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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends :
Growth or Distribution - Prospects for the Government’s Economic Policies After the Lower House Election


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Takahide Kiuchi's View - Insight into World Economic Trends :
Growth or Distribution - Prospects for the Government’s Economic Policies After the Lower House Election

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

#Market Analysis

#Takahide Kiuchi

Nov. 11, 2021

In the Lower House election on October 31, the Liberal Democratic Party (LDP) lost some seats compared to the 276 it had held before the election, but exceeded the 233 seats required for a single-party majority, securing 261 seats to reach an absolute stable majority with which it can stably manage the Diet. Backed by a reasonable amount of support from voters in the election, the Kishida Administration will now be moving to get various policies up and running. In terms of economic policy, the Kishida Administration has set forth several measures including a “new capitalism”, a “virtuous cycle of growth and distribution”, and “the Reiwa Era Income Doubling Plan”. Although the specifics of these measures are not yet entirely clear, the raising of wages and the shrinking of the income gap will likely be at their core.

Giving top priority to economic policies for raising economic growth potential and latent potential

When it comes to economic policies, it is important to clearly differentiate between short-term measures against Covid-19 and medium- and long-term policies. Even if we look back on the past 30 years or so, the Gini coefficient—which measures inequalities of income distribution and labor share as calculated from GDP statistics—has remained nearly unchanged, and there is no visible evidence indicating that such inequalities have significantly expanded in Japan. At the very least, shrinking these inequalities would not seem to be a top-priority issue in terms of medium- and long-term economic policy.
The greatest problem facing the Japanese economy is that the country’s latent economic potential and growth potential continue to decline. The fact that the growth rate of Japan’s economy is low, and that the labor productivity growth rate continues to fall, is the greatest factor behind the lack of growth in wages, which many see as problematic. And that very fact underlies the persistent sense of unease that many citizens have toward their future lives.
With scarce hope of growth ahead, companies will inevitably be cautious about wage hikes, given that labor costs could create management pressures in the medium and long term. The Kishida Administration believes that by expanding corporate tax incentives, it can encourage companies to raise their wages. That is a policy which has been implemented since the time of the Abe Administration, but it has not made much headway.
The government should prioritize above all else policies that “grow the distribution pie”, or in other words, that increase the country’s growth potential and enhance labor productivity. Doing that to create an economic environment that encourages companies to willingly raise their wages is the most important thing of all. Without such an environment in place, if companies were forced to raise wages, it is possible that these companies would rein in their capital investments because of deteriorating earnings outlooks, and that this could end up impairing latent economic potential. And that would ultimately deter any efforts to raise wages.

Short-term Covid-19 measures need to implement income redistribution

Meanwhile, it is true that the Covid-19 pandemic has temporarily expanded inequalities, and additional measures to address them are required in the form of short-term economic policies. Unlike ordinary economic downturns, the pandemic has proven to be a tailwind for many companies in terms of their performance results, and there are more than a few workers who have seen their incomes rise during this time. This significant difference from normal economic recessions, in which nearly all companies’ performance results and almost all workers’ income situations worsen, is an important characteristic of the deterioration in the economic environment brought on by Covid-19. That is what makes it necessary to implement a redistribution policy, one that reallocates income from the companies and workers who can afford it to those that have suffered serious blows.
This type of redistribution policy would have much to do with the debate over how to secure the financial resources needed to deal with Covid-19. If the government continues to cover the costs of its Covid-19 measures by simply issuing bonds, as it has been doing, the majority of that burden will be passed on to future generations, and that will only serve to enhance the sense of unfairness between generations. Furthermore, if the burden borne by future generations should increase further, it will mean a proportional drop in future demand, leading medium- and long-term growth expectations to decline, and prompting companies to cut back on their capital investments, hiring, and wages in the near term. The debate over how to secure financial resources for Covid-19 measures needs to start right away.
On the other hand, with the business support currently provided through the subsidy program for establishments that implemented temporary shutdowns or reduced business hours as requested, it is a problem that a wide range of industries have been left out from among the beneficiaries. It would seem that the Kishida Administration’s new proposed benefits system, which does not limit the industries or regions eligible for assistance, is necessary.
As for individual aid, it will surely be important to first augment the functionality of the existing safety net system, to help those whose income situations have deteriorated during the pandemic. If an additional benefits system were to be introduced, the key thing would be to restrict eligibility to persons who most urgently need assistance and provide the money to them. If the scope of eligibility is set broadly, as with uniform benefits, the ones who require aid will not receive enough money, or the financial environment would be degraded needlessly. Above all, a uniform benefits system will not shrink the income inequalities that have been exacerbated by Covid-19.
Presently, the government is looking into formulating additional economic measures and compiling a supplementary budget centered on Covid-19 countermeasures. What it should do is to first take another, closer look at the unprecedented over 30 trillion yen in the budget that went unused last fiscal year and was carried over to this one, with any unnecessary items getting a corrective reduction. By combining its measures with such a correction, it should be entirely possible to cut the scale of the supplementary budget down significantly.

