Now that it has been determined that the consumption tax rate will be raised from April 2014, discussions on the reform of the social security system have been underway. This report will reexamine whether pension, medical care and nursing care insurance systems can be sustained. A consumption tax rate hike to 10% would still be a drop in the oceanBenefit restraints and higher contributions from the elderly are necessary  Prime Minister Abe Shinzo decided on October 1, 2013 to raise the consumption tax rate to 8% in April 2014. The discussion about this hike in the consumption tax rate initially started from consideration of the Comprehensive Reform of Social Security and Tax initiated by the government of the Democratic Party of Japan, and the objective of the tax hike is believed to be to achieve sound and stable social security and stable financial resources, ... ... [Read more]

The consumption tax rate hike has set a course for securing of steady financial resources for the basic pension, but it is also necessary to take measures to cut benefits for achieving a sustainable pension system. An increase in the consumption tax rate to 8% from April 2014 is expected to generate additional annual tax revenues of approximately 8 trillion yen. However, the increase of tax revenues for FY2014 is likely to be limited to 5.1 trillion yen, given a gap in tax payment periods and a slump in consumption. Of additional tax revenues of 5.1 trillion yen, 2.95 trillion yen will be used to finance the national treasury that contributes half of the basic pension (Figure). Responding to the major issue of the pension system, the question of its sustainability due to the declining birthrate and aging population, the four acts related to ... ... [Read more]

The Japanese economy has begun to show signs of breaking away from the sustained deflation that has lasted more than fifteen years, unprecedented in modern world history. Japanese stock prices are maintaining their inherent upward momentum, and in its revised January 2014 World Economic Outlook, the International Monetary Fund (IMF) revised its forecast for Japan’s real GDP growth in 2014 (the real economic growth rate) up by 0.4 point from its forecast in October 2013, to 1.7%.  The Japanese government, led by Abe Shinzo, is extremely confident, as its policy for economic revitalization, commonly called Abenomics, which was launched at the beginning of the new government in December 2013, is clearly producing an effect. With the widespread public expectations of economic revitalization, the Abe administration’s approval rate has remained around 60%. On the other hand, the government is facing a fiscal problem, indicated by ... ... [Read more]

Inaccurate perceptions about agriculture  With respect to agriculture, there is the common perception that large-scale farmers run their modern agricultural operations by using a lot of fertilizer and chemicals, while poor small farmers engage in environmentally friendly agriculture, and that Japan can’t compete with agriculture in the United States and Australia due to its small land area and the scale of its agricultural operations.   The agricultural industry and certain experts claim that this is why Japan’s agriculture, especially its small farmers, must be protected, and that expanding the scale of farming operations to improve efficiency or for Japan to join the Trans-Pacific Partnership (TPP) is out of the question.  However, there are no poor small farmers in Japan today. Small farmers are employed at other jobs and do their farming on the side, thus earning more than working-class households. Since they don’t depend ... ... [Read more]

< Key Points > * Real wage rate after 2000 has been stagnant * Biggest factor is declining terms of trade * No room to boost labor share to any significant degree Prime Minister Abe Shinzo and his administration are actively encouraging businesses to raise wages. But are wage increases really possible, judging from the productivity trends? And, if so, then what are the necessary conditions? A nation’s labor productivity is measured by the real gross domestic product (GDP) generated per hour of labor. Of the real GDP per hour of labor (e.g. 5,000 yen per hour), the real labor cost per hour (e.g. 3,000 yen per hour) is distributed to labor. Therefore, in simplified terms, if the rate of increase in real wages exceeds that in labor productivity, labor share (60% in this example) should increase. If labor share continues to grow, return on ... ... [Read more]

< Key Points > * Reconcile labor and management thinking on the consumption tax * How corporate revenue is allocated influences the revenue * Necessary to monitor excessive labor intensification Since the beginning of this year, Prime Minister Abe Shinzo has actively sought wage increases for employees in the industrial sector. Wage levels in Japan are continuing to stagnate, resulting in weaker buying power for households (see the graph). The logic behind the demand for a wage increase is that a rise in wage levels would revitalize consumption, which accounts for about sixty percent of GDP, and facilitate a break with deflation.  As a result, some corporations raised wages at the negotiations between labor and management in the spring of this year, but there was hardly any reaction in the wage levels of the economy as a whole. According to the Monthly Labour Survey ... ... [Read more]

At the Government-Labor-Management Meeting held in the Prime Minister’s office on October 17, representatives from two leading Japanese companies—namely, President Toyoda Akio of Toyota Motor Corporation and Chairman Kawamura Takashi of Hitachi, Ltd.—expressed their positive views toward a wage increase. Prime Minister Abe Shinzo responded to this by saying, “We have heard very encouraging news.” Several years ago, or even just a year ago, there weren’t many people who thought that a wage increase would be a real possibility. I’m probably not the only one who feels that this trend has changed. Nominal wages began to decline in Japan between 1997 and 1998, just as a financial crisis was taking place. Many economists believe that, just like inflation, deflation is a “monetary phenomenon”—that is, deflation happens when the amount of money in the market is insufficient compared to the amount of goods. However, I ... ... [Read more]

Two Myths about the Consumption Tax In late August 2013, Japanese interest was focused on whether the Abe administration would raise the consumption tax as planned. The government invited sixty experts to the prime minister’s office and interviewed them regarding the pros and cons of a consumption tax hike and the necessary policies associated with the tax hike. The second intensive review meeting on August 27, which I participated in and that the mass media called “a showdown,” attracted attention, as four experts who were opposed to a consumption tax hike, led by Hamada Koichi, Tuntex Professor Emeritus at Yale University and a special advisor to the Cabinet, and five experts including me who supported a consumption tax hike, seriously discussed the issue. The minutes of the meeting are posted on the website of the Cabinet Secretariat, and I would imagine that many people ... ... [Read more]

This June, the government’s Council on Regulatory Reforms submitted a report on regulatory reforms to Prime Minister Abe Shinzo. The report discusses areas such as deregulation policies on employment highlighting “regular employment system reform” as one of the three approaches to be taken to reforming Japan’s employment system. Having served as a chairman of the working group on employment for compiling the report (refer to table on p. 2), I would like to give my perspectives on the background, objectives and specific policies regarding regular employment system reform.   “Labor mobility” is the key term  The Abe administration launched an economic growth package featuring a growth-generating structural reform strategy as an issue of top priority. This means that structural reform was the first item called for in order to produce economic growth. There are three possible approaches we can take to have the labor/employment ... ... [Read more]

[Summary] The third arrow of Abenomics, a growth strategy, aims at revitalizing industries, creating markets for selected sectors with the promise of future growth, and expanding global outreach. Prime Minister Abe’s growth strategy, formulated in June 2013, gave a timeline for implementing measures to realize these goals; many are expected to be on schedule. This would remedy one of the weaknesses of Japan’s business environment – the ease of starting a business.  However, not all measures in the growth strategy have a clear direction, nor do they all contribute directly to structural reforms. Creating markets in Japan’s health-care and agricultural sectors are examples of this, though the premier has shown a strong will to deregulate these and may have a clearer vision of their impact. Still, challenges remain for the private sector, in a rigid employment system and with high corporate taxes. Attention should ... ... [Read more]