction efforts. The budget process often lacks transparency. R&D spending levels are high.
Japan was one of the first countries to adopt circular economy policies, obliging businesses to reduce waste and enhance product durability. Because the country lies in an earthquake zone, state institutions have put substantial emphasis on preparing for emergency situations. Fossil fuel reliance is high. Observers say policy is insufficient to reach Paris Agreement goals.
Unemployment rates are extremely low. Women’s labor-force participation rate has increased rapidly in recent years, but 90% of all part time workers are women. The gap between regular and non-regular workers, particularly regarding training and benefits, remains a major concern. Spending on active labor market policies is comparatively low.
Corporate taxes are high, but the tax burden is otherwise fairly distributed. Public debt levels are very high, at more than 255% of GDP in 2023, with most debt held by domestic investors. Rising spending has complicated debt-reduction efforts. The budget process often lacks transparency. R&D spending levels are high.
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Graph View
How committed is the government to driving the transition toward a circular economy?
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The government is clearly committed to transitioning to a circular economy.
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The government is largely committed to transitioning to a circular economy.
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The government is somewhat committed to transitioning to a circular economy.
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1
The government is not at all committed to transitioning to a circular economy.
Japan was one of the first countries to adopt circular economy policies. It passed the Basic Act for Establishing a Sound Material-Cycle Society in 2000. The act obliges business operators to prevent or reduce waste from raw materials, improve cyclical usage and enhance the durability of products.
As a country that heavily relies on the import of resources, Japan has a natural interest in recycling. Local governments have developed relatively well-managed waste management and recycling systems. However, 80% of waste is still incinerated and much of the plastic waste is exported to non-OECD countries. The Fundamental Plan for Establishing a Sound Material-Cycle Society is reviewed every five years and supervised by the Ministry of the Environment. The fourth plan in 2018 examined three indicators: resource productivity, cyclical use rate and final amount disposed. In the first decade of the 21st century, Japan made considerable progress in all these fields, but there has been almost no improvement over the last decade. Numerical targets for 2025 include increasing resource productivity to JPY 490,000 per ton, cyclical use rate at inlet to 18%, cyclical use rate at outlet to 47% and reducing the final amount disposed to 1.3 million tons. In addition, new indicators have been added, such as the number of local governments working toward developing a regional circular and ecological systems, and reducing household food loss.
The Ministry of Economy, Trade and Industry (METI) has been promoting the circular economy initiative. Unlike the Ministry of Environment, METI is primarily concerned with promoting economic growth. The Circular Economy Vision 2020 treats environmentally friendly materials produced in Japan, such as marine biodegradable plastics, as a potential business opportunity. Cooperation between the Ministry of the Environment and METI has led to some ecological initiatives, such as the Resource Circulation Strategy for Plastics from 2019. The report also stresses that a circular economy relies on voluntary activities, with the government focusing on encouraging the adoption of appropriate measures. The concept of a circular economy as a business opportunity is also reflected in the fact that the government aims to help Japanese companies engage in the circular economy in order to make themselves more attractive to international investors by disseminating appropriate information.
Japan has promoted a circular economy in public procurement according to the 2000 Act on Promotion of Procurement of Eco-Friendly Goods and Services by the State and Other Entities, and the 2007 Green Contract Law. The criterion of environmental performance in procuring goods and services is obligatory for national government agencies and institutions, while local governments only have to make an effort at implementing ecological solutions. All government entities publish green procurement policies on a yearly basis.
Citations:
Arai, Risa, Martin Calisto Friant, and Walter J. V. Vermeulen. 2023. “The Japanese Circular Economy and Sound Material-Cycle Society Policies: Discourse and Policy Analysis.” Circular Economy and Sustainability. https://doi.org/10.1007/s43615-023-00298-7
EU-Japan Centre for Industrial Cooperation. “Government Procurement and Circular Economy.” https://www.eu-japan.eu/government-procurement-circular-economy
Ministry of Economy, Trade and Industry. 2020. “Circular Economy Vision 2020.” https://www.meti.go.jp/shingikai/energy_environment/junkai_keizai/pdf/20200522_03.pdf
Ministry of the Environment. 2000. “The Basic Act for Establishing a Sound Material-Cycle Society.” https://www.env.go.jp/content/900452892.pdf
Ministry of the Environment. 2018. “Fundamental Plan for Establishing a Sound Material-Cycle Society.” https://www.env.go.jp/content/900453386.pdf
As a country that heavily relies on the import of resources, Japan has a natural interest in recycling. Local governments have developed relatively well-managed waste management and recycling systems. However, 80% of waste is still incinerated and much of the plastic waste is exported to non-OECD countries. The Fundamental Plan for Establishing a Sound Material-Cycle Society is reviewed every five years and supervised by the Ministry of the Environment. The fourth plan in 2018 examined three indicators: resource productivity, cyclical use rate and final amount disposed. In the first decade of the 21st century, Japan made considerable progress in all these fields, but there has been almost no improvement over the last decade. Numerical targets for 2025 include increasing resource productivity to JPY 490,000 per ton, cyclical use rate at inlet to 18%, cyclical use rate at outlet to 47% and reducing the final amount disposed to 1.3 million tons. In addition, new indicators have been added, such as the number of local governments working toward developing a regional circular and ecological systems, and reducing household food loss.
The Ministry of Economy, Trade and Industry (METI) has been promoting the circular economy initiative. Unlike the Ministry of Environment, METI is primarily concerned with promoting economic growth. The Circular Economy Vision 2020 treats environmentally friendly materials produced in Japan, such as marine biodegradable plastics, as a potential business opportunity. Cooperation between the Ministry of the Environment and METI has led to some ecological initiatives, such as the Resource Circulation Strategy for Plastics from 2019. The report also stresses that a circular economy relies on voluntary activities, with the government focusing on encouraging the adoption of appropriate measures. The concept of a circular economy as a business opportunity is also reflected in the fact that the government aims to help Japanese companies engage in the circular economy in order to make themselves more attractive to international investors by disseminating appropriate information.
Japan has promoted a circular economy in public procurement according to the 2000 Act on Promotion of Procurement of Eco-Friendly Goods and Services by the State and Other Entities, and the 2007 Green Contract Law. The criterion of environmental performance in procuring goods and services is obligatory for national government agencies and institutions, while local governments only have to make an effort at implementing ecological solutions. All government entities publish green procurement policies on a yearly basis.
Citations:
Arai, Risa, Martin Calisto Friant, and Walter J. V. Vermeulen. 2023. “The Japanese Circular Economy and Sound Material-Cycle Society Policies: Discourse and Policy Analysis.” Circular Economy and Sustainability. https://doi.org/10.1007/s43615-023-00298-7
EU-Japan Centre for Industrial Cooperation. “Government Procurement and Circular Economy.” https://www.eu-japan.eu/government-procurement-circular-economy
Ministry of Economy, Trade and Industry. 2020. “Circular Economy Vision 2020.” https://www.meti.go.jp/shingikai/energy_environment/junkai_keizai/pdf/20200522_03.pdf
Ministry of the Environment. 2000. “The Basic Act for Establishing a Sound Material-Cycle Society.” https://www.env.go.jp/content/900452892.pdf
Ministry of the Environment. 2018. “Fundamental Plan for Establishing a Sound Material-Cycle Society.” https://www.env.go.jp/content/900453386.pdf
Graph View
How committed is the government to updating and protecting critical infrastructure?
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The government is clearly committed to updating basic technical infrastructure.
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The government is largely committed to updating basic technical infrastructure.
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The government is somewhat committed to updating basic technical infrastructure.
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The government is not at all committed to updating basic technical infrastructure.
Japan boasts one of the most advanced critical infrastructures in the world with high-quality transportation and telecommunications networks, administration, financial and medical services, as well as an efficient energy sector. Due to its location in a seismically active zone, state institutions have put substantial emphasis on preparing for emergency situations, such as earthquakes.
Different sectors of critical infrastructure are supervised by different state institutions: information and communication services, as well as government and administrative services by the Ministry of Internal Affairs and Communications; financial services by the Financial Services Agency; aviation and airport, railway, and logistic services by the Ministry of Land, Infrastructure, Transport and Tourism; electric power and gas supplies, and card services, as well as chemical and petroleum industries by the Ministry of Economy, Trade and Industry; and medical and water services by the Ministry of Health, Labor and Welfare.
