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2017 Vol.3
The Japanese Economy in the 2020s

Productivity Improvement as a Way to Survive

2017/07/27

At Mitsubishi UFJ Research and Consulting, we have prepared medium-term projections for the Japanese economy up to 2030. According to these projections, the real economic growth rate is expected to fall from an annual average of about 1.0% in the latter half of the 2010s to 0.7% in the first half of the 2020s, and then to 0.5% in the latter half of the decade. Furthermore, the potential growth rate is expected to fall from about 0.8% for recent and coming years to approximately 0.6% for the 2020s. The potential growth rate is calculated based on trends in three factors: labor force, capital equipment, and total factor productivity. A decreasing labor force resulting from a shrinking, aging population is the main factor in the declining potential growth rate. Even with women’s and senior citizens’ labor participation, the labor force will decrease by about 3 million people by 2030, which will inevitably have an adverse effect on economic growth. As the positive effect of increased capital equipment is not expected to be substantial, an increase in total factor productivity (i.e., productivity improvement) is essential to offset the decline in the labor force and maintain growth. According to estimates by Mitsubishi UFJ Research and Consulting, total factor productivity is expected to rise. However, this expectation is based on an assumption that various efforts to improve productivity, including investments for labor saving, changes in industrial structure, development of new high-value-added products and services, and work style reform, will produce positive results. There is a strong need for both the government and the private sector to improve productivity to achieve sustained growth, while recognizing other problems to be tackled besides the shrinking labor force, such as the expected slowing of the world economy due to aging populations in major countries and the urgency of efforts to achieve fiscal soundness in an environment where social security expenditures are growing.

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