METI Publishes Fourth Report of the Committee on New Direction of Economic and Industrial Policies

1. Outline

As the Japanese economy is experiencing a turning point for the first time in about 30 years due to expanding domestic investment and rising wages, this is the critical juncture to deal with rising prices and labor shortages, as well as U.S. tariff policy, in order to reach a sustainable growth trajectory.
“A Future Outlook for Japan for Each Citizen Enhancing Well-being with a Declining Population” was a recently-completed two-year project to enable a shift from the cost-cutting mindset that has persisted for 30 years to a growth mindset driven by investment and wage hikes. In the current Fourth Report, METI presents a quantitative analysis of the future macroeconomy and industrial structure, in light of the relevant policies implemented over the past year (including the GX2040 Vision and the Seventh Strategic Energy Plan) and in cooperation with the Research Institute of Economy, Trade and Industry (RIETI; directed by Chairman FUKAO Kyoji).
The Japanese economy can grow even with a declining population if Japan can transform into a “growth-oriented economy driven by investment and wage hikes.” Main issues and measures are also presented which would allow for the realization of this future outlook.
METI will share this outlook of a bright future based on rationality and feasibility with companies, citizens, and the government to increase predictability and further strengthen necessary policies.

2. Details

(1) Quantitative view of a future Japan in 2040 in which each citizen can enhance well-being with a declining population

The Third Report (June 2024) presented a qualitative future outlook of what could be achieved by further strengthening policies of the “New Direction” of economic and industrial policies. In light of the future outlook in the Third Report and the relevant policies over the past year (including domestic investment targets, the GX2040 Vision, and the Seventh Strategic Energy Plan), the current Fourth Report not only provides an updated qualitative future outlook but also presents a quantitative analysis of the future macroeconomy and industrial structure.

(i) Macroeconomy (including population, domestic investment, labor productivity, wages, and GDP)

The Fourth Report projected two cases: the case of adopting the new direction (in which the new and aggressive economic and industrial policies will be maintained and strengthened, achieving domestic investment of 200 trillion yen in the fiscal year 2040 as a public-private target) and the base case (in which domestic investment will stagnate at the same level as in the past 30 years). According to the projection, if domestic investment continues and expands, wages will continue to increase at a rate similar to the base rate of approximately 5% used in the spring wage negotiations in the last few years (5,366 yen/hour nominally in the fiscal year 2040), and nominal GDP will reach approximately one quadrillion yen (975 trillion yen in fiscal year 2040). Comparisons with rates in overseas countries are also presented.

(ii) Transformation of the industrial structure (a future developed through Manufacturing Industry X, ICT & professional service industry, and advanced essential-service industry)

The macroeconomy cannot grow without a transformation of the industrial structure. In the current estimation, METI classified industries into more than 30 industrial classifications for the first time in about 20 years so that the industrial structure in 2040 will be easier to comprehend. Moreover, this transformation, which is essential for growth of the macroeconomy, is divided into three major key elements and indicated in a quantitative manner through skyline charts of labor productivity and wages.
The first key is manufacturing. By differentiation through GX/frontier technologies and increasing added value through service transformation using digital technology, the industry will be able to expand employment and increase wages. The manufacturing industry, which is set to trigger a social transformation, is named “Manufacturing Industry X.”
The second key is the ICT & professional services industry. Through development of new sources of demand generated in the process of using frontier technology to add high value in the manufacturing industry and labor saving in the service industry, the industry will create new added value. Through such changes, it will become a growth industry realizing higher wage increases than those in other industries.
The third key is essential services. Through utilization of labor-saving investment including AI and robotics, the industry will transform into an industry of “advanced essential services,” which can realize wage increases.
Moreover, the fact that the above three keys to the transformation of the industrial structure require next-generation smart investment, including for research and development and software, is presented quantitatively. We also present a quantitative outlook of the employment structure that will support the transformation of the industrial structure.

(2) Main issues and measures needed to realize the future outlook

Amid the increasing uncertainty in the world, whether each industry will grow steadily in line with the future outlook projected in this report remains uncertain. While it is essential to remain flexible in responding to possible changes in the global situation in the future, there is no way to change the importance of shifting to a high value added economic and industrial structure in the medium to long term.
In the highly uncertainty conditions, the government should not go back to the neo-liberal approach as seen in the past 3 decades, but rather, should remain vigilant in continuing intensify the economic and industrial policy of the “New Direction”.  
In line with the above vision, the Fourth Report organizes three pillars as directions of future policies: i) structural reforms to encourage growth investment that will generate new value added, ii) local economies/industries capable of sustainable growth even under higher prices and labor shortages, and iii) enhancing economic infrastructure (energy, trade, etc.) to actualize growth investment.

Related Link

• Fourth Report of the Committee on the New Direction of Economic and Industrial Policies

Division in Charge

Industrial Structure Policy Division, Economic and Industrial Policy Bureau