Japan scored highly in the Global Cybersecurity Index 2020. Information security is regulated by the Basic Policy of Critical Information Infrastructure Protection from 2014, which clarifies the responsibilities of various governmental institutions and critical information infrastructure operators. Guidelines in this field are revised every three years. In 2015, the National Center of Incident Readiness and Strategy for Cybersecurity was established. The center formulates the Cybersecurity Strategy, the Cybersecurity Policy for Critical Infrastructure Protection and other important guidelines in this field. However, indicators to measure the outcomes specified in these documents are rather vague.
Response to emergency situations is coordinated by the deputy chief cabinet secretary for crisis management, who deals with crisis situations other than those related to national defense, such as large-scale natural disasters, shipping or airplane accidents, terrorist attacks, and operations to rescue Japanese citizens abroad. This post was established in 1998 in response to the Great Hanshin Earthquake in Kobe and the sarin subway attack in Tokyo in 1995. In addition, the post of assistant chief cabinet secretary for security affairs was created in 2001. Nevertheless, due to sectoral divisions among bureaucrats, interministerial coordination sometimes remains insufficient. For instance, organizational confusion during the Great East Japan Earthquake in March 2011 led to cognitive dissonance among decision-makers and prolonged disaster-relief activities.
Citations:
Information Security Policy Council. 2014. “The Basic Policy of Critical Information Infrastructure Protection (3rd Edition).” https://www.nisc.go.jp/eng/pdf/actionplan_ci_eng_v3.pdf
International Telecommunication Union. 2021. “Global Cybersecurity Index 2020.” https://www.itu.int/dms_pub/itu-d/opb/str/D-STR-GCI.01-2021-PDF-E.pdf
National Center of Incident Readiness and Strategy for Cybersecurity. “About NISC.” https://www.nisc.go.jp/eng/index.html
Different sectors of critical infrastructure are supervised by different state institutions: information and communication services, as well as government and administrative services by the Ministry of Internal Affairs and Communications; financial services by the Financial Services Agency; aviation and airport, railway, and logistic services by the Ministry of Land, Infrastructure, Transport and Tourism; electric power and gas supplies, and card services, as well as chemical and petroleum industries by the Ministry of Economy, Trade and Industry; and medical and water services by the Ministry of Health, Labor and Welfare.
Japan scored highly in the Global Cybersecurity Index 2020. Information security is regulated by the Basic Policy of Critical Information Infrastructure Protection from 2014, which clarifies the responsibilities of various governmental institutions and critical information infrastructure operators. Guidelines in this field are revised every three years. In 2015, the National Center of Incident Readiness and Strategy for Cybersecurity was established. The center formulates the Cybersecurity Strategy, the Cybersecurity Policy for Critical Infrastructure Protection and other important guidelines in this field. However, indicators to measure the outcomes specified in these documents are rather vague.
Response to emergency situations is coordinated by the deputy chief cabinet secretary for crisis management, who deals with crisis situations other than those related to national defense, such as large-scale natural disasters, shipping or airplane accidents, terrorist attacks, and operations to rescue Japanese citizens abroad. This post was established in 1998 in response to the Great Hanshin Earthquake in Kobe and the sarin subway attack in Tokyo in 1995. In addition, the post of assistant chief cabinet secretary for security affairs was created in 2001. Nevertheless, due to sectoral divisions among bureaucrats, interministerial coordination sometimes remains insufficient. For instance, organizational confusion during the Great East Japan Earthquake in March 2011 led to cognitive dissonance among decision-makers and prolonged disaster-relief activities.
Citations:
Information Security Policy Council. 2014. “The Basic Policy of Critical Information Infrastructure Protection (3rd Edition).” https://www.nisc.go.jp/eng/pdf/actionplan_ci_eng_v3.pdf
International Telecommunication Union. 2021. “Global Cybersecurity Index 2020.” https://www.itu.int/dms_pub/itu-d/opb/str/D-STR-GCI.01-2021-PDF-E.pdf
National Center of Incident Readiness and Strategy for Cybersecurity. “About NISC.” https://www.nisc.go.jp/eng/index.html
Graph View
How committed is the government to fully decarbonizing the energy system by 2050?
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The government is clearly committed to transitioning to a decarbonized energy system.
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The government is largely committed to transitioning to a decarbonized energy system.
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The government is somewhat committed to transitioning to a decarbonized energy system.
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1
The government is not at all committed to transitioning to a decarbonized energy system.
Japan increased its reliance on fossil fuels after the crisis at the Fukushima Daiichi Nuclear Power Plant in March 2011 and remains highly dependent on fossil fuels, with 87% of energy production coming from burning coal, gas and oil in 2022. In April 2021, Prime Minister Suga Yoshihide announced the aim to reduce greenhouse gas emissions by 46% by 2030 compared with 2013 levels and to achieve carbon neutrality by 2050. This is considerably more ambitious than Japan’s previous target of a 26% reduction by 2030.
In February 2023, the Kishida government approved the Basic Policy for Realizing the GX: Green Transformation Policy, followed by the Act on Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure, which was passed in the Diet in May 2023. The Basic Policy contains a 10-year roadmap of decarbonization based on the creation of a voluntary baseline-and-credit system, as well as a mandatory emissions trading system and carbon levy. The strategy encompasses 14 action plans, such as reducing energy usage, promoting renewable energy, reactivating nuclear power plants, and introducing hydrogen and ammonia-based technologies. The implementation of the decarbonization policy will be supervised by the newly created GX Promotion Agency. JPY 150 trillion, including JPY 20 trillion in GX Economic Transition Bonds, will be spent to achieve decarbonization goals in line with the strategies formulated by the Ministry of Economy, Trade and Industry.
According to the Climate Action Tracker rating from November 2023, Japan’s policy is insufficient to achieve the goals of the Paris Agreement. The Basic Policy for Realizing the GX has been criticized for lacking criteria related to reducing greenhouse gas emissions in the distribution of public funds for decarbonization. Some of the promoted “clean coal” technologies, such as the use of hydrogen and ammonia derived from fossil fuels, may even lead to an increase in greenhouse gas emissions. The carbon levy, planned for 2028, is expected to be set at a low level. As the decarbonization strategy is led by the Ministry of Economy, Trade and Industry, the primary focus appears to be on promoting economic growth rather than addressing global warming.
Citations:
Climate Action Tracker. 2023. “Japan.” https://climateactiontracker.org/countries/japan/
FoE Japan. 2023. “We oppose the ‘GX Promotion Bill’ which creates an unclear flow of funds to nuclear power and large-scale emitters.” https://foejapan.org/en/issue/20230410/12300/
International Carbon Action Partnership. 2023. “Japan’s Cabinet Approves Policy Roadmap Including Plans for National ETS.” https://icapcarbonaction.com/en/news/japans-cabinet-approves-policy-roadmap-including-plans-national-ets
Ministry of Economy, Trade and Industry. “GX Jitsugen ni muketa Kihon Hôshin – Kongo 10-nen o Misueta Rôdomappu” [Basic Policy for Realizing the GX – Roadmap for the next 10 years]. https://www.meti.go.jp/press/2022/02/20230210002/20230210002_1.pdf
In February 2023, the Kishida government approved the Basic Policy for Realizing the GX: Green Transformation Policy, followed by the Act on Promotion of a Smooth Transition to a Decarbonized Growth-Oriented Economic Structure, which was passed in the Diet in May 2023. The Basic Policy contains a 10-year roadmap of decarbonization based on the creation of a voluntary baseline-and-credit system, as well as a mandatory emissions trading system and carbon levy. The strategy encompasses 14 action plans, such as reducing energy usage, promoting renewable energy, reactivating nuclear power plants, and introducing hydrogen and ammonia-based technologies. The implementation of the decarbonization policy will be supervised by the newly created GX Promotion Agency. JPY 150 trillion, including JPY 20 trillion in GX Economic Transition Bonds, will be spent to achieve decarbonization goals in line with the strategies formulated by the Ministry of Economy, Trade and Industry.
