Commentary / Japan

The season of economic policy

by Heizo Takenaka

Every year, around the month of June, the “policy season” arrives in Japan — with the government adopting the outline of its economic policies. On June 15, this year’s Basic Policy on Economic and Fiscal Management and the Future Investment Strategy were approved by the Cabinet. Even though the government’s draft budget is formulated in December, the outline of policies that form the basis of the budget are decided during this season.

This timetable of separating the economic policy discussions and the budget formulation was established in 2001 by the administration of Prime Minister Junichiro Koizumi. The Democratic Party of Japan-led government (2009-2012) put the process back to the old timetable (of both holding the policy discussions and formulating the budget in December), but the practice was revived in 2013 under Prime Minister Shinzo Abe. Also under the Abe administration, the policy discussions have been held in two-pronged ways — the economic and fiscal management policy mainly dealing with macroeconomic policies, and the future investment strategy discussing microeconomic structural reforms.

I would like to highlight three points about this year’s policy outline.

First, the government laid out its new target for fiscal rehabilitation. The earlier goal of achieving a primary budget balance (in which the government’s policy expenditures excluding debt-servicing costs will be covered without incurring new debts) by fiscal 2020 has already been proven difficult. And this time, the new target for achieving the goal was set in 2025. However, it has been left vague as to what policy steps will be needed to make that happen.

Social security expenses — the biggest spending item — is forecast to expand even further as the aging of Japan’s population progresses. The latest policy outline merely put a vaguely worded cap on the increase in such expenses — that the increase in the expenses will be curbed in the same way as previously. When the Koizumi administration succeeded in fiscal rehabilitation to a fair degree, the government imposed a clear ceiling on its spending. But in recent years, the government seems to have been avoiding such a rigorous mechanism in capping expenditures.

Second, new policies have been put forward to link the fruit of the Fourth Industrial Revolution to economic growth. A typical example is the enactment of a law to introduce the so-called regulatory sandbox and its implementation. If demonstration tests of new technologies are made possible by making use of the sandbox system, hopes will emerge for the launch of breakthrough-type venture businesses.

Furthermore, a concrete road map has been laid out to put self-driving vehicles on the road as a symbol of the Fourth Industrial Revolution. Japan has substantial demand for driverless vehicles — since it suffers from a shortage of drivers. In addition, the nation holds excellent technologies in the components needed for autonomous driving — cars, sensors and cameras. Self-driving vehicles offer great opportunities for growth for Japan.

This time the government also promised to compile comprehensive legislation for the digitization of administrative procedures. Such legislation would simplify the procedures for people and businesses to register matters that directly concern their lives and operations, such as moving, births and deaths, and for establishing new enterprises.

Third, the government set a policy of accepting more foreign workers by creating a new visa status for them. By effectively accepting workers from overseas to engage in simple labor, it expects to increase the foreign workforce by more than 500,000.

Even though the latest policy outline includes such features, it also exposed some problems. One is a lack of sense of speed in the reforms. A full year had passed since the policy outline last year decided on the introduction of the regulatory sandbox until part of the relevant legislation was enacted in the current Diet session. When the policy was adopted last year, only two countries had adopted the regulatory sandbox system. But during the year it took for Japan to revise the relevant law, the number of such countries and regions with the system increased to 18.

The second problem is that, regrettably, the leadership of the Prime Minister’s Office in the government’s policy decisions appears to be waning.

As Abe often states, the political power of vested interest groups remains extremely strong, and strong leadership by the Prime Minister’s Office is crucial to break through the hurdles to reform.

Over the past year, however, Abe and his team have been kept busy dealing with the Moritomo Gakuen and Kake Gakuen scandals. Although these scandals have been largely driven by a campaign on the part of some of the media and opposition parties to fuel suspicions despite a lack of evidence, it is undeniable that in reality the scandals have diverted the resources of the Prime Minister’s Office that should instead have been spent on economic policy.

As a result, there has not been much progress in the efforts led by the prime minister to promote deregulation through the national strategic special district scheme. Also, on the issue of foreign labor, the government decision ended up with a biased policy of accepting foreign workers only in limited sectors such as farming and construction where lawmakers backed by vested interests have been calling for access to cheap labor.

The issue should have been handled by enacting a comprehensive law on immigration to set strict standards on accepting immigrant workers while at the same time cracking down on illegal immigrants. However, the end result was a decision to accept certain categories of unskilled foreign labor.

For the time being, relative stability is anticipated in both the global and domestic economies. But it is during such times that fundamental structural reforms must be pursued with the leadership of the prime minister and his office.

Heizo Takenaka, a professor emeritus of Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.