2009 Index of Economic Freedom

Quick Facts

Population:

• 127.8 million

GDP (PPP):

• $4.1 trillion
• 2.4% growth
• 1.8% 5-year compound annual growth
• $31947 per capita

Unemployment:

• 3.9%

Inflation (CPI):

• 0.0%

FDI Inflow:

• $-6500.0 million

Japan's economic freedom score is 72.8, making its economy the 19th freest in the 2009 Index. Its score is almost the same as last year because modest increases in government size and trade freedom were offset by small declines in five other components of economic freedom. Japan is ranked 5th out of 41 countries in the Asia–Pacific region.

The Japanese economy has long benefited from international commerce, although its non-tariff barriers linger, hurting its overall trade freedom. Achieving an average economic growth rate of close to 2 percent over the past five years, Japan has gradually been overcoming sluggishness that lasted for more than a decade. The economy scores above the world average in many of the 10 economic freedoms, including business freedom, monetary freedom, trade 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 has relatively weak scores in fiscal freedom, government size, and financial freedom. Total government spending equals more than a third of GDP. 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 Back to the top

Japan is an established democracy and the world’s second-largest economy. Its “lost decade” of the 1990s was followed by a strong recovery under former Prime Minister Junichiro Koizumi, who cleaned up the banking sector, started the privatization of the mammoth postal system, and tried to reform the dominant Liberal Democratic Party. His successors, however, have backtracked on economic reform. Japan’s economy remains heavily protected in some sectors, such as agriculture, and foreign investment is subject to often opaque regulatory barriers.

Business Freedom 85.8 Back to the top

The overall freedom to conduct a business is strongly protected under Japan's regulatory environment. Starting a business takes 23 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 18 procedures and 225 days. Bankruptcy proceedings are easy and straightforward.

Trade Freedom 82.0 Back to the top

Japan's weighted average tariff rate was 1.5 percent in 2006. Import and export bans and restrictions, import quotas, services market access barriers, non-transparent and burdensome regulations and standards, restrictive sanitary and phytosanitary rules, 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 67.5 Back to the top

Japan has a high income tax rate and a burdensome corporate tax rate. The top income tax rate is 40 percent, which local taxes can raise to almost 50 percent. The standard corporate tax rate is 30 percent, which local taxes can raise to around 41 percent. 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 27.4 percent.

Government Size 61.1 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 36.0 percent of GDP. Efforts to reinvigorate the economy and the rising cost of social welfare for the aging have put government spending on an upward trend.

Monetary Freedom93.6 Back to the top

Inflation is imperceptible, averaging 0.01 percent between 2005 and 2007. 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 Freedom60.0 Back to the top

Foreign investment is officially welcomed and inward direct investment is subject to few restrictions, but 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 no controls on the holding of foreign exchange accounts or on transactions, current transfers, repatriation of profits, or real estate transactions by residents or non-residents.

Financial Freedom50.0 Back to the top

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. Japanese corporations and banks maintain tight relationships, and banks often hold shares in companies with which they conduct business, giving them access to cheap credit and lessening accountability. The government supports bank mergers to speed up the transformation of the financial sector and continues to update laws and regulations to facilitate them. Credit is available at market rates. State-run institutions affect the supply of credit. The government-owned postal savings system, the world’s largest single pool of savings, is Japan’s biggest financial institution by assets. In October 2007, under a 10-year privatization 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

Property Rights70.0 Back to the top

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 are not well suited to litigation of investment and business disputes. Businesses tend to write their contracts in general terms, but contracts are highly respected.

Freedom From Corruption75.0 Back to the top

Corruption is perceived as minimal. Japan ranks 17th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Foreign investors complain of close relationships among companies, politicians, government organizations, and universities that can be difficult to penetrate.

Labor Freedom82.5 Back to the top

Japan's relatively flexible labor regulations could be further improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. Regulations on the number of work hours remain rigid.