According to the Climate Action Tracker rating from November 2023, Japan’s policy is insufficient to achieve the goals of the Paris Agreement. The Basic Policy for Realizing the GX has been criticized for lacking criteria related to reducing greenhouse gas emissions in the distribution of public funds for decarbonization. Some of the promoted “clean coal” technologies, such as the use of hydrogen and ammonia derived from fossil fuels, may even lead to an increase in greenhouse gas emissions. The carbon levy, planned for 2028, is expected to be set at a low level. As the decarbonization strategy is led by the Ministry of Economy, Trade and Industry, the primary focus appears to be on promoting economic growth rather than addressing global warming.
Citations:
Climate Action Tracker. 2023. “Japan.” https://climateactiontracker.org/countries/japan/
FoE Japan. 2023. “We oppose the ‘GX Promotion Bill’ which creates an unclear flow of funds to nuclear power and large-scale emitters.” https://foejapan.org/en/issue/20230410/12300/
International Carbon Action Partnership. 2023. “Japan’s Cabinet Approves Policy Roadmap Including Plans for National ETS.” https://icapcarbonaction.com/en/news/japans-cabinet-approves-policy-roadmap-including-plans-national-ets
Ministry of Economy, Trade and Industry. “GX Jitsugen ni muketa Kihon Hôshin – Kongo 10-nen o Misueta Rôdomappu” [Basic Policy for Realizing the GX – Roadmap for the next 10 years]. https://www.meti.go.jp/press/2022/02/20230210002/20230210002_1.pdf
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
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Labor market institutions are fully aligned with the goal of an adaptable labor market.
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Labor market institutions are largely aligned with the goal of an adaptable labor market.
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Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
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Labor market institutions are not at all aligned with the goal of an adaptable labor market.
Japan has one of the lowest unemployment rates in the OECD (2.74% in 2022) and has one of the highest participation rates for men of working age. In recent years, the participation rate of women has increased rapidly, with Japan overtaking most countries in the G7. Moreover, Japan has mobilized an increasing number of elderly workers. This has helped keep the labor force stable, despite the fact that the Japanese working population has fallen by around 11% since 2000. The effects of the COVID-19 pandemic on the labor market were relatively mild. This suggests that employers and workers have overall adapted well to population aging and a shrinking workforce. The government has made it financially attractive for women to postpone retirement beyond 65. However, similar gains in worker mobilization seem unlikely without more migration – which has increased noticeably in recent years, but still remains comparatively limited.
Large Japanese companies generally recruit new employees from among fresh university graduates on an annual basis in spring, which does not encourage flexibility. Although many firms abandoned life-long employment and seniority wage systems during the period of economic stagnation in the 1990s, they are still common in big corporations.
A key concern regarding adaptability remains the dual labor market where so-called regular workers, especially in large firms, enjoy wide-reaching and continuous on-the-job training. Non-regular workers, including the large number of part-time workers who are often employed on a different contractual basis than regular workers, are usually excluded from training and upskilling. Hence, opportunities for non-regular workers to improve their skill levels and thus address labor shortages in certain sectors are limited. Wage profiles for the two groups of workers continue to differ considerably, which means the vast majority of non-regular workers remain in low-paying jobs throughout their working lives. Until recently, Japanese governments committed comparatively few resources to job training and placement.
Instead, commercial personnel agencies play a major role in recruiting workers and facilitating mid-career job changes. However, the 2018 Guidelines for Promoting Job Change and Re-employment Regardless of Age introduced basic principles for companies hiring people who change jobs. Meanwhile, a subsidy program for firms that establish pay schemes based on competence rather than seniority was also introduced in 2018. In 2020, it became obligatory for large companies to disclose their quotas for mid-career hires. These regulations have led to a gradual increase in the number of people who change jobs at the mid-career level. Corporations are also taking steps to make the very formalized hiring system for new recruits more fluid and flexible. This system makes it difficult for graduates who start in low-paying or non-regular positions to move into better jobs later, as these are typically reserved for graduates who succeed in the hiring process before graduation.
Citations:
Fujimoto, Makoto. 2023. “Changing Jobs among Middle-aged Workers in Japan: What Affects Workers’ Personnel Treatment and Utilization of Skills and Knowledge at a New Job.” Japan Labor Issues 7 (44): 37-45.
Nishimura, Itaru. 2020. “Wages in Japan Part III: Wages and Forms of Employment.” Japan Labor Issues 4 (25): 22-25.
OECD. 2021. “Creating Responsive Adult Learning Opportunities in Japan, Getting Skills Right.” Paris: OECD Publishing. https://www.oecd-ilibrary.org/sites/0ea11b94-en/index.html?itemId=/content/component/0ea11b94-en
Large Japanese companies generally recruit new employees from among fresh university graduates on an annual basis in spring, which does not encourage flexibility. Although many firms abandoned life-long employment and seniority wage systems during the period of economic stagnation in the 1990s, they are still common in big corporations.
A key concern regarding adaptability remains the dual labor market where so-called regular workers, especially in large firms, enjoy wide-reaching and continuous on-the-job training. Non-regular workers, including the large number of part-time workers who are often employed on a different contractual basis than regular workers, are usually excluded from training and upskilling. Hence, opportunities for non-regular workers to improve their skill levels and thus address labor shortages in certain sectors are limited. Wage profiles for the two groups of workers continue to differ considerably, which means the vast majority of non-regular workers remain in low-paying jobs throughout their working lives. Until recently, Japanese governments committed comparatively few resources to job training and placement.
Instead, commercial personnel agencies play a major role in recruiting workers and facilitating mid-career job changes. However, the 2018 Guidelines for Promoting Job Change and Re-employment Regardless of Age introduced basic principles for companies hiring people who change jobs. Meanwhile, a subsidy program for firms that establish pay schemes based on competence rather than seniority was also introduced in 2018. In 2020, it became obligatory for large companies to disclose their quotas for mid-career hires. These regulations have led to a gradual increase in the number of people who change jobs at the mid-career level. Corporations are also taking steps to make the very formalized hiring system for new recruits more fluid and flexible. This system makes it difficult for graduates who start in low-paying or non-regular positions to move into better jobs later, as these are typically reserved for graduates who succeed in the hiring process before graduation.
Citations:
Fujimoto, Makoto. 2023. “Changing Jobs among Middle-aged Workers in Japan: What Affects Workers’ Personnel Treatment and Utilization of Skills and Knowledge at a New Job.” Japan Labor Issues 7 (44): 37-45.
Nishimura, Itaru. 2020. “Wages in Japan Part III: Wages and Forms of Employment.” Japan Labor Issues 4 (25): 22-25.
OECD. 2021. “Creating Responsive Adult Learning Opportunities in Japan, Getting Skills Right.” Paris: OECD Publishing. https://www.oecd-ilibrary.org/sites/0ea11b94-en/index.html?itemId=/content/component/0ea11b94-en
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
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9
Labor market institutions are fully aligned with the goal of an inclusive labor market.
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7
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Labor market institutions are largely aligned with the goal of an inclusive labor market.
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3
Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
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1
1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
The gap between regular and non-regular workers in Japan has been a great concern for many years. After a phase of labor market deregulation until about 2007, various governments have taken steps to narrow the gap between both groups, such as by increasing social security coverage and strengthening legal provisions on the principle of “equal pay for equal work.” Whereas previously legal rules often only asked employers “to make a credible effort” to ensure equal treatment, Japanese labor law now entails provisions that make employers partially liable for non-compliance.
This has led to some improvements, but wage gaps remain entrenched, and Japan still has a considerable gender wage gap. Japan has the lowest youth unemployment rate among the OECD countries (10.84% in 2022). Still, the Japanese labor market poses considerable challenges to young people. The practice of simultaneously hiring fresh university graduates discriminates against those who do not attend university or graduate from a foreign university. Working times for regular male employees are still among the world’s highest – which makes it difficult for many men to undertake a share of domestic tasks in households where both the husband and wife work (which is the norm in Japan). This limits the ability of many women to increase their working hours and seek better-paid jobs. Ninety percent of all part-time workers, who rarely move up the career ladder, are women. Prime Minister Abe Shinzô (2012 – 2020) promoted the active labor market participation of women by increasing the number of childcare centers. The current government under Prime Minister Kishida has announced a further expansion, which is supposed to put Japan ahead of Sweden. At the time of writing, legislation entailing JPY 3.6 billion for this purpose was due to be introduced into the Diet.
