2014 Index of Economic Freedom

Japan

overall score72.4
world rank25
Rule of Law

Property Rights80.0

Freedom From Corruption77.8

Limited Government

Government Spending47.1

Fiscal Freedom69.2

Regulatory Efficiency

Business Freedom80.0

Labor Freedom79.8

Monetary Freedom87.5

Open Markets

Trade Freedom82.4

Investment Freedom70.0

Financial Freedom50.0

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Quick Facts
  • Population:
    • 127.6 million
  • GDP (PPP):
    • $4.6 trillion
    • 2.0% growth
    • -0.2% 5-year compound annual growth
    • $36,266 per capita
  • Unemployment:
    • 4.4%
  • Inflation (CPI):
    • 0.0%
  • FDI Inflow:
    • $1.7 billion
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Japan’s economic freedom score is 72.4, making its economy the 25th freest in the 2014 Index. Its score is 0.6 point higher than last year, reflecting improvements in trade freedom, investment freedom, and control of government spending that outweigh deteriorations in freedom from corruption, monetary freedom, and business freedom. Japan is ranked 6th out of 41 countries in the Asia–Pacific region.

Over the 20-year history of the Index, Japan’s economic freedom has regressed, with its score falling by nearly 3 points. Declines have been recorded in six of the 10 economic freedoms, with double-digit declines in financial freedom, property rights, freedom from corruption, and control of government spending. The decline of Japan’s overall economic freedom score over the past two decades is the third worst among advanced economies.

Japan continues to be one of the “mostly free” economies. However, as reflected in the lack of progress toward greater economic freedom over the history of the Index, it continues to fall behind other countries in pursuing and implementing critical reform measures. A large and growing public debt has taken a toll on private-sector economic activity, preventing more dynamic growth. Disparities in productivity between different segments of the economy have continued to widen. Japan has lagged behind other countries in pursuing free trade agreements.

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Background

The Liberal Democratic Party retook control of the lower house of parliament in 2012, returning Prime Minister Shinzo Abe to office. The LDP’s resurgence was due in large part to the electorate’s rejection of the Democratic Party of Japan for its ineptitude and corruption scandals. Voters also view Abe as more likely to stand up to an increasingly aggressive China, which claims sovereignty over Japan’s Senkaku Islands. Although Abe has proposed pragmatic changes in Japan’s defense forces, his revisionist comments about its wartime actions have angered others in the region. The LDP won another landslide victory in the July 2013 election for the upper house, largely on popular hopes that “Abenomics” would rejuvenate the economy.

Rule of LawView Methodology

Property Rights 80.0 Create a Graph using this measurement

Freedom From Corruption 77.8 Create a Graph using this measurement

Significant efforts have been made to fight Japan’s relatively modest level of corruption by reforming the “iron triangle” system, mostly by loosening ties between the government and big business. The judiciary is independent, and its solid multi-level institutional framework, although at times inefficient, provides secure protection of real and intellectual property. Obtaining and protecting patents and trademarks can be time-consuming and costly.

Limited GovernmentView Methodology

The top individual income tax rate has been raised to 40.8 percent, and the top corporate tax rate has been lowered to 25.5 percent. A fiscal surtax exists for the next three fiscal years, bringing the effective tax rate to 28.05 percent. Local and enterprise taxes can also raise rates significantly. The overall tax burden is 27.6 percent of GDP. Government spending is 42 percent of GDP, and public debt amounts to well over twice the size of the economy.

Regulatory EfficiencyView Methodology

With no minimum capital required, business formation takes less than 10 procedures, but burdensome licensing requirements discourage dynamic entrepreneurial growth. A tendency to grant lifetime employment guarantees hurts productivity and impedes the development of a more flexible labor market. Prices are generally set by market forces, but the government subsidizes numerous industries and sectors.

Open MarketsView Methodology

Japan has a relatively low 1.3 percent average tariff rate, but significant non-tariff barriers restrict many agricultural imports. Investment in several sectors of the economy may be screened by the government. The financial sector is subject to political influence and lacks dynamic growth. Reform of the state-owned postal savings system has been largely derailed since late 2009.

Country's Score Over Time

Bar Graph of Japan Economic Freedom Scores Over a Time Period

Country Comparisons

Bar Graphs comparing Japan to other economic country groups

Regional Ranking

rank country overall change
1Hong Kong90.10.8
2Singapore89.41.4
3Australia82-0.6
4New Zealand81.2-0.2
5Taiwan73.91.2
6Japan72.40.6
7Macau71.3-0.4
8South Korea71.20.9
9Malaysia 69.63.5
10Kazakhstan63.70.7
11Thailand 63.3-0.8
12Azerbaijan61.31.6
13Samoa61.14.0
14Kyrgyz Republic 61.11.5
15The Philippines60.11.9
16Sri Lanka60-0.7
17Vanuatu59.52.9
18Mongolia58.9-2.8
19Fiji58.71.5
20Indonesia58.51.6
21Tonga58.22.2
22Cambodia57.4-1.1
23Bhutan56.71.7
24India55.70.5
25Pakistan 55.20.1
26Bangladesh 54.11.5
27Papua New Guinea53.90.3
28China52.50.6
29Tajikistan52-1.4
30Laos51.21.1
31Maldives512.0
32Vietnam50.8-0.2
33Nepal50.1-0.3
34Micronesia49.8-0.3
35Burma46.57.3
36Uzbekistan46.50.5
37Kiribati46.30.4
38Solomon Islands46.21.2
39Timor-Leste43.2-0.5
40Turkmenistan42.2-0.4
41North Korea1-0.5
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