Experts Largely Favorable on Prime Minister Abe's Growth Strategy Revision,
but Cautious about Course of Fiscal Rehabilitation

July 07, 2014

Video: Japanese Only

Tohru Sasaki, Head of Japan Rates and Foreign Exchange Research, JPMorgan Chase

Hitoshi Suzuki, Head of Policy Proposal Office, Daiwa Institute of Research

Kenji Yumoto, Vice Chairman, Japan Research Institute.

Yasushi KudoYasushi Kudo, President, The Genron NPO

Noted Japanese economic researchers have stressed the need for Prime Minister Shinzo Abe's administration to come up with a clear prescription for repairing Japan's fiscal house while basically welcoming his revised policy package aimed at reactivating the country's economy toward sustained growth.

The revised revitalization strategy was compiled June 24 with emphasis on 10 key reform areas, such as enhanced corporate governance, corporate tax reforms, a greater role for women in society, more flexible working practices and an aggressive agricultural policy.

According to a Genron NPO-organized questionnaire of well-informed intellectuals, 41.5 percent of the respondents, the largest percentage, said they were satisfied or relatively satisfied with the revision of the growth strategy. Negative or unfavorable responses came from 32.9 percent while 21.3 percent of the respondents were noncommittal.

The latest package is basically satisfactory because the government has intensively grappled with the remaining issues on its economic policy agenda, notably a proposed cut in the corporate tax rate and repeal of the so-called "set-in-stone," rigid regulations in such sectors as agriculture and medical services, said Kenji Yumoto, vice chairman of the Japan Research Institute.

However, solutions to individual problems proved to be unsatisfactory; for instance, the government stopped short of adopting a proposal for reducing the 35 percent corporate tax rate to as low as 25 percent, Yumoto said. The timing for reducing the tax rate remained ambiguous, he said.

The generally favorable response to the growth policy package in the questionnaire reflected that the Abe administration is "greedily pursuing growth" compared to past Cabinets of recent years, said Hitoshi Suzuki, a senior economist in charge of research, recommendation and planning at the Daiwa Institute of Research. As a series of recent economic figures shows that Japan's economy is in good shape, the Abe administration has been "somewhat lucky" on the economic policy front, he said.

According to Tohru Sasaki, head of Japan rates and foreign exchange research at JPMorgan Chase, the revision package included nothing particularly new, but the government's policy of enhancing corporate governance, if successfully implemented, is expected to be welcomed by the stock market.

The three economic experts were discussing the extensive revised Japan Revitalization Strategy at a Genron NPO-sponsored debate program released on the Internet.

Exactly half of the respondents in the opinion survey by the not-for-profit independent think tank said they were pinning hopes on an aggressive agricultural policy among the 10 key reform sectors in the revised growth package, according to Genron NPO President Yasushi Kudo, who served as the moderator at the three-way discussion.

The second most frequently mentioned reform area was the realization of a working environment with increased job opportunities for women with children and enhancing women's career advancement in the workplace.

The government's policy of facilitating not only companies' participation in farming businesses but also actually providing risk capital to new agriculture-related ventures has drawn strong attention from people in the corporate sector, Yumoto said. "This apparently led to the strong finding in the questionnaire as to people's interest in the government's farm policy initiative, he said.

Market participants, if polled, should be most interested in the administration's policy of having the Government Pension Investment Fund (GPIF), the world's largest institutional investor, review its portfolio management, Sasaki noted.

The GPIF's flexible fund management may be aimed at boosting share prices and weakening the yen on exchange markets by buying domestic stocks or foreign bonds and stocks, Sasaki said. "This would be rather a less favorable idea," he said. The finding that the polled persons were less interested in the GPIF-related remarks in the package was rather satisfactory, Sasaki said.

Because the problems related to the gigantic investor should be addressed along with efforts to enhance corporate governance, the administration's stance on the matter is welcome, he said.

