The pre-eminent challenge for the new Japanese government is ensuring that the economy is on a stable footing and ready and able to recover as the COVID-19 pandemic eases.
After nearly a decade, there is consensus that Abenomics, the signature economic program launched by former Prime Minister Shinzo Abe when he returned to power, has run its course and a new approach is needed. Prime Minister Fumio Kishida, who is likely to lead the next government after the coming election as well, has said that his goal is the creation of a “new capitalism” that better distributes wealth and eases the inequality that has been growing in Japan for several decades.
As important as reducing inequality, however, is nurturing energy, creativity and dynamism to promote growth. Unfortunately, well-honed instincts seem to be kicking in, and thinking appears to favor greater government intervention in the market, to both remedy inequality and promote economic security. The government must be alert to these challenges and be ready to address them, but it should not use them to excuse or rationalize greater control over the economy in ways that sap its potential and destines Japan to sluggish growth.
Abenomics promoted growth and stability. Deflation ended and some structural reforms — concerning corporate governance and the role of women in the economy — advanced. But the target of ¥600 trillion in GDP by 2020 was not reached and the goal of 2% inflation remains unfulfilled. The ratio of debt to GDP climbed more than 30 percentage points between fiscal 2012 and fiscal 2020 to 225%, and Japan remains the most heavily indebted developed economy in the world.
The growth of inequality in Japan is especially alarming. Most economists blame stagnant wages, which have been flat for nearly three decades; the OECD reports that annual real wages in Japan averaged about $39,000 in 2020, a mere 4% more than those of 1990. That compares poorly with U.S. wages, which increased by nearly 50% to $69,000, and the OECD average of $49,000, which registered 33% growth.
While Japan’s Gini coefficient — the measure of inequality within the country — is better than that of the United States or the United Kingdom, it has worsened over the last decade and living standards appear to have declined as a result of flat wages. Ultimately, stagnation reflects a failure to increase productivity. GDP per hour in Japan in 2020 was $48, about 30% below the Group of Seven average of $65, again according to OECD data. Structural reform was supposed to spark productivity, which would in turn induce foreign investment; the lack of growth is an indictment of the failure of that “third arrow.”
Kishida has promised to continue with Abenomics while shifting its emphasis. Leery of Abenomics’ neoliberal foundations, he is more focused on redistribution of wealth. “Trickle-down doesn’t happen naturally,” he explained. The details of his program remain sketchy, however, even as he talks about “new capitalism.” We along with the rest of the country await the work of his
recently created council that will flesh out his capitalism vision.
The prime minister has been inspired by the income doubling plan of the 1960s that fixed former Prime Minister Hayato Ikeda in the pantheon of Japanese leaders. Kishida wants to implement a “Reiwa income-doubling plan” that will create a “virtuous cycle in which raising the incomes of a wide range of people stimulates consumption and acts as a catalyst for the next stage of growth.”
The problem is that it isn’t clear where the money to raise incomes will originate. Former prime ministers Abe and Suga browbeat corporate Japan to lift wages; Kishida supports a gradual increase in minimum wages, currently averaging ¥930 per hour across Japan. He wants to avoid strict mandates to avoid hurting small businesses with tight margins. Tax incentives will encourage companies to comply.
Much rides on the outcome of next week’s election. While there is little chance of a change in the ruling coalition, its internal dynamics could change if the LDP loses seats as anticipated. A reduced LDP presence will force the party to rely more on Komeito, the junior partner in the government, which will have more influence over policy as a result. So, for example, Komei has proposed a ¥100,000 handout for every child, while Kishida wants to give money only to those in need.
Meanwhile, the opposition Constitutional Democratic Party of Japan (CDP) has pledged to give a one-year income-tax waiver to anyone with yearly income less than ¥10 million, along with ¥120,000 cash handouts to low-income families. It also wants to cut the consumption tax rate in half to 5% for one year and increase the minimum wage to ¥1,500.
All those promises will increase government spending; by one estimate, the CDP proposals could swallow 18% of the government’s budget. There is little discussion of how to pay for those expenses. Increases in individual taxes are out for obvious reasons — although Kishida has indicated that he wants to increase taxes on investment income of high earners — but boosting corporate taxes would sap businesses of the energy needed for growth.
It is time for new economic thinking. Kishida is right to focus on the inequalities that now scar Japan. His solutions, however, are narrowly framed and fail to explain how to unleash forces that can boost productivity. Worse, there are indications that he could roll back some of the gains that have been made in recent years, such as those concerning corporate governance.
As Japan escapes the clutches of the COVID-19 induced slowdown, the next government must be ready to ensure growth and fairness so that all Japanese share in the recovery.
The Japan Times Editorial Board
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