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- GDP (PPP):
- $4.7 trillion
- 1.5% growth
- 0.3% 5-year compound annual growth
- $36,899 per capita
- Inflation (CPI):
- FDI Inflow:
Japan’s economic freedom score is 73.3, making its economy the 20th freest in the 2015 Index. Its score has increased by 0.9 point since last year, with improvements in labor freedom, business freedom, and trade freedom outweighing modest declines in freedom from corruption, monetary freedom, and fiscal freedom. Japan is ranked 6th out of 41 countries in the Asia–Pacific region, and its overall score is above the world and regional averages.
Over the past five years, Japan’s economic freedom has experienced a turnaround, with early losses overcome by recent gains. In particular, improvements in labor and trade freedom have contributed to overall score gains.
While the government’s three arrows of reform have generated substantial enthusiasm, key structural issues continue to hold back economic freedom and growth. Government spending has been high, and deficit spending most recently has been funded by a multi-year increase in the sales tax. The financial sector is difficult for foreign investors and subject to political influence. Propelling Japan out of its decades-long malaise will require targeted reforms to improve economic freedom and remove institutional constraints.
Prime Minister Shinzo Abe’s Liberal Democratic Party has held power since 2012. Abe has reversed a 13-year trend of steadily decreasing defense spending, pushed forward on collective self-defense, and stood up to Chinese assertiveness near the Japanese-controlled Senkaku Islands. But his revisionist comments on Japan’s wartime actions, a visit to the controversial Yasukuni Shrine, and his unwillingness to discipline politicians for making provocative and egregious comments have hindered his ability to achieve international support for defense reform that would allow Japan a larger regional role. Abe has taken preliminary steps toward structural economic reform as part of his “Abenomics” plan to pull Japan from a two-decade economic slump, but he faces resistance from entrenched special interests. Japan is a significant force in world trade, but its economy continues to operate far below its potential.
While the direct exchange of cash for favors from government officials is extremely rare in Japan, a web of close relationships among companies, politicians, government agencies, and other groups fosters an inwardly cooperative business climate conducive to corruption, most often the rigging of bids on government public works projects. The judiciary is independent and provides secure protection of real and intellectual property.
The top individual income tax rate is 40.8 percent, and the top corporate tax rate is 25.5 percent (28.05 percent with a fiscal surtax). The government plans to increase the sales tax to 10 percent by 2015. The overall tax burden amounts to 28.6 percent of domestic output, and public spending is equivalent to about 42 percent of domestic production. Public debt exceeds twice the size of the economy.
The process for incorporating a business is relatively streamlined, but entrepreneurial growth is discouraged by unaddressed structural problems. The labor market is well functioning, but a propensity for lifetime employment guarantees and seniority-based wages impedes the development of greater flexibility. Prices are generally set by market forces, but the government subsidizes numerous industries and sectors.
Japan has a 1.2 percent average tariff rate. Imports and foreign direct investment are low relative to GDP, and agricultural imports face significant barriers. Investment in some economic sectors may be screened. The financial sector is competitive but vulnerable to political influence. The government retains considerable shares in the banking sector, which includes 100 percent ownership in Japan Post Holding as of 2014.