Japan: Getting Back to Abenomics

Japanese Prime Minister Shinzo Abe returned to the highest office in the land by campaigning on a platform focused on revitalizing Japan’s economy. Since being reinstated as president of the conservative Liberal Democratic Party (LDP) in September 2012 and then as prime minister in December 2012, Abe’s attention was focused on his controversial security legislation. But now that hurdle has been cleared and his message is clear: It’s an all-hands-on-deck effort to resuscitate the economy.

The original “three arrows” of Abenomics promised expansionary monetary policy and more government spending to combat deflation, and structural reforms to spur economic growth. The new Cabinet that Abe formed on October 7 has a new triumvirate of goals aimed at creating “a society with all 100 million people-plus dynamically engaged.” This means creating an economy where women, the elderly, and other underutilized laborers can more fully reap the rewards of whatever growth Japan sees. Through new economic policies meant to reach this goal, Abe and his Cabinet want to “realize a GDP of 600 trillion yen, a birthrate of 1.8 hoped for by the people, and eliminate the phenomenon of workers leaving their jobs to take care of family members in need of nursing care.”

This realignment of priorities is in line with what the Japanese public wants. Fifty-three percent of respondents to a recent Nikkei opinion poll following the Cabinet reshuffle support Abe’s efforts to build a stronger economy, support child care and improve social security in this way. Speaking more generally, 50 percent of respondents wanted the Cabinet to prioritize reforming pensions and other social security programs, and 39 percent wanted economic stimulus to be a priority.

However, questions remain about exactly how realistic these goals are. Reaching the 600 trillion yen target by around 2020 from 490 trillion yen in fiscal 2014 requires continuous 3 percent nominal growth (or 2 percent real growth) every year. But the sobering reality is that real GDP for the April-June quarter dropped at an annualized rate of 1.2 percent. This is the first negative growth in three quarters, and there has not been a significant bump in the July-September quarter. Yoshimitsu Kobayashi, chairman of Keizai Doyukai (Japan Association of Corporate Executives), does not think the goal is reachable. Kobayashi said “600 trillion yen is a target figure that is utterly impossible to attain.” But while such numbers might be fanciful, at the very least it signals Abe’s willingness to spend his energy and political capital on handling economic issues.

Abe is also trying to improve the livelihood of everyday Japanese by urging businesses to increase capital investment. In a recent meeting between Abe, Cabinet ministers, and business leaders, Abe told business leaders to invest more in facilities and human resources. Along the same lines, the Abe government has been urging companies to raise wages for a while now, and is expected to continue such outreach. As companies’ retained profits increased by nearly 50 trillion yen from fiscal 2012 to 2014, they can be doing more to spread the fruits of their success to their workers.

So far, the Abe government has worked very well with business leaders. In fact, Keidanren (Japan Business Federation), Japan’s most powerful business lobby, recently called on its 1,300 member companies to make political contributions to the LDP to express their gratitude and continue to shape the government’s preferred policies. Sadayuki Sakakibara, Keidanren chairman, commented to reporters: “Extremely important policies for economic recovery have made progress. We want [the Abe administration] to continue to carry out policies to release the country from the grip of deflation.”

Specifically, Keidanren is pleased by the nuclear restart, the successful conclusion of the Trans-Pacific Partnership (TPP), and the slashing of the effective corporate tax rate. Currently, the average effective corporate tax rate, including national and local taxes, in Japan is 32.11 percent – considered high by international standards – but the Japanese government is preparing to cut the effective rate to less than 30 percent in fiscal 2017.

Business leaders have also been invited to continue giving their input by joining a panel to guide the creation of a “society where everyone can play a full role.”

In addition to pushing businesses to pay higher wages, the Abe government is exploring ways to exempt essential necessities from the tax increase scheduled for April 1, 2017. Currently, the consumption tax rate is 8 percent; it is set to increase to 10 percent, causing concerns about whether or not it will dampen consumption. But following consultations with and pressure from Komeito, the LDP’s junior coalition partner, the Abe government wants to have a reduced rate for essentials to ease the burden on low-income earners.

Deciding what constitutes an “essential” item (three proposals currently considered are: food and beverages, excluding alcohol; fresh foods; and rice), as well as implementing a system that will be simple enough to avoid placing huge accounting burdens on individuals and businesses remain challenges.

Meanwhile, Japan still needs to figure out a way to pay down some of its government debt. After repeated attempts at fixing the economy through fiscal stimulus measures, Japan’s national debt now stands at 1.057 quadrillion yen, or about 8 million yen per person. As Japan does not have a lot of discretionary spending (as in the U.S., a lot of Japan’s spending goes towards legally binding commitments such as social security and health care), the only realistic way to tackle the issue is to increase tax revenue.

Despite the simplicity of Abe’s economic rhetoric, there is no easy or obvious way forward for the Japanese government. Reforms will likely continue in the same piecemeal fashion they always have. As the LDP faces no serious political contender and is not bound to any particular economic ideology, they can afford to take their time so long as they remain consistent in their messaging and align their stated priorities with the voters’ wishes.