The Kishida Administration’s economic policies moving in a positive direction

October 4 marked two years since the Kishida administration came into office. In that time, despite being faced with the headwinds of soaring inflation, the country’s economic environment overall has been relatively stable, and that in some sense arguably has bolstered the administration. That the effects of the COVID-19 pandemic have abated during this period of time has provided stability to the Japanese economy as well as to the global economy.

Let’s take a look back on the past two years of the Kishida administration’s economic policies. The “New Capitalism” initially touted by the administration never quite gelled in any concrete sense, and its economic policies seemed sluggish even at the very outset. Although the administration also advocated for a “virtuous cycle of growth and distribution”, in actuality this policy approach had a strong liberal (or left-wing) flavor with a heavy emphasis on the distribution aspect.

Given that the main cause behind long-term wage stagnation is low growth rather than a distribution problem, the administration should have focused its attention on policies promoting growth more than distribution. And when this policy was first launched, a review of financial income taxation was also considered, which would have created adverse conditions for the stock market, and this stance almost made the administration something of an enemy of the stock market.

However, since around the spring of 2022,the Kishida administration’s economic policies have been on a major course correction with a new emphasis of growth. This was a desirable turn of events. An “asset income doubling plan” was proposed, and with that the administration’s long-held policy promoting a shift “from saving to investment” was reaffirmed. Under that approach the new NISA system was formed.

As an extension of that, asset owner reforms are now being pursued together with asset management companies. Individuals are enticed to put their money into the stock market, with companies channeling it into capital investments, thereby driving growth. Those individuals can then reap the fruits of that growth in the form of dividends and share appreciation, and that in turn grows consumer spending and spreads the benefit to companies. Aiming to achieve this sort of virtuous cycle through the stock market is the correct way to go.

That said, as long as economic and corporate growth expectations and revenue growth expectations fail to rise, personal assets likely won’t be funneled all that aggressively into the stock market, and companies likewise won’t seek to actively make capital investments. For the shift “from saving to investment” to lead to a virtuous cycle, it would also be necessary to raise corporate and individual growth expectations by promoting growth strategies.

The “Three Pillars of Spending” facing problems with regard to securing funding

Subsequently, the focus of the Kishida administration’s economic and fiscal policies will be on a large-scale growth in spending, shifting to the so-called “Three Pillars of Spending”. This refers to the three elements of boosting defense spending, GX investments, and measures to address the declining birthrate. All of these policies could readily obtain support in the general debate, and thus the decisions on spending increases were finalized with relative ease.

If we total up the planned defense spending of 43 trillion yen over five years, the roughly 3.5 trillion yen in annual spending on measures to counter the falling birthrate, and the 20 trillion yen in GX investments over ten years, it works out to an expenditure of about 10 trillion yen per year.

However, even as expenditures are set to be raised significantly, the debate over securing funding remains a complicated one. With regard to defense costs, at the end of 2022, the Prime Minister led the decision to raise taxes for defense by one trillion yen annually, but after pushback from within his own party that decision is yet to be settled. And the debate over how to fund measures for dealing with the declining birthrate hasn’t even begun in any concrete way. As for GX investments, the plan is to raise funds at first by issuing bridging bonds (GX economic transition bonds), and then to subsequently fund these investments by levying taxes on companies through carbon pricing. However, it’s unclear whether sufficient funding can be ensured by the redemption of bridging bonds.

Thus, although major spending increases in the form of the “Three Pillars of Spending” have been decided, the actual funding for them has yet to be secured. The way of obtaining this funding that Prime Minister Kishida has in mind is facing opposition from conservatives within the LDP and is essentially unable to move forward. The weakness of the Prime Minister’s political base is ultimately undermining his ability to promote policy.

For Prime Minister Kishida to overcome this situation, he needs to gain another victory in the upcoming national election, and rejuvenate his approval rating which is currently stalling. Accomplishing that will likely take some time.

Unless the debate over how to fund the “Three Pillars of Spending” is successfully resolved, that spending will probably have to be funded little by little by issuing new government bonds. In the end that would lead to further deterioration of fiscal conditions, a greater burden on future generations, a decline in growth expectations brought on by lower indications of future demand, and also lower economic growth potential.

In the third year, expectations for growth strategies to be promoted further

The challenges that the Kishida administration—now in its third year—will have to contend with on the economic policy front entail continuing with its efforts to secure funding for the “Three Pillars of Spending”, and maintaining a firm stance on fiscal consolidation. Alongside that, it would be desirable for the administration to aggressively pursue a number of growth strategies.

