Can Japan’s economy recover under Kishida?

Author: Naohiro Yashiro, Showa Women’s University

Japan’s new Prime Minister Fumio Kishida won his first election on 31 October 2021 by achieving a majority of seats in Japan’s lower house. In early October, Kishida had just won his Liberal Democratic Party’s (LDP) leadership vote, competing with Taro Kono. Kono was the minister of regulatory reform in the former Yoshihide Suga cabinet and appealed to younger voters as an expected reformer of the stagnated economy.

By contrast, the 64-year old Kishida is a symbol of stability for the vested-interest supporters of the LDP. He is likely to heavily depend on the bureaucrats who have confidence in managing the economy, following the tradition of former prime minister Shinzo Abe.

Kishida accuses previous LDP leaders of being neo-liberalist and depending too much on market competition, while watching income disparity increase. He emphasises income distribution for the benefit of the middle-income class, rather than the low-income class. He intends to achieve it through tax incentive measures for corporate firms, contrary to the supply-side approach of increasing productivity through the regulatory reform of agriculture, communication and service industries.

Kishida has developed an idea he calls a ‘new kind of capitalism’, which provides the theoretical framework that guides his policy. Though its content is unclear, this new capitalism is likely to emphasise income distribution rather than profit-seeking. But this is not a good strategy given that Japanese companies are suffering from low profits and excessive elderly employment.

Kishida is likely to focus on populist issues, depending on fiscal measures rather than tax increases to finance the substantial current budget deficit. The only exception is a policy for raising the tax on financial assets. It was an essential measure to gain support for Kishida’s income distribution policy, as those with financial assets are the primary beneficiaries of Abenomics. Still, he quickly withdrew the measure for fear of its negative impact on the stock market.

In short, despite being the LDP leader, Kishida’s economic policy stance resembles that of the leftist opposition parties. He is claiming that he will deliver cash benefits of 100,000 yen for all children under 18 years old, excluding the top 10 per cent household income group, which is criticised even by LDP supporters for not targeting those who really need the benefits.

Kishida’s policy stance is far from appropriate given Japan’s current economic and fiscal situation. Japan’s GDP has not grown since it peaked at US$5.5 trillion in 1995. In 2020, it sank to US$5 trillion. The decline is contrary to steady GDP increases in the United States and China. The net financial debt-to-GDP ratio in Japan increased from 34 per cent to 177 per cent during the same period. Long-run economic stagnation in Japan cannot be blamed on a lack of fiscal policy measures.

With no growth in GDP, it is no wonder that Japanese wages have not increased. Poor wage growth can also partly be attributed to the lower production level of goods and services. Though Abenomics did see share prices and firms’ profits grow due to the lower value of the yen, which was induced by the Abe administration’s expansionary monetary policy.

Thanks to the softer yen, foreign tourists in Japan increased to the historically high level of 32 million in 2019 just before the COVID-19 crisis. This is contrary to what happened in the 1980s when Japanese tourists could be found in every major city in the world enjoying the benefits of a strong yen.

Kishida is urging for further fiscal expansion amounting to 30 trillion yen to overcome the COVID-19 recession, but potential private consumption demand has been accumulating, waiting for the end of the pandemic. Under this new type of recession, stimulating fiscal policy measures is like stepping on the accelerator and brake simultaneously.

Tax incentive measures for raising wages are not appropriate at all. With a rapidly ageing population, the unemployment rate was just 2.4 per cent in 2019, close to the full employment experienced right before the COVID-19 crisis. An important question is why Japanese wages have not increased despite the tightening labour market situation. One explanation is a lack of productivity increase in the Japanese economy.

Successive LDP administrations have called for structural reform. Kishida is the first prime minister to not use the word ‘reform’ at all in his opening speech in the Diet. Kishida’s populist policy stance will likely continue until the upper house election takes place in July 2022.

Of course, not all Japanese people are satisfied with Kishida’s shift to a more left-leaning economic policy stance. An increasing number of seats went to the conservative opposition Japan Innovation Party in the recent election, meaning it now occupies the third most powerful position in the lower house. It is a slight glimmer of hope for the future of Japanese politics.

Naohiro Yashiro is Vice President and Professor at Showa Women’s University.

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