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Japan lost sight a long while ago of a virtuous economic cycle. In 2022, the country must ensure the recovery of the economy, which has been weighed down by the novel coronavirus pandemic.
The Japanese economy is at a crossroads as to whether it will be able to get on a full-fledged recovery track. The revised real gross domestic product for the July-September quarter in 2021 was the first negative growth in two quarters, decreasing by 3.6% on an annualized basis from the previous quarter.
Real GDP has not returned to the level of the October-December quarter in 2019, before the outbreak of the coronavirus. As a result of the protracted states of emergency declared for the pandemic, the Japanese economy has been slow to pick up compared with other major economies, such as the United States and Europe, which are already showing positive growth.
Higher wages needed
Progress in the vaccination campaign and the end of states of emergency have led to the gradual normalization of economic activities. The groundwork for recovery has been laid.
The focus is on consumer spending, which stagnated due to the pandemic. A sharp increase in consumption of services such as dining and accommodations has been predicted, following a long period of restraint by consumers. However, it is unknown what impact the new omicron variant of the coronavirus will have.
It is important to create an environment in which the public can engage in consumption without concern. The central government must aim to bring about both infection control and economic activities by smoothly implementing the third round of vaccinations, and making every possible effort through such measures as securing hospital beds and expanding the testing capacity, while drawing on the lessons learned from past experiences.
Prime Minister Fumio Kishida has advocated a “new form of capitalism” and a “virtuous cycle of growth and distribution.” Although the overall picture of his signature policies has yet to be fully understood by the public, it is obvious that the prime minister intends to urge companies to raise wages.
Japan’s sluggish wage growth is serious. According to statistics compiled by the Organization for Economic Cooperation and Development, average wages in major Western countries and South Korea have risen sharply over the past 20 years, while those in Japan have remained low. Wages in Japan are among the lowest in the developed nations.
Without higher salaries, it is impossible for people to spend money with a sense of assurance. It is reasonable to aim to connect wage hikes to a virtuous economic cycle. The question is what concrete measures should be taken to realize this goal.
In the outline of tax system revisions for fiscal 2022, the government and ruling parties have proposed tax incentives for companies that raise wages. However, business operators are reluctant to do so, because once wages are raised, the burden on companies will increase over the long term, including the payment of social insurance premiums.
It is hoped that an economic environment will be created in which businesses can expect growth, rather than a limited-term tax cut measure.
Address population decline
Despite the coronavirus pandemic, companies have maintained strong results. In their midterm account settlements for the half-year period ending in September 2021, the combined net profits of companies listed on the Tokyo Stock Exchange, excluding the financial sector, were more than double those of a year earlier.
As of the end of March 2021, internal reserves — which are the accumulation of corporate profits — stood at about ¥484 trillion, up more than 60% from 10 years ago. There must be abundant funds for wage increases. Wage hikes should occur not just at large companies, but also be spread out to small and midsize companies, which account for 70% of all employment in Japan, and to nonregular workers.
Companies’ domestic capital investment has also been sluggish. Investment in fiscal 2020 was down compared with that of fiscal 2015. Although there are some effects from the coronavirus pandemic, many companies seem to be too conscious of the shrinking domestic market due to the declining birthrate.
Increasing productivity is essential to continue economic growth in a shrinking population, and corporate investment is vital for that purpose. The focus should be on overcoming the decreasing population, rather than worrying about the issue.
It is important to change the corporate mindset and actions in a positive manner. The government’s growth strategy is key.
The Abenomics economic policy package, which was touted by the Cabinet of former Prime Minister Shinzo Abe, boosted stock prices and corporate performance through monetary policy and fiscal stimulus, but its growth strategy produced few tangible results. It is vital to examine this issue.
Many areas need to be strengthened, such as decarbonization, including the spread of electric vehicles; semiconductor production; and infrastructure development for the high-speed, high-capacity 5G telecommunications standard. To attract corporate investment, the government needs to identify growth areas and present a clear vision for that purpose.
Attend to fiscal expansion
Another task is to rebuild the nation’s fiscal condition. The fiscal 2022 national budget plan exceeded ¥107 trillion, a record high for the 10th consecutive year. The fiscal 2021 supplementary budget also allocated a record high of ¥36 trillion, making expenditure expansion through supplementary budgets the norm.
The total amount of outstanding government bonds is expected to surpass ¥1 quadrillion by the end of this fiscal year. The fiscal situation is one of the worst among major countries.
Kishida has stressed his intention to prioritize economic revitalization over fiscal reconstruction. However, if the government continues unregulated spending in the future, the public’s doubts and fears will increase about whether the social security system can really be maintained.
Passing huge debts to future generations could dampen the motivation of younger generations. The government should quickly redraw the road map for long-term fiscal reconstruction and present it to the public.
— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 4, 2022.
