Japan Debates Economic Future After Abenomics

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The main challenge for the new Japanese government is to ensure that the economy is on a stable and ready basis and able to recover as the COVID-19 pandemic abates.

After nearly a decade, there is consensus that the Abenomics, the flagship economic program launched by former Prime Minister Shinzo Abe upon his return to power, has run its course and that a new approach is needed. Prime Minister Fumio Kishida, who is also expected to lead the next government after the next elections, said his goal was to create a “new capitalism” that would distribute wealth better and reduce the inequalities that have been growing in Japan for several years. . decades.

However, just as important as reducing inequalities is nurturing energy, creativity and dynamism to promote growth. Unfortunately, well-established instincts seem to be manifesting themselves, and the thinking seems to favor greater government intervention in the market, both to address inequalities and promote economic security. The government must be mindful of these challenges and be prepared to meet them, but it must not use them to excuse or rationalize increased control over the economy in a way that undermines its potential and condemns Japan to sluggish growth.

Abenomics have promoted growth and stability. Deflation has ended and some structural reforms – concerning corporate governance and the role of women in the economy – have progressed. But the target of 600 trillion yen of GDP by 2020 has not been reached and the target of 2% inflation has still not been reached. The debt-to-GDP ratio climbed more than 30 percentage points between fiscal 2012 and 2020 to reach 225%, and Japan remains the world’s most heavily indebted developed economy.

The growth of inequalities in Japan is particularly alarming. Most economists blame stagnant wages, which have been stable for nearly three decades; The OECD reports that annual real wages in Japan were on average around $ 39,000 in 2020, barely 4% more than in 1990. This compares poorly with wages in the United States, which have increased by almost 50%. % to reach $ 69,000, and the OECD average of $ 49,000, which saw 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 past decade and living standards appear to have decreased due to fixed wages. Ultimately, stagnation reflects a failure to increase productivity. GDP per hour in Japan in 2020 was $ 48, about 30% lower than the Group of Seven average of $ 65, again according to OECD data. Structural reform was supposed to boost productivity, which in turn would induce foreign investment; the lack of growth is an indictment of the failure of this “third arrow”.

Kishida has vowed to continue with Abenomics while shifting her focus. Wary of the neoliberal foundations of Abenomics, he focuses more on the redistribution of wealth. “Runoff doesn’t happen naturally,” he explained. The details of his program remain unclear, however, even though he talks about “new capitalism”. With the rest of the country, we await the work of his
recently created council that will flesh out its vision of capitalism.

The prime minister was inspired by the revenue doubling plan of the 1960s which placed former prime minister Hayato Ikeda in the pantheon of Japanese leaders. Kishida wants to implement a “Reiwa Income Doubling Plan” which will create a “virtuous cycle in which increasing income for a wide range of people stimulates consumption and acts as a catalyst for the next stage of growth” .

The problem is that it is not clear where the money will come from to increase income. Former Prime Ministers Abe and Suga urge Japanese companies to raise wages; Kishida supports a gradual increase in the minimum wage, which currently averages ¥ 930 an 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 depends 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 expected. A reduced LDP presence will force the party to rely more on Komeito, the government’s junior partner, who will thus have more influence on politics. So, for example, Komei offered a donation of 100,000 for each child, while Kishida wants to give money only to those who need it.

Meanwhile, the opposition Constitutional Democratic Party of Japan (CDP) has pledged to grant a one-year income tax exemption to anyone with an annual income of less than 10 million yen, as well as ‘a distribution of 120,000 yen in cash to low-income families. He also wants to halve the consumption tax rate to 5% for a year and increase the minimum wage to 1,500 yen.

All of these promises will increase government spending; according to one estimate, the CDP’s proposals could swallow up 18% of the government’s budget. There is little discussion of how to pay for these expenses. Personal tax increases are being phased out for obvious reasons – although Kishida has indicated he wants to increase taxes on the investment income of high earners – but raising corporate taxes would deprive businesses of the energy they need to their growth.

It’s time for new economic thinking. Kishida is right to focus on the inequalities that now mark Japan. Its solutions, however, are tightly framed and do not explain how to unleash the forces that can increase productivity. Worse, there are indications that it could roll back some of the gains that have been made in recent years, such as those in 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 people participate in the recovery.

The Japan Times Editorial Board

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