Japan has made important progress in recent years in the area of regulatory and other structural reforms, but there is an urgent need for further and more rapid progress to strengthen future Japanese growth and prosperity.

While external shocks and cyclical factors have played a role in current economic difficulties in Japan, the most important factor has been structural rigidities, resulting from an increasingly outmoded regulatory and institutional framework. The engines that drove rapid Japanese growth over the past three decades (high export growth, rapid capital accumulation and labor force growth) are not likely to continue.

Without further regulatory reform, economic recovery will likely be modest and unemployment will remain high. With an aging population and shrinking workforce, it is crucial that Japan strengthen the competitive position of firms to assure future growth. A comprehensive program of regulatory reform is essential to create a more efficient and flexible economy, to encourage the growth of new industries and services and to create more jobs. This is even more urgent in the face of continuing reform in Europe, North America and elsewhere in Asia. According to OECD estimates, if the present declining trend in total factor productivity continues, Japan's per capita GDP, currently about 21 percent higher than the European Union's average, would be 21 percent lower than Europe's in 25 years.