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Japan
Japan’s
economic freedom score is 72.9, making its economy the 19th freest in the
2010 Index. Its score is almost the same as last year. Japan is ranked 5th
out of 41 countries in the Asia–Pacific region.
The export-oriented
Japanese economy has long benefited from global trade, although non-tariff
barriers linger, hurting overall trade freedom. The economy scores above
the world average in many of the 10 economic freedoms, including business
freedom, property rights, freedom from corruption, and labor freedom. The
regulatory environment is efficient and facilitates overall
entrepreneurial activity. Property rights are generally well respected,
and corruption is perceived as minimal.
Japan still faces a
number of challenges in trying to revitalise its stagnant economy.
Together with deflationary pressure, which increased during the course of
2009, a large and growing public debt (around 180 per cent of GDP) has
crowded out private-sector economic activity. Disparities in productivity
between different segments of the economy have continued to widen. The
financial sector is modern and well developed, but it remains subject to
government influence and a host of restrictions. Taxation is fairly
burdensome, and Japan’s corporate tax rate is becoming increasingly
uncompetitive.
Background
Japan is the world’s
second-largest economy, but its “lost decade” of the 1990s has
extended well into a second decade. The economy is smaller than it was in
the first quarter of 1992. Japan’s brief period of economic expansion
earlier this decade under Prime Minister Junichiro Koizumi was driven
primarily by reliance on exports. Market re-form is now urgently needed to
create domestic sources of growth. The Democratic Party of Japan won a
historic victory in August 2009, capturing both houses of parliament and
elevating Yukio Hatoyama to the prime ministership.
Business freedom 84.5%
The overall freedom to
start, operate, and close a business is strongly protected under Japan’s
regulatory environment. Starting a business takes 23 days, compared to the
world average of 35 days. Obtaining a business license takes less than the
world average of 18 procedures and 218 days. Bankruptcy proceedings are
easy and straightforward.
Trade freedom 82.4%
Japan’s weighted
average tariff rate was 1.3 per cent in 2008. Import and export bans and
restrictions, import quotas and licensing, services market access
barriers, non-transparent and burdensome regulations and standards,
restrictive sanitary and phytosanitary rules, restrictions in government
procurement, state trade in some goods, subsidies, and inefficient customs
administration add to the cost of trade. Fifteen points were deducted from
Japan’s trade freedom score to account for non-tariff barriers.
Fiscal freedom 67.2%
Japan has a high income
tax rate and a moderate corporate tax rate. The top income tax rate is 40
per cent, which rises to almost 50 per cent when local taxes are included.
The standard corporate tax rate is 30 per cent, which local taxes can
raise to around 41 per cent. Other taxes include a value-added tax (VAT),
a tax on interest, and an estate tax. In the most recent year, overall tax
revenue as a percentage of GDP was 27.9 per cent.
Government spending
61.1%
Total government
expenditures, including consumption and transfer payments, are relatively
high. In the most recent year, government spending equaled 36 per cent of
GDP. Efforts to reinvigorate the economy and the rising cost of social
welfare for an aging population have put government spending on an upward
trend.
Monetary freedom 88.8%
Inflation is minimal and
falling, averaging 1.0 per cent between 2006 and 2008. Japan is struggling
with its second round of deflation this decade, with the corporate goods
price index falling at a record pace while the jobless rate rose to near
an all-time high. Other product prices are also expected to drop as
retailers slash prices to encourage recession-wary consumers to spend.
Formal price controls apply to rice, but major producers, backed by
regulators, are able to dictate retail and wholesale prices. Five points
were deducted from Japan’s monetary freedom score to account for
policies that distort domestic prices.
Investment freedom 60.0%
Foreign investment is
officially welcomed, and inward direct investment is subject to few
restrictions. However, foreign acquisition of Japanese firms is inhibited
by insufficient financial disclosure and cross-holding of shares among
companies in the same business grouping (keiretsu). Further deterrents
include public resistance to foreign acquisitions, overregulation, and a
slow court system. Government approval is needed for investments in
agriculture, forestry, petroleum, electricity, gas, water, aerospace,
telecommunications, and leather manufacturing. There are few controls on
the holding of foreign exchange accounts or on current transfers,
repatriation of profits, or real estate transactions by residents or
non-residents.
Financial freedom 50.0%
Japan’s modern
financial system remains subject to government influence. Overall
transparency is still weak despite gradual improvement. Deregulation and
competition have led to consolidation in an effort to create banks large
enough to be major players abroad. The government supports bank mergers
and continues to update laws and regulations to facilitate them. The
government-owned postal savings system is Japan’s biggest financial
institution by assets. In late 2007, under a 10-year privatisation plan,
the Japanese post office was divided into four commercial entities: a
bank, an insurance company, a mail-delivery service, and a
branch-management entity. Capital markets are relatively well developed.
The impact of the global financial turmoil on the Japanese banking sector
has been relatively modest because of its limited exposure to troubled
assets.
Property rights 80.0%
Real and intellectual
property rights are generally secure, but obtaining and protecting patents
and trademarks can be time-consuming and costly. The courts do not
discriminate against foreign investors, but they are not well suited to
litigation of business disputes. Contracts are highly respected.
Freedom from corruption
73.0%
Corruption is perceived
as minimal. Japan ranks 18th out of 179 countries in Transparency
International’s Corruption Perceptions Index for 2008.
Labour freedom 82.4%
Japan’s labour
regulations are relatively flexible. The non-salary cost of employing a
worker is moderate, and dismissing an employee is not difficult.
Regulations on work hours are rigid.
— Courtesy: The
Heritage Foundation
Quick Facts
Population
127.7 million
GDP (PPP)
$4.4 trillion
-0.7% growth
1.4% 5-year compound
annual growth
$34,099 per capita
Unemployment
4.0%
Inflation (CPI)
1.4%
FDI Inflow
$24.4 billion
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