Kishida retreats from new capitalism

Author: Richard Katz, Carnegie Council for Ethics in International Affairs

For six long months, the Kishida administration, aided by outside advisors from universities and new companies, toiled to translate Prime Minister Fumio Kishida’s mantra of a ‘new form of capitalism’ into concrete policies. The rather hollow end product that the Cabinet approved on 7 June 2022 must have disappointed many of the participants.

When it came to the foundational principle — that healthy growth and a more equal distribution of income needed each other — Kishida surrendered to critics in the ruling Liberal Democratic Party (LDP) and financial markets who wrongly accused him of promoting socialism. In reality, promoting redistribution to reduce inequality and improve consumer demand is a longstanding ingredient in the standard macroeconomic recipe.

Some critics claim that rather than distribution measures, Kishida would achieve better wage growth through reforms that enhanced labour productivity. While that’s necessary, it is no longer sufficient to boost wages. Wages in the last few decades have stopped increasing in proportion to productivity growth in many countries. This wage gap is worse in Japan than in other rich countries.

The result is a Japanese policy document full of rhetoric about attaining a ‘virtuous cycle of growth and distribution’ — with few substantive measures to achieve it. It is equally weak on how to achieve its growth-boosting goals, such as the declared objective of a tenfold increase in start-up companies.

Kishida’s surrender began just after his inauguration in October 2021. During the ‘Kishida shock’, stock prices fell in response to his call for higher capital gains and dividend taxes so that multimillionaires would no longer pay lower tax rates than upper-middle class citizens. Kishida quickly withdrew.

The backpedalling continued, when Kishida decided that he could not afford to offend Keidanren, the big business federation, on the eve of the July upper house election. As the leader of a weak LDP faction, he also did not wish to rile the stronger, more conservative factions led by former prime minister Shinzo Abe and former finance minister Taro Aso.

That left Kishida with nothing more than a rehash of failed measures already set out by his predecessors. On wages, Kishida repeated Abe’s futile pleas for companies to raise wages by 3 per cent per year. He also repeated the 12 year-old goal of attaining a minimum wage of 1000 yen (US$7.40) per hour (at today’s exchange rate) but gave no deadline for reaching that level (it is currently 930 yen [US$6.89]). He proposed raising the level of the temporary tax breaks granted to companies that raise wages by a certain increment, even though that measure has had little impact in the past.

When some officials and outside experts involved in the deliberations protested the lack of specific solutions, they were told to ‘wait until after the upper house elections’. Kantei (the prime minister’s office) feared that getting into the details would expose discord among ministries and interest groups, which would hurt the LDP in the election. It promised those frustrated in the process that by the end of 2022 it would present a detailed ‘five-year plan’, but few have any confidence in the final outcome.

The primary culprit in income distribution is the gap between corporations and households. Corporations are hoarding ‘retained earnings’ — profits that they do not plough back into the economy through wage hikes, investment or taxes. Council members were given materials showing that, from 2000 to 2020, retained earnings mushroomed as worker compensation and investment fell.

The government has compounded the problem by repeatedly raising taxes on consumers while slashing the corporate tax rate — from 52 per cent of profits in 1998 to 30 per cent as of now. That has eroded revenue from the corporate income tax by a few per cent of GDP. Rolling back the corporate tax cuts and using the resulting revenue gains to reduce the consumption tax would leave total tax revenue the same. No one in the Council meetings even raised this option.

Japanese law has long mandated equal pay for equal work between regular and non-regular workers and between men and women. Yet no agency of government is charged with investigating violations and penalising offenders. Worse still, courts have effectively gutted parts of the law, taking a pro-employer view of what constitutes ‘reasonable’ discrimination and ruling that seniority pay rules apply to non-regulars. The law needs both strengthening and enforcement.

Raising the minimum wage has surprisingly powerful ripple effects. It not only elevates the income of those below the minimum but also those earning 15–20 per cent above it. Since the average wage of part-time workers is just US$8.20 and they comprise almost a third of all employees, the impact on living standards and consumer demand would be dramatic.

Among 21 OECD countries, Japan comes in 18th with its 2020 minimum wage equal to just 45 per cent of the national median wage. In a typical high-income country, it is 52 per cent, while 50 per cent marks the poverty line. These days, a 52 per cent goal in Japan would translate to around 1,155 yen (US$8.5).

It is not hard to come up with practical solutions. The challenge lies in overcoming political resistance to Kishida’s plan.

Richard Katz is Senior Fellow at the Carnegie Council for Ethics in International Affairs.

This article is digested from Japan Economy Watch.

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