Business / Economy

Abe's post-election policy targets wages but delays fiscal reform

by Leika Kihara and Stanley White

Reuters

Prime Minister Shinzo Abe’s economic agenda is shaping up after his landslide election win with a focus on steering firms to hike wages and keeping the economic recovery going with loose fiscal and monetary policies.

Details emerged on Wednesday of policymakers’ plans to push businesses to use their huge cash piles to boost salaries and moves to shift fiscal prudence targets, a sign Abe will continue to prioritize growth over austerity.

While the government has no immediate plans for a big spending spree, the Bank of Japan’s pledge to keep borrowing costs virtually at zero with ultraeasy policy will allow lawmakers to delay steps to rein in the huge public debt, analysts say.

“The government wants the BOJ to maintain the status quo and help the economy with ultraeasy policy,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

“In the meantime, wage hikes would be crucial to generate inflation and a positive economic cycle. The government has had little success so far, but it’s not a bad idea to make clear its resolve to boost wages,” he said.

With inflation distant from its 2 percent goal, the BOJ is set to keep policy steady at next week’s rate review and stress its resolve to keep its money spigot open.

Abe’s ruling coalition scored a landslide victory in Sunday’s general election, boosted by his campaign promises to invest more heavily in education and child care.

To encourage more growth, the government is considering expanding tax breaks for companies that raise salaries to achieve a 3 percent increase in overall salaries, sources said. That would be higher than a roughly 2 percent increase in big firms’ wages in 2017.

The move reflects the government’s frustration over slow wage growth that has weighed on private consumption, even as companies reap record profits thanks to an improving economy. Total cash earnings rose a revised 0.7 percent in August compared with the same month last year, labor ministry data showed, but adjusted for inflation they fell 0.1 percent.

“The government will continue to shift more spending to policies that directly affect households,” said Norio Miyagawa, senior economist at Mizuho Securities. “Companies have a lot of reserves, so it makes sense to try to get them to spend that money on capital expenditure and wages.”

More spending for households, however, comes at the expense of further delays in  reducing the nation’s debt burden which, at twice the size of the economy, is the worst among advanced economies.

Abe has pledged to proceed with a twice-delayed sales tax hike to 10 percent from 8 percent in 2019. But he decided to divert more proceeds for spending instead of debt payment, forcing the government to abandon its original fiscal 2020 deadline for balancing the budget.

Some members of the government’s top economic council will on Thursday propose setting no new time frame for meeting a fiscal goal aimed at repairing Japan’s tattered finances, a sign that Abe will continue to prioritize growth over fiscal austerity, sources said.

Delays in fiscal reform have not rattled the bond market yet, but snowballing social security spending for the fast-aging and shrinking population could strain government finances and make Japan more vulnerable to a sudden spike in borrowing costs.

Abe swept to power in late 2012, pledging to pull the world’s third-largest economy out of nearly two decades of deflation and stagnation. Abenomics, his three-pronged growth policy, has helped boost stock prices and enrich manufacturers by weakening the yen.