Never in the past 30 years has productivity growth been lower than since the 2008 global financial crisis, and never has income inequality been higher than it is today in Japan, and in the OECD area. The two challenges have some common origins, including a widening productivity and wage gap between leading firms and those that are lagging. This creates scope for positive synergy between policies to promote productivity and inclusive growth. Exit policy should be improved to facilitate the closure of non-viable firms, whose survival hampers the growth of viable firms in Japan. This would also increase firm entry, along with policies to promote entrepreneurship. The growing gap between small and medium-sized enterprises and large firms also needs to be addressed. Breaking down labour market dualism, which limits human capital accumulation by non-regular workers and contributes to earnings and income inequality, is also a priority. Finally, ensuring appropriate skills, including those needed for digitalisation, would help support higher productivity and inclusive growth.

The common origins of the productivity and income inequality challenges 8 Improving exit and entry policies 11 Improving exit policy to ensure the closure of non-viable firms 11 Encouraging firm entry and entrepreneurship 18 Other policies to promote synergy between higher productivity and inclusive growth 22 Product market reform to promote entrepreneurship and innovation 22 Improving corporate governance 24 Innovation to promote productivity growth and social inclusion 27 Increasing international openness 29 Making the SME sector more dynamic 32 Directions for reform to improve government programmes for SMEs 35 Breaking down labour market dualism 36 Human capital and skills 40 Ensuring that digitalisation promotes inclusive growth 41 REFERENCES 44 Tables 1. Legal insolvency procedures in Japan 14 2. Personal insolvency regimes 16 3. Flows of R&D funds in 2014 28 4. Non-regular worker households suffer from a high poverty rate 38 5. Investment in Information and Communication Technology is low in small firms 42 Figures 1. Relative poverty in Japan is high 6 2. Productivity growth has slowed worldwide since the 1990s 7 3. Labour productivity in Japan remains about a quarter below the top half of OECD countries 8 4. The labour productivity gap between global frontier firms and other firms is widening 9 5. Productivity in Japanese firms has diverged significantly 10 6. Labour income inequality is positively correlated with productivity disparities between firms 10 7. Exit, bankruptcy and dissolution of firms in Japan 12 8. The share of non-viable firms in Japan is significant 12 9. Small firms in Japan tend to stay small 13 10. International comparison of corporate insolvency frameworks 15 11. Japan''s annual firm entry rate is lower than in other advanced economies 18 12. The share of entrepreneurs in Japan is low, especially among women 19 13. Views on entrepreneurship in Japan are negative 20 14. Access to entrepreneurial training and finance is relatively low in Japan, especially for women 21 15. The venture capital sector is relatively undeveloped in Japan 21 16. There is scope to align Japan''s product market regulation with OECD best practice 23 17. Share of institutional investors complying with the Stewardship Code''s principles 25 18. The share of companies with independent directors has increased rapidly 26 19. R&D spending is concentrated in large firms in manufacturing 28 20. Agricultural producer prices in Japan are high 29 21. Japan’s farm workforce is elderly: the age distribution of rice farmers in 2015 31 22. The level of foreign direct investment in Japan remains low 32 23. Productivity in small firms in Japan is low relative to large firms 33 24. The productivity gap between manufacturing and non-manufacturing has widened sharply 33 25. Public credit guarantees for loans to small and medium-sized enterprises have fallen significantly 34 26. Credit guarantees for small and medium-sized enterprises in Japan are exceptionally high 35 27. Non-regular employment is concentrated among women 36 28. The wage gap between regular and non-regular workers is large 37 29. Percentage of workers reporting a skill mismatch in 2011-12 40 30. Japan is lagging in the share of firms with broadband connectivity 41 Boxes Box 1. Main policy recommendations for boosting productivity for inclusive growth 43