Japan has, for several decades, experienced a toxic combination of an aging and shrinking population, slow growth, and very large fiscal deficits and debt. Looking forward, Japan’s potential growth is expected to approach zero, in large part owing to its demographic profile (see IMF).
These interrelated issues have led policy-makers in Japan on a search for meaningful structural reforms to raise potential growth and offset the impact of eventual fiscal adjustment. One area that has received significant attention has been the Japanese labor market, which is characterized by low female labor force participation; a significant duality between heavily-protected workers and “non-regular” workers with few protections and lower productivity; and limited flexibility regarding working conditions and modalities (Figure 1).
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