Demystifying Japan’s Economic Recovery

A Tale Of Its Structural Reform

By Jun Kurihara

Jun Kurihara is a senior fellow at the Mossavar-Rahmani Center for Business and Government of the Kennedy School of Government at Harvard University. Prior to that, he was a senior economist at the Fujitsu Research Institute (FRI) in Japan. His research focuses on Japan's industrial rejuvenation from the perspective of venture capital activity. In addition to his work with FRI, he has taught at the Tokyo Institute of Technology, chaired the Working Group on Economic Statistics, and served as a senior member of the Japan Statistics Council for the Government of Japan. He earned his Masters degree in 1993 from Kyoto University.

After having undergone protracted economic doldrums, Japan has begun to attract the world’s attention. Prime Minister Shintaro Abe, taking office in September 2006, pledged to continue his predecessor’s reforms while looking to closer economic ties with Japan’s neighboring countries. This paper examines the challenges the Abe administration must address, the reforms the administration still needs to tackle, and the problems that lie ahead. It starts with an evaluation of Japan’s economic condition from a long-term perspective, especially the drastic change in its labor market and its rapidly aging society. It then discusses the unfinished reforms the government is facing— restored fiscal balances, a less-regulated economy both at home and abroad, and a new innovation-driven growth path. In sharp contrast to his single-minded and charismatic predecessor, Prime Minister Abe has taken a less spectacular and more nuanced stance toward reforms. A more market-principled Japan will create increased competitive conditions for economic players in both the private and public sectors. Japan’s economy will face a precarious state—swinging between an economy armed with marketbased principles (but suffering from a “growth pain”) and an “ugly Japan” that divides the haves and the have-nots.

This paper was originally presented as part of a panel on economic reform in Germany and Japan at NABE’s Washington Economic Policy Conference, March 12, 2007. The views expressed here are the author’s own and do not necessarily represent those of Harvard University.

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