Boosting Productivity Is Key Issue for Japan, McKinsey Says

Japan’s future economic success hangs on increasing the pace of productivity gains as the population declines, according to a report by the research arm of McKinsey & Co.

The productivity growth of workers in the world’s third-largest economy dropped during the so-called “lost decades” following the bursting of its asset-price bubble in the early 1990s, McKinsey Global Institute said in a report this week. Labor productivity in Japan now lags behind the U.S. by about one-third, according to McKinsey.

“Japan could face a third decade of stagnation -- one that would collide with an unprecedented demographic shift, creating even more damaging consequences,” McKinsey said.

Gross domestic product is on course to expand by about 1.3 percent annually over the next decade if the current trend of 2 percent productivity growth holds, according to the report. Boosting productivity gains 4 percent would translate into annual economic expansion of about 3 percent, McKinsey said.

Prime Minister Shinzo Abe has made ending Japan’s deflationary mindset and boosting the country’s growth rate key priorities of his government. He’s fired the first two arrows of his policy -- fiscal and monetary stimulus -- and is working on the third: structural reform. McKinsey said corporate Japan should fashion a fourth arrow, targeting productivity.

There have been some recent developments among large companies, with some car and electronic manufacturers announcing plans to change pay structures based on time served at a firm.

Toyota Motor Corp. said in January it would consider introducing performance pay for younger employees and wanted to tie compensation more closely to talent rather than rank and tenure.

Before it's here, it's on the Bloomberg Terminal.