In recent years, several Japanese governments have also tried to improve the inclusiveness of the labor market by reducing working hours. The 2018 Act on the Arrangement of Related Acts to Promote Work Style Reform limited allowed overtime work to 45 hours per month and 360 hours per year, and introduced penalties for violating the new rules. In 2020, JPY 65 billion was devoted to a three-year plan to promote the advancement of the “employment ice age generation” (people who entered the labor market during the economic stagnation from the early 1990s to the mid-2000s) to regular jobs.
Citations:
OECD. 2021. “Creating Responsive Adult Learning Opportunities in Japan, Getting Skills Right.” https://www.oecd-ilibrary.org/sites/0ea11b94-en/index.html?itemId=/content/component/0ea11b94-en
“Japan to boost child care spending to match Sweden.” Kyodo News, June 1. https://english.kyodonews.net/news/2023/06/527c2e8ba284-japan-to-boost-child-care-spending-to-match-sweden.html
Otsuki, Kensuke, and Shota Asao. 2018. “Act on the Arrangement of Related Acts to Promote Work Style Reform.” Labor and Employment Law Bulletin 40, July. https://www.amt-law.com/asset/pdf/bulletins9_pdf/LELB40.pdf
Sim, Walter. 2020. “Japan Takes Steps to Help Those Trapped in ‘Employment Ice Age’.” The Straits Times January 1. https://www.straitstimes.com/asia/east-asia/japan-takes-steps-to-help-those-trapped-in-employment-ice-age
This has led to some improvements, but wage gaps remain entrenched, and Japan still has a considerable gender wage gap. Japan has the lowest youth unemployment rate among the OECD countries (10.84% in 2022). Still, the Japanese labor market poses considerable challenges to young people. The practice of simultaneously hiring fresh university graduates discriminates against those who do not attend university or graduate from a foreign university. Working times for regular male employees are still among the world’s highest – which makes it difficult for many men to undertake a share of domestic tasks in households where both the husband and wife work (which is the norm in Japan). This limits the ability of many women to increase their working hours and seek better-paid jobs. Ninety percent of all part-time workers, who rarely move up the career ladder, are women. Prime Minister Abe Shinzô (2012 – 2020) promoted the active labor market participation of women by increasing the number of childcare centers. The current government under Prime Minister Kishida has announced a further expansion, which is supposed to put Japan ahead of Sweden. At the time of writing, legislation entailing JPY 3.6 billion for this purpose was due to be introduced into the Diet.
In recent years, several Japanese governments have also tried to improve the inclusiveness of the labor market by reducing working hours. The 2018 Act on the Arrangement of Related Acts to Promote Work Style Reform limited allowed overtime work to 45 hours per month and 360 hours per year, and introduced penalties for violating the new rules. In 2020, JPY 65 billion was devoted to a three-year plan to promote the advancement of the “employment ice age generation” (people who entered the labor market during the economic stagnation from the early 1990s to the mid-2000s) to regular jobs.
Citations:
OECD. 2021. “Creating Responsive Adult Learning Opportunities in Japan, Getting Skills Right.” https://www.oecd-ilibrary.org/sites/0ea11b94-en/index.html?itemId=/content/component/0ea11b94-en
“Japan to boost child care spending to match Sweden.” Kyodo News, June 1. https://english.kyodonews.net/news/2023/06/527c2e8ba284-japan-to-boost-child-care-spending-to-match-sweden.html
Otsuki, Kensuke, and Shota Asao. 2018. “Act on the Arrangement of Related Acts to Promote Work Style Reform.” Labor and Employment Law Bulletin 40, July. https://www.amt-law.com/asset/pdf/bulletins9_pdf/LELB40.pdf
Sim, Walter. 2020. “Japan Takes Steps to Help Those Trapped in ‘Employment Ice Age’.” The Straits Times January 1. https://www.straitstimes.com/asia/east-asia/japan-takes-steps-to-help-those-trapped-in-employment-ice-age
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
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Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
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Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
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Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
2
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1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
In 2020, Japan spent only 0.24% of GDP on unemployment benefits, well below the 0.58% OECD average. Moreover, only a comparatively small share of the unemployed receive benefits, which can be at least partially explained by the fact that many non-regular positions do not qualify workers for benefits. However, the criteria for participation in the unemployment insurance program have been continually relaxed. In 2010, the minimum expected period of employment was reduced from six months to 31 days and the minimum weekly working hours required were lowered from 30 to 20 in 2012. The unemployment insurance payment period in Japan ranges between 90 and 360 days, depending on the duration of insured employment, age and the reasons the employment ended.
Traditionally, Japanese labor policy has emphasized keeping at-risk workers employed to avoid unemployment in the first place. The Employment Adjustment Subsidy and other subsidy programs have been crucial in this approach and have helped employers maintain excess workers during economic downturns by subsidizing wages. The experience of the global financial crisis and the COVID-19 pandemic suggests that this approach has been largely successful as unemployment rates remained well below those of comparable countries. In contrast, Japan has always spent far less on active labor market policies than comparable countries. Japan’s Support System for Job Seekers provides some free vocational education and training (VET) programs, as well as allowances for VET participants. Re-employment allowances are also available for recipients of unemployment benefits.
Another major concern of Japanese employment practices has been the treatment of migrant workers. The Technical Intern Training Program, which has facilitated the temporary migration of low-wage workers to Japan mostly from developing countries, has been criticized for allowing abusive employment practices and making it hard for workers to claim rights. The current government has announced that the program will be abolished and replaced with more formalized mechanisms of labor migration. This could improve the legal position of workers.
Due to the traditionally large role of corporate welfare schemes, the limited integration of non-regular workers and migrant workers into these systems means there are still considerable differences between different types of workers. In addition, there has been a large gap in social benefits between workers in large, and small and medium-sized firms. Public schemes do not mitigate these gaps in any way and are considered – as a government council admitted – inadequate, especially with regard to old age, where most pensioners rely to a large extent on corporate lump sum payments and pension benefits in addition to the public pension. Payments for workers outside large firms tend to be much lower and non-regular workers do not usually receive any payment. Japan has improved public pension options for self-employed workers in recent years.
As in other countries, low-wage workers have benefited particularly from wage growth, not least because regional and national minimum wage rates have been raised almost every year above inflation. In October 2023, the minimum wage was raised from JPY 1,072 to JPY 1,113 (€7) per hour for Tokyo. Despite improvements in the situation of non-regular workers, who accounted for 36.7% of all employees in 2022, they face many more risks than regular workers. The safety net still does not cover all non-regular workers, though the Kishida cabinet plans to extend some benefits to those working below 20 hours per week. Furthermore, some trade unions that had previously only accepted regular workers as members began to represent the interests of non-regular workers. Thanks to these changes, the number of involuntary non-regular workers has declined considerably from 3.41 million in 2013 to 2.10 million in 2022.
Citations:
Aoki, Kotaro, Nana Iwamoto, and Taro Yamada. 2023. “Japan’s Labor Movement Is Taking Up the Demands of Part-Time and Temporary Workers.” Jacobin, May 9. https://jacobin.com/2023/05/japan-labor-movement-union-organizing-nonregular-workers-spring-offensive
“End of Technical Intern Program: Use Reformed System to Improve Working Environment for Foreigners.” Japan News, February 10, 2024. https://japannews.yomiuri.co.jp/editorial/yomiuri-editorial/20240210-168083/
“Japan weighs jobless benefits for part-timers below 20 hours a week.” Nikkei Asia, April 25. https://asia.nikkei.com/Spotlight/Work/Japan-weighs-jobless-benefits-for-part-timers-below-20-hours-a-week
“Minimum Wage Increased in Japan from 01 October 2023 – October 02, 2023,” 2023, https://wageindicator.org/salary/minimum-wage/minimum-wages-news/2023/minimum-wage-increased-in-japan-from-01-october-2023-october-02-2023
OECD. 2023. “Public unemployment spending (indicator).” doi: 10.1787/55557fd4-en (accessed: 5 December 2023).
