/

Noda says Abe buying into ‘voodoo economics’

by William Pesek

Bloomberg

Sour grapes are in season in Tokyo as Prime Minister Shinzo Abe’s predecessor steps up and slams the incumbent’s tax plans.

However, beneath the bad feelings and twinge of regret, Yoshihiko Noda makes a very timely point when he accuses Abe of buying into former U.S. President Ronald Reagan’s debunked theories on trickle-down prosperity.

“It’s a kind of voodoo economics,” Noda said of the “Abenomics” program that has thrust Japan back into the global spotlight. Noda made those comments, which are sure to irk Abe’s team, to my Bloomberg colleagues Chikako Mogi and Kyoko Shimodoi.

The immediate context is Japan’s sales tax, which Noda’s short-lived 2011-12 government agreed to raise in two steps to contain the world’s highest debt burden.

In April, Abe’s government went ahead with the first hike to 8 percent, but there are questions about the second move to 10 percent next year. If the hike doesn’t take place, Noda warned, that “would imply that Japan’s fiscal management strategy will collapse, and the market perception risks are huge.”

However, far more interesting is Noda’s critique of Abe’s corporate tax plan. Yes, the nearly 36 percent levy is among the highest in the world and bringing it down could make Japan a more attractive investment destination.

But, as Noda asks, won’t lowering corporate taxes make higher consumption taxes a wash? Absolutely, and the folks at Moody’s and Standard & Poor’s won’t be fooled by this fiscal bait-and-switch. The bigger question is Abe’s faith in the Reagan-era ideology of lowering corporate taxes and reducing levies on profits in order to boost growth, tax revenue and, by extension, living standards.

In November 2012, Tokyo unleashed one of modern history’s greatest gestures of corporate welfare, driving the yen down 20 percent. Nineteen months on, have companies shared the wealth? Nope.

The money’s there; Japan Inc. is sitting on record piles of cash. At of the end of 2013, private companies, excluding financial ones, were sitting on at least $2.2 trillion. That sum dwarfs U.S. corporate cash holdings, which is quite a feat considering America’s annual output is 2.7 times greater than Japan’s.

With that kind of money, corporate Japan could pool its spoils to buy Russia and settle most of its energy needs. Given that any wage increases so far in 2014 have been negligible, that cache has surely grown. It’s hard to argue, then, that current corporate tax rates are hurting Japanese companies. Nor are taxes the main impediment for many foreign companies who might covet the Japanese market (America’s rate is higher).

The problem is an aging population, low productivity, disappointing returns on investments, an expensive and rigid workforce, immigration policies than ensure little diversity of opinion among managers and a general lack of innovation from the ground up.

Rather than cater to the likes of Sony and Toyota, why not go the other way and empower startups? How about this for a tax reform: If you put out a shingle in Tokyo, Osaka or Fukuoka today, hire some people and meet certain metrics for growth, you pay no taxes for five years.

That way, wealth trickles up instead of down. The policies of former U.S. leaders Reagan and George W. Bush showed companies are more apt to use tax breaks to enrich executives and shareholders than workers. Yacht makers and Rolex merchants are happy, while the average Joe — or Mrs. Watanabe — slides backward.

The magnitude of Abe’s restructuring task is a daunting one and no magic wands exist to deregulate industry, improve corporate governance and cultivate entrepreneurship. Why, then, does Abe think he can get the job done using voodoo?

William Pesek is a Bloomberg View columnist.

  • Steve Jackman

    I’d say Abenomics is more like VD economics. It may be fun in the short-term while it lasts, buy it could make you crazy or kill you in the long-term if it goes unregognized and untreated for too long. You’re also likely to spread it and hurt other unsuspecting parties due to your own recklessness as you go down. Best to be cautious and not engage in such risky behavior.

  • zer0_0zor0

    Noda is right about the corporate tax, but he was dead wrong about letting the yen rise to unprecedented highs against the dollar while the USA was engaged in massive “quantitative easing”.

    Will, on the one hand, you say

    Japan Inc. is sitting on record piles of cash. At of the end of 2013, private companies, excluding financial ones, were sitting on at least $2.2 trillion. That sum dwarfs U.S. corporate cash holdings, which is quite a feat considering America’s annual output is 2.7 times greater than Japan’s.

    and on the other hand

    an expensive and rigid workforce, immigration policies than ensure little diversity of opinion among managers

    I don’t see how you can praise the outcome of the system and then criticize aspects of it without grounds. There is certainly nothing “expensive and rigid about the workforce”, that statement represents the mentality of the funny-money investment caste that caused the financial crisis leading to “quantitative easing”. Meanwhile, even Abe is trying to raise wages.

    How can you criticize the move to cut corporate taxes and then say that the workforce is too expensive? It’s totally unclear as to whose interests you would identify with the public interest, or which countries policies you favor, but the neoliberal cliches don’t jibe with a critique of voodoo economics. And mind you, Japanese companies achieved the amount of cash they have on hand without “foreign managers”.

    • phu

      I’m not sure the cash stockpile point was intended as praise; it can also be viewed an indictment of companies that simply throw it in the bank rather than using it in ways that could prove materially helpful to the nation (e.g. raising salaries or investing in R&D).

      Personally, I’d say the expense and rigidity comes in with Japan’s regulations regarding hiring and firing. That may not be what the author was going for, but as a small business owner, I’d be terrified to hire anyone in Japan for the fear of being unable to fire them (or lay them off) legally if that became necessary for whatever reason.

      • zer0_0zor0

        Companies obviously are investing in R&D, otherwise they couldn’t maintain their leading status in their respective markets. Japan was granted the highest number of patents in 2012, the latest year for which statistics are available.

        The problem with wages is that companies have to compete internationally. Even Toyota had to move production facilities overseas recently to remain competitive. Part of the problem is that corporate taxes are too low in some countries, with labor laws and environmental standards being the other major factors.

        Let’ not forget the temporary worker system in Japan, which allows companies flexibility, but was meant to be for short term use. Temps are paid less for the same work, etc. There are other problems than “rigidity”, and the adoption of the dysfunctional US model would appear to be part of the problem, not the solution. Not that I am pretending to know the solution.

  • Maranyika

    Lets cut Abenomics a slack! at least Abe san is doing something Japan has been over cautious for too long. The current global environment is either sink or swim which calls upon atleast engaging in risky behavior.