Promoting Innovation by Expanding Free Trade and Breaking Away from In-house Mentality

DX and human capital investment will get the Japanese economy on growth track again

Tatsuya ISHII

  Principal Economist

Tomoki MATSUO

  Senior Economist

Katsuaki OCHIAI

  Specially Appointed Fellow

Tatsuo KOBAYASHI

  Principal Economist

2023/04/20

1. Baseline scenario－－Negative growth may become the norm in the 2030s. The real GDP growth rate will be -0.1% per year (FY31-35 average) due to the negative private domestic demand growth. Throughout the forecast period, the fiscal deterioration will continue. The current account balance will remain in surplus, but the trade and services balance will remain in deficit. Some of the assumptions are as follows. Sanctions against Russia will continue throughout the forecast period regardless of the status of the Ukraine war. Oil price (WTI) will continue to fall until 2025, however, it will rise to $94.6 by 2035. In order to get the Japanese economy on a growth track again, it is essential to increase productivity. To achieve this, efforts must be made from the three perspectives; (1) expanding open innovation that utilizes internal and external resources, (2) accelerating and spreading DX, and (3) promoting free trade.
2. Reform scenario－－In this scenario, the productivity growth rate increases with the implementation of the initiative required as follows;
   • Raise business competitiveness (adaptability to future environment) to the level of the world's top 10
   • Raise the TFP levels of regional areas through promotion of digitalization
   • Maintain and strengthen the free trade system
   Therefore, the real GDP growth rate will improve to 0.6% (FY31-35 average). The current account surplus expands, and the trade and services balance become positive. However, the fiscal deterioration trend will continue.

 Tatsuya Ishii (Principal Economist), Tomoki Matsuo (Senior Economist), Katsuaki Ochiai (Specially Appointed Fellow), Tatsuo Kobayashi (Principal Economist), Trainee Economists: Ryohei Akutsu, Takahiro Kawauchi, Kazuki Ito, Aiko Fujii, and Norio Hibi.