OECD. 2023. “Social Spending (Indicator).” doi: 10.1787/7497563b-en
OECD. 2023. “The OECD Tax-Benefit Database. Description of Policy Rules for Japan 2023.” https://web-archive.oecd.org/2023-11-08/500515-TaxBEN-Japan-latest.pdf
Takahashi, Koji. 2023. “Non-Regular Employment Measures in Japan.” Japan Labor Issues 7 (44): https://www.jil.go.jp/english/jli/documents/2023/044-05.pdf
Traditionally, Japanese labor policy has emphasized keeping at-risk workers employed to avoid unemployment in the first place. The Employment Adjustment Subsidy and other subsidy programs have been crucial in this approach and have helped employers maintain excess workers during economic downturns by subsidizing wages. The experience of the global financial crisis and the COVID-19 pandemic suggests that this approach has been largely successful as unemployment rates remained well below those of comparable countries. In contrast, Japan has always spent far less on active labor market policies than comparable countries. Japan’s Support System for Job Seekers provides some free vocational education and training (VET) programs, as well as allowances for VET participants. Re-employment allowances are also available for recipients of unemployment benefits.
Another major concern of Japanese employment practices has been the treatment of migrant workers. The Technical Intern Training Program, which has facilitated the temporary migration of low-wage workers to Japan mostly from developing countries, has been criticized for allowing abusive employment practices and making it hard for workers to claim rights. The current government has announced that the program will be abolished and replaced with more formalized mechanisms of labor migration. This could improve the legal position of workers.
Due to the traditionally large role of corporate welfare schemes, the limited integration of non-regular workers and migrant workers into these systems means there are still considerable differences between different types of workers. In addition, there has been a large gap in social benefits between workers in large, and small and medium-sized firms. Public schemes do not mitigate these gaps in any way and are considered – as a government council admitted – inadequate, especially with regard to old age, where most pensioners rely to a large extent on corporate lump sum payments and pension benefits in addition to the public pension. Payments for workers outside large firms tend to be much lower and non-regular workers do not usually receive any payment. Japan has improved public pension options for self-employed workers in recent years.
As in other countries, low-wage workers have benefited particularly from wage growth, not least because regional and national minimum wage rates have been raised almost every year above inflation. In October 2023, the minimum wage was raised from JPY 1,072 to JPY 1,113 (€7) per hour for Tokyo. Despite improvements in the situation of non-regular workers, who accounted for 36.7% of all employees in 2022, they face many more risks than regular workers. The safety net still does not cover all non-regular workers, though the Kishida cabinet plans to extend some benefits to those working below 20 hours per week. Furthermore, some trade unions that had previously only accepted regular workers as members began to represent the interests of non-regular workers. Thanks to these changes, the number of involuntary non-regular workers has declined considerably from 3.41 million in 2013 to 2.10 million in 2022.
Citations:
Aoki, Kotaro, Nana Iwamoto, and Taro Yamada. 2023. “Japan’s Labor Movement Is Taking Up the Demands of Part-Time and Temporary Workers.” Jacobin, May 9. https://jacobin.com/2023/05/japan-labor-movement-union-organizing-nonregular-workers-spring-offensive
“End of Technical Intern Program: Use Reformed System to Improve Working Environment for Foreigners.” Japan News, February 10, 2024. https://japannews.yomiuri.co.jp/editorial/yomiuri-editorial/20240210-168083/
“Japan weighs jobless benefits for part-timers below 20 hours a week.” Nikkei Asia, April 25. https://asia.nikkei.com/Spotlight/Work/Japan-weighs-jobless-benefits-for-part-timers-below-20-hours-a-week
“Minimum Wage Increased in Japan from 01 October 2023 – October 02, 2023,” 2023, https://wageindicator.org/salary/minimum-wage/minimum-wages-news/2023/minimum-wage-increased-in-japan-from-01-october-2023-october-02-2023
OECD. 2023. “Public unemployment spending (indicator).” doi: 10.1787/55557fd4-en (accessed: 5 December 2023).
OECD. 2023. “Social Spending (Indicator).” doi: 10.1787/7497563b-en
OECD. 2023. “The OECD Tax-Benefit Database. Description of Policy Rules for Japan 2023.” https://web-archive.oecd.org/2023-11-08/500515-TaxBEN-Japan-latest.pdf
Takahashi, Koji. 2023. “Non-Regular Employment Measures in Japan.” Japan Labor Issues 7 (44): https://www.jil.go.jp/english/jli/documents/2023/044-05.pdf
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
10
9
9
The tax system is fully aligned with the goals of ensuring adequate tax revenues.
8
7
6
7
6
The tax system is largely aligned with the goals of ensuring adequate tax revenues.
5
4
3
4
3
The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
2
1
1
The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
Both the welfare and tax systems generally encourage employment in Japan. However, the Japanese tax system seriously disincentivizes individuals, particularly women, from seeking high-paying employment or full-time jobs. After surpassing an income threshold of JPY 1 million (€6,400) per year, workers married to a full-time worker have to pay local residence taxes, and lose some cash benefits and child allowances. Above an income threshold of JPY 1.03 million per year, they are subject to national income tax. Exceeding further thresholds leads to compulsory enrollment in the employees’ insurance as well as loss of spousal deduction. Due to these barriers, many housewives prefer to work part-time. The Japanese government has announced plans to address this problem, though detailed policies are yet to be announced. In October 2023, Prime Minister Kishida also revealed his intention to introduce tax breaks for corporations to promote investment.
While the tax-revenue-to-GDP ratio is slightly above the OECD average, a major issue with the tax system is that revenues continue to fall way short of government spending. Japan has by far the highest debt ratio of any country. VAT increases since 1989 have proven highly unpopular and are often softened with a number of exemptions. Despite continuous reductions in recent decades, corporate tax rates in Japan remain relatively high.
Japan’s tax administration capacity has been evaluated slightly above the OECD average in the Tax Justice Network ranking. Generally, tax evasion is effectively punished in Japan. According to the Tax Justice Network, Japan loses more than $8.3 billion annually due to global tax abuse committed by multinational corporations and private individuals. This corresponds to 0.87% of Japan’s tax revenue, lower than the regional average of 1.6% and the global average of 2.8%. Under the Tax Haven Counter Measure Law from 1978, the profits earned by subsidiaries of Japanese companies located in tax havens are treated as income of the parent corporations and taxed in Japan.
Citations:
Kato, Yuka. 2023. “Tax avoidance is not illegal, but is it unfair!?” Meiji University. https://english-meiji.net/articles/4175/
Morinobu, Shigeki. 2023. “Making Work Pay for Japanese Women: Toward a Smarter Approach to Tax and Social Security Reform.” The Tokyo Foundation for Policy Research. https://www.tokyofoundation.org/research/detail.php?id=946
OECD. 2023. “Revenue Statistics 2023 – Japan.” https://www.oecd.org/tax/revenue-statistics-japan.pdf
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
Tax Justice Network. 2023. “Japan.” https://taxjustice.net/country-profiles/japan/
Yamaguchi, Mari. 2023. “Japan’s Prime Minister Kishida Plans an Income Tax Cut for Households and Corporate Tax Breaks.” AP News, October 23. https://apnews.com/article/japan-kishida-economy-tax-cuts-05cea22ccacfb21fe4eb4df88d7b8b7d
While the tax-revenue-to-GDP ratio is slightly above the OECD average, a major issue with the tax system is that revenues continue to fall way short of government spending. Japan has by far the highest debt ratio of any country. VAT increases since 1989 have proven highly unpopular and are often softened with a number of exemptions. Despite continuous reductions in recent decades, corporate tax rates in Japan remain relatively high.
Japan’s tax administration capacity has been evaluated slightly above the OECD average in the Tax Justice Network ranking. Generally, tax evasion is effectively punished in Japan. According to the Tax Justice Network, Japan loses more than $8.3 billion annually due to global tax abuse committed by multinational corporations and private individuals. This corresponds to 0.87% of Japan’s tax revenue, lower than the regional average of 1.6% and the global average of 2.8%. Under the Tax Haven Counter Measure Law from 1978, the profits earned by subsidiaries of Japanese companies located in tax havens are treated as income of the parent corporations and taxed in Japan.
