The Cabinet on Tuesday adopted a revised policy to rehabilitate the budget, saddled with the world’s biggest debt burden. It also accepted a strategy to boost economic growth, but economists and an opposition leader warned that snowballing social security costs need further belt-tightening.
The fiscal reform plan, titled “Basic policies for economic and fiscal management and reform,” aims to achieve the goal of turning Japan’s primary budget balance into a surplus by fiscal 2020, betting that robust economic growth will boost tax revenues amid the swelling social security costs for the nation’s fast-aging population.
The revamped Japan Revitalization Strategy, as the growth strategy is called, aims to boost business investment with a focus on such fields as information technology and human resources.
Under the strategy, the government plans to take measures to increase the number of women in the workforce and double the number of foreign employees in the IT and communications sector to 60,000 by 2020. It also aims to draw more than 20 million foreign tourists annually by 2020.
Following the Cabinet’s approval of the two key updates to “Abenomics,” economic and fiscal policy minister Akira Amari told reporters that Prime Minister Shinzo Abe’s economic policy has completed its first stage and is now set to move on to the second.
“In the first stage, we aimed to bring back a favorable cycle for the economy by, to use the human body as an analogy, curing the disease called deflation,” Amari said. “In the second stage, we aim to turn the body, which has now recovered health, into a more muscular one.
“As we move forward on the path of population decrease . . . what we must do first and foremost is make the economy stronger by raising productivity and giving industry the potential to generate higher added value,” he added.
But Katsuya Okada, leader of the largest opposition Democratic Party of Japan, was quick to criticize the envisioned path for government fiscal recovery, which assumes healthy economic growth that is far from guaranteed.
“We can’t go on pushing back the issue of fiscal rehabilitation, which has serious implications for the future of our nation, by relying on an optimistic assumption that economic growth will solve all problems,” Okada said in a statement Tuesday.
Some analysts took sides with Okada. Hidenobu Tokuda, senior economist at Mizuho Research Institute, said the government won’t be able to achieve the primary balance goal “if it assumes economic growth rate of 2 percent in the first place.”
“The potential growth rate is currently said to be from 0.5 percent to slightly below 1 percent, and the population is declining,” Tokuda said. “In this situation, 2 percent is a lofty target. If there is growth above 1 percent I would still call the growth strategy a success.”
The plan calls for limiting the snowballing social security costs, which are expected to grow by nearly ¥1 trillion each year if left unattended, to below ¥1.5 trillion by fiscal 2018. However, economist Takuya Hoshino called for a more substantive approach that would include “reforms accompanied by pain.”
In fact, the “real serious situation for social security and the government budget awaits in fiscal 2020 and beyond, and even if the fiscal target is achieved by then, it won’t solve the problem for the government’s revenue sources,” the Dai-ichi Life Research Institute researcher wrote in a note Monday written based on the near-final draft of the plan released June 22.
He noted that the social security budget balance will sharply deteriorate as postwar baby boomers turn 75 and older.
The key target of the latest growth strategy is to boost the supply side of the economy — productivity, in particular. Economists welcomed this emphasis, amid fears that the nation’s aging and shrinking population may become a major drag down the road.
Expressing the view that the latest Abenomics revision has taken a turn in “the right direction,” Tokuda of Mizuho Research Institute said he particularly welcomes the newly introduced measures to support the nation’s information technology industry, which he thinks lags behind those overseas.
“The technology to take advantage of big data is an example. Google Inc. has already developed technology to take advantage of big data, such as in storing and processing such data.” Tokuda said. “Japan has hardly built on its knowledge about the technology, and it was late in joining the big-data bandwagon in the first place.”
Economists acknowledge Abenomics has so far achieved a degree of success, including boosting stock prices. This increases the value of investors’ assets and, in turn, spending, and improves the general economic sentiment. The yen’s significant depreciation, which enhances the international competitiveness of exporters such as automakers, is also counted among the positives.
“I think Abenomics is doing a good job,” said Soichiro Monji, an economist at Daiwa SB Investments Ltd.
” I would count (reform of) corporate governance, efforts to raise wages and promotion of tourism as key achievements,” Monji said. Corporate governance reforms, for example, forced corporate managers who had clung to their cash amid lingering reservations about the economy’s future to come face to face with stakeholders and drove them toward investing and hiring.
“The reforms forced businesses to set a specific earnings goal in terms of return on equity and explain to shareholders how they plan to achieve it,” Monji said. “The results were striking. Mergers and acquisitions grew, and capital expenditures started to increase. Wages rose too.
“Abe’s growth strategy is now in its third version, and if the government has done a good job so far, there isn’t the need to include new measures,” Monji said. “It looks like the latest version is criticized for lacking a punch, but that’s expected. I would be surprised if it still had a punch at this point.”
Information from Kyodo, Bloomberg added