【Aging, safety net and fiscal crisis in Japan】No.66: The potential growth rate of Japan's economy is less than 1%

4Q 2017 (October - December) real gross domestic product (GDP) increased for the 8th consecutive quarter. The Japan Center for Economic Research predicts that the real GDP growth rate in 2017 (2017.2 Q - 2018.1 Q) will be 1.7% as a result of balanced growth in domestic and external demand. However, the center predicts that the real GDP growth rate will slow down to 1.3% in 2018 and 0.9% in 2019, respectively.

A growth rate of 0.9% reflects the potential growth rate of Japan's economy according to the Bank of Japan, which estimates and announces the potential growth rate. As shown in Figure 1, the potential growth rate in the latter half of the 1980s, which was the time of the bubble economy, exceeded 4%. Potential growth rate dropped below zero around 2010, and it has been less than 1% ever since then, even though the trend has been slightly upward.

According to the Bank of Japan, the potential growth rate is calculated as the sum of [the average growth in inputs of labor and capital] and [the growth in their utilization efficiency called Total Factor Productivity (TFP)]. Table 1 shows the Bank of Japan's calculation of the potential growth rate through factorial decomposition. According to the Abe administration's economic plan, the growth rate of TFP is set between 1% (baseline case) and 1.5% (growth realization case). Although the plan includes slogans such as the human resource development revolution and the working way reform, their effectiveness appears to be low and TFP has remained around 0.3% to 0.4%.

（Source）Bank of Japan