Addressing the declining birthrate is also one key growth strategy, but merely implementing measures centered on enhancing the child allowances that have already been decided on may not lead to any remarkable uptick in the birthrate. Combatting the declining birthrate from a broad perspective, including by facilitating a balance for women between childcare and work, and by encouraging men to take on a greater share of raising children, will still be necessary.

I also have high expectations for the economic measures that the Kishida administration is advocating among those to be put together in October, namely the structural wage hikes and the “three-in-one” labor market reforms intended to achieve them. If improvements to workers’ technical skills made by “reskilling” and the active encouragement of career changes were to be combined, that could be an effective way of promoting positive industrial restructuring and greater overall economic productivity. Furthermore, enhancing workers’ technical skills as a path to raising wages will require expanding the Japanese-style occupation-based pay system.

However, given that it will take time before the three-in-one labor market reforms lead to higher labor productivity and higher wages, it would be desirable for the government to simultaneously pursue other growth strategies.

The “annual income barrier” measure that was recently indicated by the government is important from the standpoint of expanding the labor supply and enhancing the economy’s growth potential. However, subsidies given to companies and the like are nothing more than a temporary measure, and a drastic overhaul of the “Category-3 insured persons system” standing in the way of greater female participation in the workforce will be needed down the road.

Growing inbound demand and expanding the utilization of foreign labor 

Augmenting the continuity of the inbound demand that’s now recovering rapidly and inducing more corporate investment is also an important growth strategy for boosting Japan’s economic potential. Doing that will necessitate leading more foreign tourists to visit regional areas and easing the bottleneck in cities as seen in the lack of accommodations and lodging.

In addition, growing inbound demand in rural areas will generate new demand in these other regions, and serve as a means of vitalizing local economies. As a result, companies and labor will migrate from urban areas to regional ones, leading infrastructure that’s not being used effectively in those areas to be better utilized, and even spurring Japan’s overall productivity to rise.

The greater allowance of foreign labor is likely also an important growth strategy. By expanding the scope of “Special Skills Category 2”—which is a residence qualification for foreigners in Japan—the government is moving to encourage greater acceptance of foreign labor. Additionally, this will enable foreigners to stay longer in the country and to invite their families to join them. This would arguably constitute a de-facto revision of Japan’s immigration policy. Doing that would probably help ease the country’s labor shortage, expand the workforce into the future, improve the birthrate, and increase personal consumption, thereby contributing to raising Japan’s potential growth rate.

Yet the conservative wing within the LDP is strongly resistant to making greater allowances for foreigners in a way that would lead to revising the country’s immigration policy. Under these circumstances, it will be a test of the Kishida administration’s policy capabilities to see whether it can solve the social problem of having Japanese people and foreigners live together in harmony, while also making foreign labor more widely accepted and boosting Japan’s potential growth rate.

Growth strategies are themselves a shortcut to sustainable wage growth

The raising of wages arguably has been the greatest economic problem faced by the administration since it first took office. While nominal wages rose more than expected this year, real wages (minus inflation) have only continued to fall. Companies have raised their wages in response to soaring prices, but they likely won’t raise wages at a pace that’s commensurate with that of inflation. As a result, the decline in real wages may well only continue for quite some time.

In order to increase real wages and encourage consumer spending to rise, labor productivity will need to be raised. That would lead to higher expectations for corporate growth in the medium and long term in light of the government’s growth strategies, and would bring about an increase in capital investments.

When it comes to raising real wages and improving the living conditions of individual citizens, rather than directly urging companies to hike wages, a shortcut would be to promote a variety of growth strategies in tandem to raise labor productivity. That itself is the Kishida administration’s fundamental approach to achieving structural wage hikes.

There is also a growing optimism over the fact that amid serious labor shortages, companies have begun to take a more positive stance toward wage hikes. However, high wage growth spurred by soaring inflation probably isn’t sustainable. And with such excessively optimistic expectations at play, for the government to simply monitor corporate wage growth with no real aim during next spring’s labor-management wage negotiations would be a waste of time.

Now that the Kishida administration is in its third year, its policy stance should be to strongly encourage the rise of real wages by accelerating its growth strategies, instead of waiting for companies to become more proactive about wage hikes. If we could then see conditions more conducive to a sustainable rise in real wages, the administration’s political base would be more stable, and it might have a clearer path to remaining in power for the long term.

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  Takahide Kiuchi

  Executive Economist