In Japan's basic policies for the economic and fiscal consolidation and reform for 2014, announced along with the growth strategy revision, the government reaffirmed its policy of achieving a surplus in the primary balance by fiscal 2020 while endeavoring to create sustained economic growth.

But the Genron NPO-organized questionnaire of well-informed people found that 64.9 percent of the respondents were negative about the possibility that the twin goals for economic growth and fiscal consolation would be achieved by the target year. This was an increase of over 20 percentage points from a similar survey in February, according to Kudo.

The latest announcement did not include any particularly new remedy for rehabilitating the primary balance, the balance of core government spending and revenue, excluding debt servicing costs and debt issue income, Suzuki said.

The foremost element in repairing the fiscal house is social security spending, he said. The government intends to reduce public benefits disbursed from the social security budget overall, but there is no specific prescription for realizing a truly sustainable social security system, Suzuki said.

Priority given to fiscal consolidation is believed to have declined following the inauguration of the Abe administration, Yumoto said. This is because the government has exerted most of its energy in pulling the economy out of the years of deflation, and raising Japan's growth potential to attain a certain level of economic growth amid a declining birthrate and an aging of society.

The government should increase the income tax rate further to 10 percent in October 2015, as scheduled, but this will not be sufficient to fully improve the fiscal situation, Yumoto said. "According to my calculations, the fiscal condition will not improve any more unless the income tax rate is increased to a level near 20 percent," he said.

The government should also make serious efforts to cut its expenditure and make its spending more efficient, Yumoto said.

"I personally believe that Japan should adopt something like a fiscal rehabilitation act" so that efforts to repair the public finances will not be hampered by politicians' possible arbitrary moves or intervention, he said.

According to Sasaki, if long-term interest rates are kept at a certain level amid a relatively high inflation rate, the government's fiscal consolidation will become easier to achieve. But long-term interest rates are unlikely to be maintained at a low level in such circumstances, he said.

Sasaki predicted that long-term interest rates will increase to around 2 percent sometime in the future.

If the inflation rate is truly stabilized at 2 percent, it will be only natural for the interest rate on 10-year government bonds to grow to 2 percent, but then, the government's debt servicing costs will increase gradually, he noted. In that event, Japan's long-term interest rates may take a leap, Sasaki said.

In the Genron NPO questionnaire of well-informed people, 61.7 percent of the respondents said they were concerned that efforts to cut into the rigid regulations may be undermined by resistance from parties with vested interests, according to Kudo. Meanwhile, 52.1 percent of them cited the possibility that a worsening of diplomatic relations with neighboring countries would make it difficult for the government to focus on economic policies. Lack of a consensus among the ruling camp about how to finance a proposed cut in the corporate tax rate and other policy programs was mentioned by 20 percent while 23.4 percent of respondents referred to a delay in moves to restart Japan's nuclear power stations, the operations of which were suspended after an earthquake triggered meltdowns and critical radiation leaks at a plant in Fukushima Prefecture in March 2011, in order to secure a stable energy source.

Unlike recent administrations, the Abe government apparently intends to use an unconventional method for penetrating the tightly protected business sectors, notably agriculture, providing incentives that may satisfy anti-reform forces and get them to side with the reform campaign, Yumoto said.

Simple, orthodox attempts to break into the long-standing regulations will only increase the risk of failure, he warned. "I think that the government expects to prepare a comprehensive policy plan to change the heavily protected sectors to growth areas," trying to persuade the opposing parties that they can also have access to the fruits of reform, he said.

The government's economic policy will not make progress if diplomatic relations are unstable, Suzuki said. "This is true as economic activities are becoming global," but in the meantime, if the economic situation is unfavorable, diplomacy will not work in a satisfactory manner, he said.

Noting that Japan should earn more in external trade by increasing investment in foreign markets, Suzuki said that it will be very important for the government to strive to enhance the Japanese economy from a global point of view while making further efforts on the diplomatic front.

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