Citations:
Kato, Yuka. 2023. “Tax avoidance is not illegal, but is it unfair!?” Meiji University. https://english-meiji.net/articles/4175/
Morinobu, Shigeki. 2023. “Making Work Pay for Japanese Women: Toward a Smarter Approach to Tax and Social Security Reform.” The Tokyo Foundation for Policy Research. https://www.tokyofoundation.org/research/detail.php?id=946
OECD. 2023. “Revenue Statistics 2023 – Japan.” https://www.oecd.org/tax/revenue-statistics-japan.pdf
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
Tax Justice Network. 2023. “Japan.” https://taxjustice.net/country-profiles/japan/
Yamaguchi, Mari. 2023. “Japan’s Prime Minister Kishida Plans an Income Tax Cut for Households and Corporate Tax Breaks.” AP News, October 23. https://apnews.com/article/japan-kishida-economy-tax-cuts-05cea22ccacfb21fe4eb4df88d7b8b7d
To what extent do existing tax institutions and procedures consider equity aspects?
10
9
9
The tax system is fully aligned with the goal of ensuring equity.
8
7
6
7
6
The tax system is largely aligned with the goal of ensuring equity.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of ensuring equity.
2
1
1
The tax system is not at all aligned with the goal of ensuring equity.
Japan generally has a fair tax system, with 40.2% of revenues raised from social insurance taxes, 19.5% from consumption taxes, 19.1% from individual taxes, 12.9% from corporate taxes and 8.1% from property taxes. Corporate taxes have been continuously reduced but are still comparatively high at 29.7%. The consumption tax rate, introduced in 1989, was raised to 10% in 2019, but remains relatively low compared with other OECD states.
Both income and inheritance taxes are highly progressive with tax rates varying between 5% and 45% for the former, and between 10% and 55% for the latter tax, depending on income. Redistribution is also ensured by a reduced 8% consumption tax rate on food and beverages. In addition, a hometown tax was introduced in 2008 to reduce income disparities between urban and rural regions. Under this system, taxpayers may deduct donations to countryside areas from their income and inhabitant taxes.
Nevertheless, some taxpayer groups, such as farmers, are more privileged than others, as they have access to more tax deductions than salaried workers. Moreover, the introduction of the Qualified Invoicing System in October 2023 put tax-exempt businesses at a significant market disadvantage, compelling many freelancers and small businesses to register as consumption taxpayers to avoid losing clients.
While the redistributive function of the tax system has improved over the years, it remains limited in comparison to other systems (Shiozaki 2020) and is often criticized for disadvantaging low-wage workers.
Citations:
Margolis, Eric. 2023. “Freelancers aren’t happy with Japan’s new invoice system.” The Japan Times September 25. https://www.japantimes.co.jp/community/2023/09/25/how-tos/freelancer-tax-system/
Shiozaki, Akihisa. 2020. “Japan’s Homogeneous Welfare State. Development and Future Challenges.” In The Crisis of Liberal Internationalism: Japan and the World Order, eds. Yoshi Funabashi and John Ikenberry. Washington, DC: Brookings Institution Press, 203-236.
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
World Economic Forum. 2023. “The Pros and Cons of Furusato Nozei, Japan’s Hometown Tax Programme.” https://www.weforum.org/agenda/2023/02/japans-hometown-tax-programme-show-challenges-for-the-future-tax-system/
Both income and inheritance taxes are highly progressive with tax rates varying between 5% and 45% for the former, and between 10% and 55% for the latter tax, depending on income. Redistribution is also ensured by a reduced 8% consumption tax rate on food and beverages. In addition, a hometown tax was introduced in 2008 to reduce income disparities between urban and rural regions. Under this system, taxpayers may deduct donations to countryside areas from their income and inhabitant taxes.
Nevertheless, some taxpayer groups, such as farmers, are more privileged than others, as they have access to more tax deductions than salaried workers. Moreover, the introduction of the Qualified Invoicing System in October 2023 put tax-exempt businesses at a significant market disadvantage, compelling many freelancers and small businesses to register as consumption taxpayers to avoid losing clients.
While the redistributive function of the tax system has improved over the years, it remains limited in comparison to other systems (Shiozaki 2020) and is often criticized for disadvantaging low-wage workers.
Citations:
Margolis, Eric. 2023. “Freelancers aren’t happy with Japan’s new invoice system.” The Japan Times September 25. https://www.japantimes.co.jp/community/2023/09/25/how-tos/freelancer-tax-system/
Shiozaki, Akihisa. 2020. “Japan’s Homogeneous Welfare State. Development and Future Challenges.” In The Crisis of Liberal Internationalism: Japan and the World Order, eds. Yoshi Funabashi and John Ikenberry. Washington, DC: Brookings Institution Press, 203-236.
Tax Foundation. 2023. “Taxes in Japan.” https://taxfoundation.org/location/japan/
World Economic Forum. 2023. “The Pros and Cons of Furusato Nozei, Japan’s Hometown Tax Programme.” https://www.weforum.org/agenda/2023/02/japans-hometown-tax-programme-show-challenges-for-the-future-tax-system/
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
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9
9
The tax system is fully aligned with the goal of minimizing compliance and collection costs.
8
7
6
7
6
The tax system is largely aligned with the goal of minimizing compliance and collection costs.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
2
1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
Japan’s tax system is relatively complex with many different taxes, income thresholds and tax deductions. In recent years, however, Japan has been working on simplifying tax payment procedures. The National Tax Agency has been implementing the vision of a “society where all tax procedures can be performed without going to a tax office.” Nevertheless, between FY2020 and FY2021, the number of taxation-related requests for reconsideration increased from 4,369 to 4,582, with 10.4% of requests approved in 2020 and 13.4% in 2021.
The Digital Agency, established in September 2021, has promoted the use of My Number – a 12-digit personal number provided to each citizen to facilitate and link all administrative interactions. However, the introduction of My Number cards has proceeded with many problems. In May 2023, it was revealed that 130,000 bank accounts were erroneously linked to the wrong person. Once properly implemented, the My Number system should facilitate payment of taxes, reduction of administrative collection costs and sharing of data between various institutions.
Citations:
“My Number glitches undermine Japan’s digital future.” The Japan Times, June 9. https://www.japantimes.co.jp/opinion/2023/06/09/editorials/my-number-failure/
National Tax Agency. 2022. “National Tax Agency Report 2022.” https://www.nta.go.jp/english/Report_pdf/2022e.pdf
National Tax Agency. 2023. “National Tax Agency Report 2023.” https://www.nta.go.jp/english/Report_pdf/2023e.pdf
The Digital Agency, established in September 2021, has promoted the use of My Number – a 12-digit personal number provided to each citizen to facilitate and link all administrative interactions. However, the introduction of My Number cards has proceeded with many problems. In May 2023, it was revealed that 130,000 bank accounts were erroneously linked to the wrong person. Once properly implemented, the My Number system should facilitate payment of taxes, reduction of administrative collection costs and sharing of data between various institutions.
Citations:
“My Number glitches undermine Japan’s digital future.” The Japan Times, June 9. https://www.japantimes.co.jp/opinion/2023/06/09/editorials/my-number-failure/
National Tax Agency. 2022. “National Tax Agency Report 2022.” https://www.nta.go.jp/english/Report_pdf/2022e.pdf
National Tax Agency. 2023. “National Tax Agency Report 2023.” https://www.nta.go.jp/english/Report_pdf/2023e.pdf
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
10
9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
The share of environmental taxes in Japan’s total tax revenues (1.27%) is below the OECD average (1.40%). As the Global Warming Countermeasures Tax on the consumption of fossil fuels is set at a very low level of JPY 289 (approximately €1.80) per ton of CO2, it only internalizes environmental pollution costs to a very limited extent. In addition, the carbon levy, planned to be introduced in 2028, is expected to be set at the relatively low level of JPY 1,500 (approximately €9.50) per ton of CO2.
