Prime Minister Shinzo Abe's "Abenomics" economic policies have initiated a "virtuous economic cycle" producing "signs of reversing deflation" according to an annual government white paper released on July 23.

However, the Annual Report on the Japanese Economy and Public Finance -- put together this year by a committee under minister for economic and fiscal policy Akira Amari -- also listed challenges to the success of the Abenomics program, including the need to strengthen Japanese firms' ability to grow and the need to boost employment. It concluded by urging continued and dynamic economic reform aimed at sustained economic growth.

One area the white paper zeroed in on for drastic reform was Japan's manufacturing sector. The paper called the sector out for poor productivity and profitability, and warned that Japanese firms were losing their ability to compete internationally. Japanese manufacturers' return on assets (ROA) is in the 2 percent range, as compared to 8 percent for U.S. companies and 4 percent for German firms.

The white paper pinned the blame for this on long-term deflation, which prompted companies to put off capital investment and led to reduced productivity as equipment aged. R&D investment also lagged due to deflation. Furthermore, during the deflationary period, companies held down wage increases to preserve earnings. However, "now is not the time for cost-cutting; it is time to take aim at innovation-driven productivity and profitability," the white paper stated, pressing companies to make investments that will better their competitiveness.

Hiring was also a major focus of the paper, which pointed out that the ratio of Japanese young people without regular employment hit 30 percent this year, many of whom had been forced to take temporary or irregular work because they could not get permanent positions. The paper urged firms to set up work experience opportunities for high school and university students, and give them skills that will better their chances of getting full-time jobs.

The white paper singled out the information and communications technology sector -- perpetually hungry for qualified candidates -- as an example of the mismatch between skills and industry needs. Despite the demand for workers, the number of vocational school graduates meeting the sector's needs has in fact been declining, raising the risk of a serious lack of human capital.

The paper also pointed out that far fewer foreigners come to Japan than other advanced economies. For example, the United Kingdom grants permanent residency to some 30 percent of its highly skilled immigrants, among other measures to attract international talent.

"We strongly expect high-grade foreign workers to become an immediate resource for the Japanese economy, as well as have synergistic effects on our powers of innovation," the white paper said. It also points to boosting foreign student numbers and the conclusion of economic partnership agreements to boost international trade as major draws for highly skilled foreign workers.

On the subject of Japan's government finances, which have long been deep in the red, the paper lays much of the blame on repeated stimulus measures and the growing cost of the country's social welfare programs. To rehabilitate Japan's sad financial situation, the white paper states that the government must restrain spending and establish a guaranteed source of annual revenue resistant to the ups and downs of the economy.

Regarding the consumption tax increase set to take effect in April next year, the paper stated that it " will not necessarily be a brake on economic expansion," pointing to economic growth in France even after the European Union's value-added tax was raised.

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This news was published on July 24, 2013.

Source: http://mainichi.jp/english/english/newsselect/news/20130724p2a00m0na007000c.html