Commentary / Japan

Economic priorities beyond Abenomics

by Jesper Koll

On Dec. 26, the current administration of Prime Minister Shinzo Abe will be entering its eighth year. He is now Japan’s longest-ever serving prime minister and deserves much credit for turning the nation from the burned-out ruin it was in the post-bubble “lost decades” into a bastion of stability. Under Abe’s team, Japan’s economic policy pragmatism and political efficiency have become the envy of the world.

Unfortunately, in economic policymaking you are always only as good as your last policy decision. Global markets, technological progress and competitive human nature demand constant fine-tuning and new decisions. And for Japan, there is much that needs to, and can, be done to ensure that the newfound stability does not feed the next cycle of stagnation. Make no mistake — Abenomics was successful crisis management to end an era of stagnation and defeatism; now Japan must move beyond Abenomics to start a new era of confidence and sustained growth.

Specifically, here are my top two suggestions for economic policy actions that should raise significantly the chances of Japan’s future prosperity, as well as Abe’s historic legacy as economic policymaker.

First, create a “startup nation Japan” entrepreneurship ecosystem.

Now that the economy is stable, the key focus must be on future growth. Nothing creates growth as powerfully and sustainably as a strong entrepreneurial culture. Empirically, more than 70 percent of net new employment comes from young startup companies. Clearly, Japan has work do to: It has barely one entrepreneur for every three in Germany; and both Israel and the United States have double the number of entrepreneurs that are in Japan (all adjusted for relative population).

That is why prosperity growth, productivity and commercialization of innovation is so much higher there than in Japan. For every 1 percent a nation raises its entrepreneur share in the population, potential growth gets a boost of at least 0.5 percent.

How to do this? Special economic zones, deregulation and social policies that allow  failure and encourage trial and error, are a macro policy imperative. Specifically, tax incentives not just for startups but also for established businesses that open their supply chains or vendor practices to new startup suppliers. Many startups fail because Japan Inc. is good at closing ranks and never gives a new but untested innovator a chance to get into the game.

To get going, create a top-level task force reporting directly to the prime minister, charged with designing a global best-in-class exemplary ecosystem for entrepreneurs here in Japan. It goes without saying that the greater the number of private sector entrepreneurs on this task force, the greater its credibility.

Second, cut entitlements by introducing means testing.

Japan must focus on specific and targeted expenditure cutbacks, not tax increases, to raise public sector efficiency and fiscal credibility. Japan’s massively inflated system of entitlements for social security, pensions and public medical services is the single biggest drag on public finances and government efficiency. Coupled with rapid aging of the population, this forces a runaway fiscal deficit, projected to rise by almost 2 percent of GDP every four to five years.

The solution is entitlement cuts targeted in proportion to the financial health of the consumer. So out-of-pocket expenses for medical care giving, medication, hospitalization, etc., should go up progressively: The higher one’s net financial assets the more he or she should pay out of pocket.

For example, if your net financial assets are more than ¥15 million, and you have no mortgage debt, your out-of-pocket pay for medical services goes up to 90 percent or 100 percent, from the current top rate of 30 percent.

To be sure, this is not an easy policy to design, because where do you draw the line? Certain standards of minimum guaranteed care will have to be established. However, in an aging society where an ever-growing proportion of the people no longer earn employment income and live off their pensions, taxation will have to shift and focus on assets and net worth.

To design a fair and efficient system, genuine political leadership is required. The good news is that Japan’s younger, post-Abe generation of politicians is not afraid to think out of the box and experiment with means testing. Politically it should even prove quite popular because financial means testing delivers an immediately credible focus on fairness. It is a progressive “tax” that solves the gap between the rich and the poor. Abe already pointed in this direction when he declared he wants to be a “gap buster” at the 2019 World Economic Forum in Davos, Switzerland.

Imagine if Abe were to empower a task force open to the aspiring post-Abe young leaders to come up with a first blueprint, he would show truly visionary leadership: Selecting his successor on the basis of demonstrated leadership on Japan’s most pressing domestic social and fiscal issue would be a revolutionary demonstration that Japan is a functioning political meritocracy.

Of course, there are many other economic policy issues that will need addressing and fine-tuning, from detailed tax policy to public works allocation, defense spending and minimum wages, down to monetary policy, immigration and many more details. However, now that the post-bubble crisis has been overcome, the key priority must be to set new overarching targets.

“Startup nation Japan” for sustained prosperity, and “financial means testing” for social fairness and fiscal stability are an excellent place to start. I am certain that any concrete signs of progress here would not just raise Abe’s historic legacy as economic policymaker, but, more importantly, increase further Japan’s reputation as the envy of the world.

Based in Tokyo, Jesper Koll is WisdomTree’s head of Japan. Researching and investing in Japan since 1986, he is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.

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