Despite hikes in recent years, the tobacco excise tax remains relatively low, which fails to combat health issues connected with smoking. Japan performs better in internalizing the problem of traffic congestion through high automobile taxes.
Japan has a comprehensive R&D tax credit system, under which tax deductions are available for basic or applied research and experimental development up to the ceiling of 25% of the corporation’s or 40% of the R&D venture corporation’s national corporate income tax liability. In September 2023, the Kishida government considered the introduction of additional tax breaks for investments in areas such as batteries, electric vehicles and semiconductor chips.
Citations:
Influence Map. 2023. “Carbon Taxes.” https://japan.influencemap.org/policy/Carbon-Tax-5346
Masao Ichikawa and Takahiro Tabuchi. 2022. “Are Tobacco Prices in Japan Appropriate? An Old but Still Relevant Question.” Journal of Epidemiology 32 (1). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8666320/
Innotax. 2023. “General type R&D tax credit.” https://stip-pp.oecd.org/innotax/incentives/JPN1
Leussink, Daniel. 2023. “Japan to deliberate tax breaks for major corporate investments.” https://www.reuters.com/markets/asia/japan-govt-deliberate-tax-breaks-major-corporate-investments-2023-09-27/
OECD. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
Despite hikes in recent years, the tobacco excise tax remains relatively low, which fails to combat health issues connected with smoking. Japan performs better in internalizing the problem of traffic congestion through high automobile taxes.
Japan has a comprehensive R&D tax credit system, under which tax deductions are available for basic or applied research and experimental development up to the ceiling of 25% of the corporation’s or 40% of the R&D venture corporation’s national corporate income tax liability. In September 2023, the Kishida government considered the introduction of additional tax breaks for investments in areas such as batteries, electric vehicles and semiconductor chips.
Citations:
Influence Map. 2023. “Carbon Taxes.” https://japan.influencemap.org/policy/Carbon-Tax-5346
Masao Ichikawa and Takahiro Tabuchi. 2022. “Are Tobacco Prices in Japan Appropriate? An Old but Still Relevant Question.” Journal of Epidemiology 32 (1). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8666320/
Innotax. 2023. “General type R&D tax credit.” https://stip-pp.oecd.org/innotax/incentives/JPN1
Leussink, Daniel. 2023. “Japan to deliberate tax breaks for major corporate investments.” https://www.reuters.com/markets/asia/japan-govt-deliberate-tax-breaks-major-corporate-investments-2023-09-27/
OECD. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
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9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
8
7
6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
5
4
3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
Japan has no legal public debt limit. In 2023, Japan had the highest public debt, amounting to 255.24% of GDP, and one of the worst primary balances among OECD countries, amounting to -5.48% of GDP. Even when one takes into account the very high stock of fixed public capital in Japan, the debt level remains exceptionally high by international comparison. Because most public debt (currently 86.2%) is held by domestic investors and bond yields have remained low, the issuance of new bonds has for several decades been used to finance budget deficits. At the moment, the Japanese central bank, the Bank of Japan, holds roughly half of Japanese government bonds (JGB), which likely contributes to low bond yields. How long this policy can continue, however, is unclear. The central bank will find it difficult to end its policy of quantitative easing without higher economic growth and wage growth. Although nominal wages rose by almost 4% in 2023, inflation has meant that real wages continued to decline. As the Japanese population is rapidly aging, it may also become more difficult to find alternative domestic buyers for JGBs once the BOJ withdraws. So far, financial markets have remained confident, however, and JGBs are even attracting growing interest among foreign investors.
The government incorporated some elements of long-term planning into the Basic Policies for Economic and Fiscal Management and Reform issued by the Council on Economic and Fiscal Management. The cabinet has stated its intent to achieve primary balance since the early 2000s but has postponed this target several times. The current government maintains its aim of achieving primary balance and lowering the debt-to-GDP ratio in FY2025, although it may prove challenging due to wage hikes for public employees, expansion of public investment, more spending on childcare and the planned increase in military spending to 2% of GDP by FY2027. The budget takes into account green transformation investments, though it does not refer specifically to SDGs.
The government’s fiscal consolidation and structural reform efforts seem insufficient overall. Due to the practice of adopting supplementary budgets, budgetary spending ceilings have repeatedly failed to limit actual government expenditures. The transparency of the budgeting process in Japan is limited because a large number of entities, accounts and policies sidestep spending limits. For instance, according to Article 4 of the 1947 Public Finance Act (PFA), the government can issue “construction bonds” only to finance critical infrastructure but not social spending. To circumvent this rule, Japanese governments have issued ever more “special deficit-financing bonds.”
Citations:
D’Ambrogio, Enrico, and Matthew Parry. 2016. “Japan’s National Budget Procedure and the Public Debt Burden.” EPRS European Parliamentary Research Service. https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577985/EPRS_BRI%282016%29577985_EN.pdf
Kajimoto, Tetsushi. 2023. “Japan Still Seen Missing Target to Balance Primary Budget by March 2026.” Reuters July 25. https://www.reuters.com/world/asia-pacific/japan-govt-still-seen-miss-fy2025-budget-balancing-target-2023-07-25/
Ministry of Finance. 2023. “Japanese Public Finance Fact Sheet.” https://www.mof.go.jp/english/policy/budget/budget/fy2023/02.pdf
Kono, Shohei. 2024. “Japan’s pay needs to grow 3.6% to outpace inflation, think tanks say.” NikkeiAsia January 23. https://asia.nikkei.com/Economy/Japan-s-pay-needs-to-grow-3.6-to-outpace-inflation-think-tanks-say
The government incorporated some elements of long-term planning into the Basic Policies for Economic and Fiscal Management and Reform issued by the Council on Economic and Fiscal Management. The cabinet has stated its intent to achieve primary balance since the early 2000s but has postponed this target several times. The current government maintains its aim of achieving primary balance and lowering the debt-to-GDP ratio in FY2025, although it may prove challenging due to wage hikes for public employees, expansion of public investment, more spending on childcare and the planned increase in military spending to 2% of GDP by FY2027. The budget takes into account green transformation investments, though it does not refer specifically to SDGs.
The government’s fiscal consolidation and structural reform efforts seem insufficient overall. Due to the practice of adopting supplementary budgets, budgetary spending ceilings have repeatedly failed to limit actual government expenditures. The transparency of the budgeting process in Japan is limited because a large number of entities, accounts and policies sidestep spending limits. For instance, according to Article 4 of the 1947 Public Finance Act (PFA), the government can issue “construction bonds” only to finance critical infrastructure but not social spending. To circumvent this rule, Japanese governments have issued ever more “special deficit-financing bonds.”
Citations:
D’Ambrogio, Enrico, and Matthew Parry. 2016. “Japan’s National Budget Procedure and the Public Debt Burden.” EPRS European Parliamentary Research Service. https://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577985/EPRS_BRI%282016%29577985_EN.pdf
Kajimoto, Tetsushi. 2023. “Japan Still Seen Missing Target to Balance Primary Budget by March 2026.” Reuters July 25. https://www.reuters.com/world/asia-pacific/japan-govt-still-seen-miss-fy2025-budget-balancing-target-2023-07-25/
Ministry of Finance. 2023. “Japanese Public Finance Fact Sheet.” https://www.mof.go.jp/english/policy/budget/budget/fy2023/02.pdf
Kono, Shohei. 2024. “Japan’s pay needs to grow 3.6% to outpace inflation, think tanks say.” NikkeiAsia January 23. https://asia.nikkei.com/Economy/Japan-s-pay-needs-to-grow-3.6-to-outpace-inflation-think-tanks-say
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
Despite a severe fiscal situation, Japan has significantly increased spending for promotion of science and technology compared to other expenses since the beginning of the 21st century. In the budget for FY2023, the funds for science were increased by 1.1% compared to the previous year, with emphasis both on promoting R&D of advanced technologies such as quantum and AI, and on supporting basic research and young researchers.
