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Cheer over Reagan’s arrival won’t trickle down to most Japanese

by William Pesek

Bloomberg

The Ronald Reagan moment Japan investors have long fantasized about has finally arrived.

Shinzo Abe’s plan to restore Japan’s economic might draws heavily upon principles long associated with the former U.S. president: welfare-spending cuts, debt-swelling tax reductions for the wealthy and corporations, deregulation, a lowering of trade barriers, and reforms that make it easier to fire workers.

Yet while investors have greeted this supply-side shock therapy with enthusiasm, Japan’s 126 million people may not find its side effects quite so pleasing. As in the U.S., Abe’s reforms could hollow out the middle class and create the kind of gulf between rich and poor Japan has long tried to avoid.

Everyone from officials at the U.S. Treasury to punters in London trading pits to salarymen in Osaka are so ecstatic to see a Japanese leader acting boldly that they’ve forgotten to study his strategy. It’s great that Abe wants to shake Japan Inc. out of two decades of complacency. It’s equally important, though, that his fixes are the right ones and are implemented carefully.

Take Abe’s plan to cut the 35.6 percent corporate tax rate — the second-highest level among Group of Seven nations — while at the same time doubling consumption taxes. How exactly does Japan hope to encourage households to spend more to boost gross domestic product while raising the cost of consuming? The last time Japan tried something similar, in 1998, tax increases scuttled the recovery from a financial crash eight years earlier.

Shift in wrong direction

“To raise the consumption tax while cutting corporate taxes will further shift things in the wrong direction,” says Richard Katz, editor-in-chief of the New York-based Oriental Economist Report. “That does not make sense for a country where consumer spending is chronically weak due to weak consumer income.”

What would make more sense is clamping down on tax-dodging executives. An eye-popping 73 percent of Japanese firms pay no tax, said Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo. “This breaks into two groups — companies that are uneconomical and companies that are economical with the truth,” Smith says.

Abe’s labor reforms pose risks, too. Japan should indeed scrap the antiquated practices of lifetime employment and seniority-based promotions while reducing the power of uncompromising labor unions. The country ranks 134th out of 144 nations in terms of ease of hiring and firing, according to the World Economic Forum’s Global Competitiveness Report. Yet Japan lacks a public safety net to catch the hundreds of thousands of workers who could soon be out of a job.

Japan eschewed an American-style unemployment-insurance system because companies never laid off workers. The reason Tokyo spent so much time and money propping up banks in the late 1990s and early 2000s was so they could keep so-called zombie companies afloat and unemployment low. Before Abe helps companies to sack 20,000 workers here and 50,000 there, he must create a social-benefits program and fund extensive job- retraining programs.

Otherwise, Abenomics will only exacerbate Japan’s underappreciated working-poor problem. Among Organization for Economic Cooperation and Development members, Japan ranks fifth in the number of working-age persons living on less than half the average national income. The dynamic began in former Prime Minister Junichiro Koizumi’s day and accelerated with what Japan calls the “Lehman shock” in 2008. State statisticians are only now catching on to the problem.

Consensus preference

Between 2001 and 2006, Koizumi dabbled a bit himself in Reaganomics. Japan’s preference for consensus over conflict meant he moved more gingerly than Reagan did, or than Margaret Thatcher did as Britain’s prime minister in the 1980s. Koizumi’s signature achievement was privatizing the sprawling Japan Post Holdings Co. Ltd., which plans an initial public offering by April 2015.

Yet Koizumi also cut pensions and tweaked labor laws to allow companies to hire more workers on a part-time basis at lower pay and without benefits. That slammed incomes in the middle of the wage spectrum and hit women especially hard. It’s led to many unexpected consequences, including an epidemic of shoplifting among the elderly. Abe’s move to get the Bank of Japan to double the monetary base excites hedge-fund managers but punishes savers who must live on a fixed income.

These changes would be less destabilizing if trickle-down economics actually worked. It would help, too, if Japan had a buoyant startup industry creating scores of new jobs to fill the void. “Japan’s entrepreneurial animal spirits are dormant,” says Jeff Kingston, head of Asian studies at the Tokyo campus of Temple University. Even if Abe complemented Reaganomics with a dash of socialism and financed a venture-capital industry publicly, it would take years to yield results.

Many of Abe’s policies are exactly what Japan needs. Joining the Trans-Pacific Partnership would pump fresh energy through Japan Inc.’s atrophied veins. So would deregulating sectors from energy to medical services to education to agriculture. Yet reforms that should bear fruit in the long run lack the financial cushions and economic checks and balances needed in the short run. Abe must develop a transition plan to keep his strategy from polarizing Japan’s proudly egalitarian society. It’s not as if most Americans are happy with that legacy of Reaganomics.

William Pesek is a Bloomberg View columnist. His opinions are his own.

  • http://getironic.blogspot.com/ getironic

    Deregulation? What deregulation?
    Welfare cuts? What welfare cuts?
    Labour-law reform? What reform? Where?

    “Yet Japan lacks a public safety net to catch the hundreds of thousands of workers who could soon be out of a job.”.

