Japan's economy must shift away from 'crisis-mode' to demand-driven growth, government panel says

A Japanese government panel recommended implementing fiscal policies that respond to rising prices and strengthening growth instead of continuing a "crisis-mode" approach.

Japan must shift its policy focus away from crisis-mode stimulus towards achieving private sector-driven economic growth, a government panel said on Tuesday in the wake of the central bank's decision to end eight years of negative interest rates.

In a proposal to the government's top economic council, the panel urged policy changes in the face of rising domestic prices and interest rates, as well as wage growth at a 30-year high as companies face job shortages.

"Japan's economic and fiscal policies must shift away from the crisis-mode approach that worked when prices barely moved, to one that responds to rising prices and strengthening growth," the panel said in the report, which was submitted to the council's meeting on Tuesday.

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"We need to achieve a domestic demand-driven growth and a sustainable fiscal structure," the report said, urging Japan to wean itself off decades of heavy fiscal and monetary support that had underpinned the fragile economy.

The recommendations by the panel and private members lay the groundwork for setting the government's long-term economic policies and their priorities.

Private-sector members of the government council also called for continued cooperation between the government and the Bank of Japan to ensure wages keep rising next year and beyond.

"With the BOJ having ended negative rates, monetary policy has entered a new stage," the private-sector members said in their joint proposal. "We're seeing an opportunity open up to achieve economic growth driven by private demand."

The council's meeting also debated the impact of Japan's rapidly aging population on long-term economic growth.

Under a baseline scenario that assumes the economy will keep growing around the current pace, Japan will see its per-capita gross domestic product (GDP) rise just 6.2% in 2060, the Cabinet Office's estimates showed.

While that will be up from 4.1% in 2020, it will be well below 9.6% for the United States, 8.1% for Germany, 7.6% for Britain and 7.1% for France in 2060, the estimates showed.

Japan has one of the world's fastest-aging populations that is intensifying labor shortages and leading to a shrinking domestic market. The ratio of those aged 65 or higher is expected to rise to 37.9% in 2060 from 28.6% in 2020, the estimates showed.

Japan's economy grew 1.0% in 2022, lower than Germany's 1.8% and 1.9% in the United States for the same year.