Research and innovation policy is planned by the Council for Science, Technology and Innovation in the Cabinet Office, which also coordinates its implementation by governmental agencies and ministries. In March 2021, the council issued the sixth Science and Technology Basic Plan for 2021 – 2025, which aims to create “Society 5.0,” integrating cyberspace and physical space to balance economic development with the resolution of social problems. This also includes goals such as reducing emissions and promoting “sustainable industrialization.” Referring to the SDGs, JPY 30 trillion (€190 billion) of public funds were planned for JPY 120 trillion (€770 billion) worth public-private investments in R&D. The Basic Plan contains numerical targets and concrete measures for the realization of specific tasks, such as “promoting social change and discontinuous innovation to overcome global issues,” “formation of an innovation ecosystem that is the foundation for creating new industries that share value,” and “promoting university reform and expanding functions for strategic management.” A JPY 10 trillion (€64 billion) university fund was established to increase the global competitiveness of Japanese universities in response to a stagnant number of researchers per 1,000 employment, and insufficient collaboration between academia and industry.
The Japan Science and Technology Agency, with an annual budget of about JPY 280 billion, is engaged in developing initiatives to achieve the SDG goals through science and technology. Its activities are linked to the SDGs Promotion Headquarters in the Cabinet Office, which coordinates SDG-related activities and initiatives across ministries. The headquarters issues an annual SDG Action Plan. The 2021 plan emphasized four pillars: preparing for the next pandemic, building back better strategies for businesses, regional revitalization and social initiatives aimed at strengthening civil society.
Citations:
Cabinet Office. 2021. “Science, Technology, and Innovation Basic Plan.” https://www8.cao.go.jp/cstp/english/sti_basic_plan.pdf
Japan Science and Technology Agency (JST). 2021. “Mobilizing Science, Technology and Innovation for SDGs Japanese Actions in STI for SDG.” https://www.jst.go.jp/sdgs/en/pdf/sti_for_sdgs_report_en_apr_2021.pdf
Ministry of Finance. 2023. “Japanese Public Finance Fact Sheet.” https://www.mof.go.jp/english/policy/budget/budget/fy2023/02.pdf
Research and innovation policy is planned by the Council for Science, Technology and Innovation in the Cabinet Office, which also coordinates its implementation by governmental agencies and ministries. In March 2021, the council issued the sixth Science and Technology Basic Plan for 2021 – 2025, which aims to create “Society 5.0,” integrating cyberspace and physical space to balance economic development with the resolution of social problems. This also includes goals such as reducing emissions and promoting “sustainable industrialization.” Referring to the SDGs, JPY 30 trillion (€190 billion) of public funds were planned for JPY 120 trillion (€770 billion) worth public-private investments in R&D. The Basic Plan contains numerical targets and concrete measures for the realization of specific tasks, such as “promoting social change and discontinuous innovation to overcome global issues,” “formation of an innovation ecosystem that is the foundation for creating new industries that share value,” and “promoting university reform and expanding functions for strategic management.” A JPY 10 trillion (€64 billion) university fund was established to increase the global competitiveness of Japanese universities in response to a stagnant number of researchers per 1,000 employment, and insufficient collaboration between academia and industry.
The Japan Science and Technology Agency, with an annual budget of about JPY 280 billion, is engaged in developing initiatives to achieve the SDG goals through science and technology. Its activities are linked to the SDGs Promotion Headquarters in the Cabinet Office, which coordinates SDG-related activities and initiatives across ministries. The headquarters issues an annual SDG Action Plan. The 2021 plan emphasized four pillars: preparing for the next pandemic, building back better strategies for businesses, regional revitalization and social initiatives aimed at strengthening civil society.
Citations:
Cabinet Office. 2021. “Science, Technology, and Innovation Basic Plan.” https://www8.cao.go.jp/cstp/english/sti_basic_plan.pdf
Japan Science and Technology Agency (JST). 2021. “Mobilizing Science, Technology and Innovation for SDGs Japanese Actions in STI for SDG.” https://www.jst.go.jp/sdgs/en/pdf/sti_for_sdgs_report_en_apr_2021.pdf
Ministry of Finance. 2023. “Japanese Public Finance Fact Sheet.” https://www.mof.go.jp/english/policy/budget/budget/fy2023/02.pdf
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
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7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
Due to having an export-oriented economy and the strong position of the Tokyo Stock Exchange, it is in Japan’s interest to support a stable global financial system. Japan remains a major shareholder in the Asian Development Bank and traditionally gets to nominate its president. However, the Japanese government has rarely been an agenda-setter in the field of international financial markets regulations. It usually supports U.S.-centered institutions, such as the International Monetary Fund, to counterbalance China’s initiatives, such as the Asian Infrastructure Investment Bank (AIIB). As an alternative to the AIIB, Japan has promoted the Partnership for Quality Infrastructure since 2015.
Japan has participated in various initiatives related to maintaining a stable global financial system promoted by the G20 and G7. During the G20 summit in Osaka in 2019, Japan proposed the establishment of Task Force 2 to examine the causes of global financial instability, share Japan’s experience in introducing crypto asset regulations, create recommendations for strengthening global financial safety nets and discuss the development of Fintech. Nevertheless, so far, there has been no progress in realizing these plans.
During the meeting of G7 finance ministers and central bank governors in Niigata in May 2023, Japan agreed to implement effective regulatory and supervisory frameworks for crypto asset activities and markets, as well as supported increasing the role and resources of the Financial Action Task Force charged with combating money laundering. In addition, G7 countries expressed their commitment to the disclosure of information on sustainability including climate. Nevertheless, Japan has remained relatively passive in promoting these initiatives. Japan supports the OECD policy of a 15% corporate minimum tax rate.
A potential problem for the stability of the global financial system arises from the fact that the Bank of Japan maintains a low-interest policy, whereas all other major central banks have raised interest rates to battle inflation. According to analysts, the gap between bond yields in Japan and the rest of the world may harm Japanese investors who own foreign bonds and the global issuers of bonds who have relied to a large extent on demand from Japanese buyers.
Citations:
“How Japan Poses a Threat to the Global Financial System.” The Economist, November 23, 2023. https://www.economist.com/finance-and-economics/2023/11/02/how-japan-poses-a-threat-to-the-global-financial-system.
Ministry of Finance. 2023. “G7 Finance Ministers and Central Bank Governors Meeting Communiqué.” https://www.mof.go.jp/english/policy/international_policy/convention/g7/g7_20230513_1.pdf
“Task Force 2: International Financial Architecture for Stability and Development/Crypto-assets and Fintech.” 2019. https://t20japan.org/task-forces/international-financial-architecture-stability-development-crypto-assets-fintech/
Japan has participated in various initiatives related to maintaining a stable global financial system promoted by the G20 and G7. During the G20 summit in Osaka in 2019, Japan proposed the establishment of Task Force 2 to examine the causes of global financial instability, share Japan’s experience in introducing crypto asset regulations, create recommendations for strengthening global financial safety nets and discuss the development of Fintech. Nevertheless, so far, there has been no progress in realizing these plans.
During the meeting of G7 finance ministers and central bank governors in Niigata in May 2023, Japan agreed to implement effective regulatory and supervisory frameworks for crypto asset activities and markets, as well as supported increasing the role and resources of the Financial Action Task Force charged with combating money laundering. In addition, G7 countries expressed their commitment to the disclosure of information on sustainability including climate. Nevertheless, Japan has remained relatively passive in promoting these initiatives. Japan supports the OECD policy of a 15% corporate minimum tax rate.
A potential problem for the stability of the global financial system arises from the fact that the Bank of Japan maintains a low-interest policy, whereas all other major central banks have raised interest rates to battle inflation. According to analysts, the gap between bond yields in Japan and the rest of the world may harm Japanese investors who own foreign bonds and the global issuers of bonds who have relied to a large extent on demand from Japanese buyers.
Citations:
“How Japan Poses a Threat to the Global Financial System.” The Economist, November 23, 2023. https://www.economist.com/finance-and-economics/2023/11/02/how-japan-poses-a-threat-to-the-global-financial-system.
Ministry of Finance. 2023. “G7 Finance Ministers and Central Bank Governors Meeting Communiqué.” https://www.mof.go.jp/english/policy/international_policy/convention/g7/g7_20230513_1.pdf
“Task Force 2: International Financial Architecture for Stability and Development/Crypto-assets and Fintech.” 2019. https://t20japan.org/task-forces/international-financial-architecture-stability-development-crypto-assets-fintech/