    What’s the point of stating this? That in the process of (allegedly) cutting welfare it should also be increased at the same time?
    Secondly, why do they need to be “caught” by anyone other than themselves?

    “…including an epidemic of shoplifting among the elderly”

    This is just sensationalism. Do you know what an epidemic is?

    In epidemiology, classifying an epidemic requires a comparison to a baseline of incidence. Just because there is an increase in the number of cases of X does not mean there is an epidemic. That’s because the baseline of the rate of incidence is determined by the number of possible cases. So for example, if one winter 10 young people in a town got a bad flu, but the next winter 50 young people in the same town did, it does not necessarily mean there is a flu epidemic. Why? Because compared to what? The population of the young: If the population of the young went from 100 to 500, the rate of incidence is still the same.

    Now how is the population shifting in Japan? Less young people, and comparatively more old people. So the “rate” of shoplifting, even if it stays the same, will mean there will be more elderly shoplifters, because there are more elderly people. There is going to be more of everything from the elderly simply because there are more of them. Accounting for population the actual increase in the last 20 years is 6.5%. Is that an “epidemic”? I don’t know, but it deserves more than this vague description William Pesek has offered.

    “It would help, too, if Japan had a buoyant startup industry creating scores of new jobs to fill the void. “Japan’s entrepreneurial animal spirits are dormant,” says Jeff Kingston…”

    Perhaps the animal spirits would not be dormant if it weren’t for the crippling regulations and taxes on being an entrepreneur. Or if there was not a culture of fear about being persecuted for doing things one’s own way. Ask Takafumi Horie how he feels about how Japan rewards entrepreneurial risk-taking vs. insulating the status quo.

    What motivation is there to be wildly successful if your rewards consist of living under the rules of your inferiors, public persecution, demands that you “make the workplace more accessible” to “insert group here”, and that you not become too successful as that might upset the established order and we’ll just have to put you in prison for the first minor error you make — and you WILL make an error, because we’ll keep passing so many laws that it will become impossible for anyone not be be dirty, if only by accident. This way we keep everything how we like it, nice and dormant — and under control. Our control. All this could be yours, potential entrepreneurs! All this could be yours*! (*: it’s not actually your property, it’s ours)

    Meanwhile some token “intellectuals” can go around blaming the very people who are being oppressed for not wanting to work through all of this. How unsurprising. A lot of help the universities are, just the happy co-conspirators of the state in this ruse. So much for debate. So screw it. Better to just opt out, stay at home, play some Wii and post on 2ch; the conditions have rigged all the incentives towards not trying. Ask the freeters and grasseaters, they feel the same as their invisible brothers: all the individuals who might have achieved great things in business, but weighed the risks and decided they’d be happier doing something else. And we’re all worse off because of that.

    “Many of Abe’s policies are exactly what Japan needs. Joining the Trans-Pacific Partnership would pump fresh energy through Japan Inc.’s atrophied veins.”

    No…just no. That is all.

  • JTCommentor

    I agree with the basic premise of the point relating to tax. Basic tax policy tells us that shifting tax from an income tax to a consumption tax encourages saving behavior, as if a person is not spending they have a comparatively lower tax burden – consumption tax is kind of like a voluntary tax burden. On the other hand, shifting overall tax burden from consumption type taxes to income tax tends to promote spending activities as once the money is earned, the tax has already been paid and there is not much benefit to sitting on the money, so you may as well spend it. While an impending increase in consumption tax might cause short term spending prior to that increase (and we are seeing this), long term lower income tax and higher consumption tax is going to lead to less spending and more saving.

    However, this article only mentions the corporate tax rate (which is incorrect, its currently about 38% and will be down to about 36% in a couple of years). This is not the right comparison – personal tax rates should be looked at when discussing this element of tax policy. The author should be asking what effective tax rate the average earner pays in Japan (top rates are high, but I think average earners have a lower effective tax burden than, say, the US), and also whether Abe’s plan involes any changes to personal income tax levels.

    On the corporate income tax point discussed -a further cut in corporate tax rates would theoretically help business, provided that this can be funded by the government in some other form (revenue from increased audits of SMEs for example). However, to truly generate sustainable momentum, this, as well as other positive environmental factors for businesses ultimately need to be passed on to the employees. Wages in Japan are low. If prices are going up, wages need to increase or all of this Abenomics is just going to leave average Japanese people in a worse situation than they are now – average people facing more hardship, just so headlines and big businesses can yell out about “growth”.

  • Edmund Wong

    The middle class is a useful class to utilise for consumption. But because the middle class in Japan are saving more than enough to spur the japanese economy thus, in my opinion, Abenomics sort to ‘reverse’ the vicious cycle for a while so that corporation can hire more or increase wages. with regards to welfare, there might be different approaches for a homogenous Japanese culture. This Abenomics might just work in the short run. Since it is Abenomics, it is always a on-going economics as long as he is in charge. I dare say that this radical approach will not be welcome by the middle class but the middle class jolly well knows that they are saving more than they should be spending. Unless the boon in the reduction of corporate taxes does not translate to more jobs or increase in real wages.