Shaky foundation for recovery

The economy appears to be on the recovery path, at least temporarily, thanks to the policy of the Abe administration. But optimism is not warranted ahead of the expected effects from the rise in the consumption tax, beginning in April, and the extra financial burden placed on households under the fiscal 2014 draft budget. Although the Abe administration’s economic policy is based on the belief in “trickle-down” benefits, it is not certain whether this theory will work.

Since the Abe administration began about a year ago, Japan’s gross domestic product has expanded steadily. While the Bank of Japan’s quantitative monetary easing has led to a cheaper yen, thus helping export-oriented firms improve their performance, increased spending on public works projects has pinned down domestic demand. But the peak effect from public works spending has passed, and the consumption tax rate will rise from 5 percent to 8 percent in April. The tax is set to rise further to 10 percent from October 2015. Many private-sector economists predict that GDP will dip by an annualized 4 to 5 percent in the April-June quarter.

BOJ Gov. Haruhiko Kuroda says that although economic growth will temporarily slow down in that quarter, it will pick up in the July-September and October-December quarters.

To combat the cooling effect of the consumption tax raise, the Abe administration in December decided on an economic package worth ¥18.6 trillion and drafted a fiscal 2014 budget of ¥95.88 trillion. Both strongly favor businesses. The government needs to implement economic measures included in the package and the budget at an early date.

The big issue is whether the household sector, whose spending accounts for about 60 percent of the nation’s GDP, will withstand the pressure from the consumption tax hike. It is estimated that the consumption tax hike will increase the household sector’s financial burden by about ¥6 trillion a year. If the planned increase in pension premiums for corporate workers and the planned decrease in pension benefits are taken into consideration, the additional burden is estimated at about ¥7.5 trillion.

The government plans to provide cash payments to low-income households and home buyers. But these are one-time measures. Consumers are also suffering from price rises in commodities that use imported materials.

The Abe administration hopes that increased consumer spending and capital investment will lead to a strong economic recovery. But for this to happen, large wage hikes will be necessary. While major export-oriented firms are positive about increasing wages, medium-size and small enterprises are cautious about it.

The Abe administration will push deregulation as a third arrow of its economic policy. But it is not certain whether such a policy will really help to strengthen the Japanese economy. Deregulation in the labor market, for example, could increase the number of irregular workers, who are paid lower wages than permanent workers and have worse working conditions. Increasing the number of such workers will only weaken the foundation of the economy.

The administration appears to think that improving the profitability of major firms will work as an economic panacea. There is no guarantee that workers as a whole will enjoy permanent wage increases in accordance with the rise in profits of businesses benefitting from the administration’s policy.

Prime Minister Shinzo Abe should reconsider whether his basic approach will enhance the well-being of all citizens and strengthen the economy.