Unlocking Japan Growth Potential Is Task for Abenomics 2.0

Prime Minister Shinzo Abe’s election win strengthened his hand to move beyond the fiscal and monetary stimulus that brought an end to deflation in his first two years. The tougher task for Abenomics 2.0 will be to boost Japan’s growth potential.

First up for the next Abe administration will be completing left-over fiscal measures -- a supplementary budget of as much as 3 trillion yen ($25 billion), and replacement legislation for the sales tax, to delay the next increase to April 2017.

Abe, 60, then needs to battle fiscal-tightening advocates to enact corporate tax cuts he has pledged to make Japan more appealing to invest in. Lobbyists for small farms have hampered a trade deal with the U.S. in the Trans-Pacific Trade Partnership talks. Labor and medical-industry interests may counter his plans for strategic zones with lighter regulation.

“There’s resistance in every area -- like agriculture, labor and medicine,” said Hisashi Yamada, chief economist at the Japan Research Institute Ltd., a consulting and analysis group set up in 1969. “It’s not easy to push through reforms that bring pain.”

With the second straight two-thirds majority for his coalition in the lower house of parliament, and rising prospects of staying in office until 2018, Abe has a platform to pressure Japan’s companies to distribute near-record cash holdings in the form of capital spending and worker pay.

Potential Constrained

Abe today called on companies whose earnings have benefited from the weaker yen to boost wages and investment and take into account prices they pay their suppliers.

“I request people in the business community to make utmost efforts to increase wages next spring,” Abe said at a meeting of business and labor leaders. “I want the effects of Abenomics to penetrate every corner of the nation with pay increases next year and the year after.”

His success in stoking a rally in stocks, slide in the yen and profit gains among the nation’s biggest exporters has boosted calls for support to smaller companies and struggling regional economies that have seen less benefit from Abenomics. The stakes are rising for Abe to deliver on his growth program, with the central bank estimating Japan’s growth potential at no better than 0.5 percent and the public debt expanding.

“The acid test of Abenomics is results -- i.e. economic reform that raises growth,” Robert Feldman, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo, wrote in a Dec. 15 note. “The short term policy agenda focuses on budgets and the consumption tax, and may disappoint investors looking for growth policy. However, come spring, we expect the growth agenda to re-accelerate.”

Corporate Tax

The new cabinet will be inaugurated on Dec. 24, with a special parliamentary session that day to approve the prime minister, the Nikkei newspaper reported. Abe said Dec. 15 that by the end of the month he wants a stimulus package assembled, and an outline for tax policy for the fiscal year that starts April 1.

One decision looming is the size of a corporate tax cut for next fiscal year, the first in a round of reductions. Abe said in June he would reduce the rate to less than 30 percent over a few years from around 35 percent.

Japan has the second highest corporate tax rate among Group of Seven nations, according to the finance ministry. The U.K.’s corporate tax rate is set to drop to about 20 percent next year while Japan’s rival in electronics and automobiles, South Korea, has set its levy at around 22 percent.

Luring Foreigners

Economy Minister Akira Amari has said the government aims to lower the rate in increments over five years. Trade Minister Yoichi Miyazawa said he would like to see a reduction of at least 2.5 percentage points next fiscal year, according to the Kyodo news agency. The government and ruling coalition are weighing a cut of about that size for next fiscal year, the Nikkei newspaper reported today.

Once the budgets have been passed by parliament, Abe would need to resubmit legislation to implement deregulation in the special zones. The bill, which was shelved because of the snap election, would make it easier for foreign entrepreneurs to start businesses and also allow for the employment of foreign housekeepers.

The strategic areas help Abe to sidestep entrenched opposition from groups including farmers and the medical lobby, at least in six zones he set in March.

Special Zones

Fukuoka was chosen as an area to experiment in labor market reform, which hasn’t gained traction in a nation that has prized lifetime employment. Niigata in the north and Yabu in central Japan will test changes in agriculture policy and Okinawa will focus on international tourism, with changes already under way to ease visa requirements in the prefecture.

The region around Tokyo was designated for international business and the area surrounding Osaka for medical innovation. Details of regulatory regimes in the six areas have yet to be decided.

The government will probably add more areas, said Daiju Aoki, an economist at UBS Group AG who worked at the Cabinet Office from 2001 to 2010. One possibility: Semboku, in northern Akita prefecture, where city officials have proposed a medical tourism zone that would ease restrictions on foreign doctors and promote local hot springs, he said.

Hiroyuki Kishi, professor at Keio University and former trade ministry bureaucrat, said he was skeptical of Abe delivering on what the prime minister calls his “third arrow” growth policies. The first two arrows are monetary and fiscal measures.

Tariff Protection

“Whenever there was a chance to progress up to now, it was blocked by lawmakers with vested interests or bureaucrats,” said Kishi. “If that hasn’t changed, I’d like to ask how progress can be made.”

Opening up opportunities for business in agriculture is one way Abe is seeking to revive the regions and increase economic productivity. He is dismantling a four-decade long policy that has helped to sustain the nation’s 1.2 million rice farms even as it encouraged many growers to reduce their crops.

Abe will have to fight for concessions from the farm lobby as he pursues a Trans-Pacific Partnership deal, with Japanese farmers protected by tariffs as high as 778 percent on imports of rice.

“It’s a challenging task because of resistance within the party,” said Tomo Kinoshita, an economist at Nomura Holdings Inc., who said Abe may hold off until after the local elections in April. “It’s necessary to steadily proceed with reforms to boost agricultural productivity before opening up the domestic market with the TPP.”

Tourism Boom

Another way Abe aims to boost local economies is to stoke a tourism boom that has followed declines in the yen. The government is considering granting sightseeing visas of up to one year for wealthy foreigners, starting next fiscal year, and has relaxed visa restrictions for visitors from Southeast Asia, India and China.

Tourism receipts have helped support spending in the world’s third-biggest economy, which fell into its fourth recession since 2008 in the aftermath of an April sales-tax increase -- a statistic that serves as a reminder of the nation’s two-decade struggle to recover its mojo.

“So far only big companies and rich people have received the merits of Abenomics -- it did create a hope for the rest but a majority are still suspicious,” said Takeshi Minami, an economist at Norinchukin Research Institute in Tokyo. “It’s hard to see how Japan will have another chance to get out of this stagnation era. The next few years will define Abenomics.”

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