Measures for controlling population decline, digitalization etc. hold promise

Meanwhile, under its medium- and long-term economic policies, the government would do well to prioritize enhancing the economy’s growth potential and latent potential through structural reforms and growth strategies. In this last Lower House election, both the ruling and opposition parties gave generally low priority to structural reforms and growth strategies in the context of their economic policies, and both gave the impression that they would merely maintain the current Covid-19 economic countermeasures through the use of benefit payments and tax cuts.
If the government were to announce structural reforms and growth strategies that the public could trust, that would make it possible to elevate expectations for growth in the corporate world. From that standpoint, measures to control population decline such as improving the birth rate, and refashioning Japan’s inbound tourism strategy which collapsed as a result of the pandemic, would quite likely be effective.
Besides the above, it is also crucial to promote structural reforms that use the Covid-19 crisis as an opportunity to enhance economic efficiency. One area of this would be the field of digital technology. With the pandemic causing a rising demand for remote work, now is also the chance to promote greater digitalization in the private sector. Prime Minister Kishida has also touted his vision to build a “digital garden city state”, emphasizing the spread of 5G service to suburban areas and rural regions.
In addition, with concerns now being raised over the risk of infection associated with the use of cash, this is even a good opportunity to promote cashless payments. Doing that would contribute to greater economic efficiency and would likely also serve as an entry point allowing individuals to become more familiar with our digital society. When it comes to going cashless, the issuance of a central bank digital currency (CBDC)—whereby the central bank would issue a digital currency as a form of legal tender—should also be considered. Prime Minister Kishida has also supported the issuance of a CDBC and of digital yen by the Bank of Japan.

Using the Covid-19 crisis as a chance to promote growth strategies and structural reforms

With remote work now permeating society and people remaining on guard for the risk of infection, the current moment is also a good chance to fix the matter of overconcentration in Tokyo. Japan’s population has become excessively concentrated in Tokyo, and there are signs that Tokyo’s economic efficiency is on the decline. Furthermore, problems created by this population density such as a shortage of daycare facilities are driving the birthrate in Tokyo down. In a sense, that might well be making Japan’s overall population troubles graver and put downward pressure on the economy’s potential growth rate. The government should be leading the way in correcting this overconcentration in Tokyo by actively transferring its agencies and ministries to rural areas. Having the population or corporate activity spread throughout rural regions will likely lead the untapped land, public infrastructure, and human resources in these areas to be put to greater use, thereby boosting Japan’s overall economic efficiency.
A policy that aims to directly raise wages would, I believe, merely distort our economy further and would not function properly. Instead of that, creating an economic environment that encourages companies to raise wages themselves may seem a roundabout way but in fact is what would be the shortest path to higher wages. To achieve that end, the government should aggressively promote structural reforms and growth strategies to enhance our economic efficiency and raise companies’ expectations for growth. In addition, given that the accumulation of government bonds itself might drive down future growth expectations, measures to improve the fiscal health should also be given a place in any material growth strategies.

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