Japan Awaits Abe’s Third Arrow as Companies Urged to Invest

Japanese Prime Minister Shinzo Abe’s reflation campaign shifted to structural domestic reforms after he unveiled a stimulus package offering a short-term cushion for the first sales-tax rise since 1997.

Abe’s administration is honing legislation for its “growth strategy” for the year’s final parliamentary session, an initiative companies will scrutinize for fresh reasons to invest in a domestic market burdened by a shrinking and aging population. For now, they get a slew of tax breaks unveiled with yesterday’s 5 trillion yen ($51 billion) program.

Getting businesses to start distributing their rising profits and near-record cash through higher wages and new projects at home will be key to sustaining a rebound in the world’s third-largest economy. Without pay rises, households will be hit by both higher taxes and living costs -- as energy bills climb after the yen slid 21 percent the past year.

“What is needed is for the government to provide a long-term vision -- 10 years from now for example,” said Nobuyasu Atago, a senior official at the Japan Center for Economic Research in Tokyo who has worked at the central bank. “Unless the potential growth rate is raised, there is no guarantee that companies will really raise wages and boost capital investment just because of tax incentives.”

Olympic Spending

The Topix index slid for a fourth day, losing 1.5 percent today in Tokyo, as investors weighed the sales-tax increase and stimulus plan and the U.S. government shutdown. The yen gained 0.4 percent against the dollar to 97.60 per dollar as of 3:51 p.m.

The package that Abe said yesterday would be prepared for December will include measures to boost capital investment by smaller companies; spending for the 2020 Olympics; payments to low-income earners; and tax incentives for home purchases.

As well as 1 trillion yen in annual tax cuts, including 730 billion yen in investment tax reductions, policy makers will decide in December on any early end to a levy on companies for earthquake reconstruction, the government said. Without the support measures, the economy would face “an extremely high risk of stalling,” Abe said.

A bigger challenge awaits with reforms that would threaten vested interests, such as reducing labor regulations dating from the 1960s that offered lifetime employment for workers at larger enterprises -- rules that reduce the attractiveness of hiring. Abe, 59, has also identified agriculture, health care and tourism as sectors to be targeted in his so-called third arrow.

First Arrows

The administration is also engaged in trade-liberalization talks with the U.S.-led Trans Pacific Partnership group of nations. Millions of small farmers have opposed the move, seeking to maintain protection for meats, wheat, sugar, dairy and other goods like rice, which has a tariff of 778 percent.

Abenomics has so far relied on the first two arrows -- of government spending and BOJ Governor Haruhiko Kuroda’s unprecedented commitment to achieve 2 percent inflation by increasing the supply of money -- to end two decades of Japanese malaise.

The first two components have done little to change companies’ reluctance to unleash their improving earnings, which left some 220 trillion yen in cash on their balance sheets at the end of June, according to data compiled by the BOJ. Regular wages excluding overtime and bonuses fell 0.4 percent in August from a year earlier, a 15th straight drop, government data showed yesterday.

Household Concerns

More than 40 percent of the working-age population is neither employed nor looking for a position, with the absence of women on the job holding down Japan’s potential growth. Abe has highlighted the female job growth as a potential dynamo for the nation. Tapping the resource would require greater access to childcare for mothers.

Meantime, households are girding for a 3 percentage point increase in the consumption levy, to 8 percent starting April 1. Consumer confidence fell in August for a third consecutive month, and sentiment among merchants declined for a fifth straight month.

“It’s important to have them spend,” Takeshi Niinami, chief executive officer of Japanese convenience store chain Lawson Inc. and a member of the Industrial Competitiveness Council that contributed to the growth strategy, told reporters yesterday. “I want to raise wages to encourage employees to work but we will be in a phase where bonuses will also go up so I have to consider if there is any way to prevent employees from saving.”

BOJ’s Role

For his part, Sony Corp. Chief Executive Officer Kazuo Hirai told reporters yesterday that the higher sales tax -- designed to help rein in the world’s largest public debt burden -- is good for the country. Sony is among Japanese exporters benefiting from the yen’s slide.

Japan’s central bank has indicated that it will add to already unprecedented easing if a setback to the economy warrants it. For now, Governor Haruhiko Kuroda is targeting an annual 60 trillion to 70 trillion yen expansion in the monetary base, with all 36 economists in a Bloomberg News survey expecting the BOJ to maintain this target at a meeting this week.

Twenty-six of the 36 economists expect the BOJ to add to easing in the first six months of next year, according to the survey carried out between Sept. 26 and Oct. 1. Increasing purchases of Japanese government bonds, exchange-traded funds and Japanese real-estate investment trusts are among the options.

’Political Grandstanding’

Abe, who has enjoyed the longest-lived popular backing of any prime minister since Junichiro Koizumi was in office 2001-2006, is betting the stimulus plan will be enough to assuage unease among segments of the public and his own Liberal Democratic Party about proceeding with the higher consumption duties. The legislation for the increase was passed by the former government, before Abe took office in December.

“It’s just political grandstanding to show the Abe administration is making the best efforts for a rise in wages -- it will be difficult to make up for the 3 percentage-point increase in the sales tax by a wage rise,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. “The reforms that will bring animal spirits back are the real structural reforms.”

The sales tax is set to ratchet up again to 10 percent in October 2015, subject to a go-ahead by the prime minister. Abe said any further increase would depend on economic conditions.

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