Even with the revision of policy strategy, achieving the goal of fiscal consolidation by 2025 remains uncertain. The above 3 per cent nominal and 2 per cent real GDP growth rates assumed in the government’s plan are still overly optimistic. The government’s strategy has to to rely on faster economic growth rather than spending cuts if its to succeed. Indeed, the government has stopped referring to its previous commitment to limit increases in social security spending by 500 billion yen (US$4.45 billion) per year. This suggests that it gives continued priority of stimulating economic growth over fiscal consolidation.
But the prospect of any acceleration in economic growth is very doubtful. There is little room for further monetary easing by the Bank of Japan and the government is committed to raise the value-added tax from 8 per cent to 10 per cent in October 2019. The projected growth rate depends almost entirely on strong productivity improvement, which will be difficult to realise.
Some argue that the Japanese government does not need to rush to achieve fiscal consolidation. A large portion of public debt is financed domestically, and the government still has large net foreign assets. In addition, any cuts in social security spending — especially for the elderly — would face political opposition. Politicians are most likely to remain reluctant to deliver fiscal consolidation. Any substantial plans for fiscal or social security reform are unlikely to emerge at least until the next upper house election, which is scheduled for July 2019.
A warning signal on the fiscal balance could come from the bond market. The pace of net financial assets growth in the household sector is falling and will keep falling, reflecting a declining household savings rate due to Japan’s ageing population. If gross government debt keeps climbing at a faster pace than household net financial assets, it will become more difficult to absorb new government bonds in the financial market. This concern, if it grows among market participants, may trigger a punitive increase in the interest rate, which could immediately threaten debt sustainability. Although low interest rates and the Bank of Japan’s aggressive bond purchases tend to obscure the risk of fiscal collapse, this now appears to be adding to the potential cost of Japan’s ‘exit’ strategy.
Another issue the government had to address in coming years is labour force participation among the elderly. An ageing population means an increase in the share of the dependent elderly in the total population. Income transfers from the young to the elderly will become less and less sustainable — as indicated by the mounting government budget deficit. More broadly, the overall balance between consumption and production in society will deteriorate, causing a reduction in net national savings. To tackle this demographic pressure, the elderly with the capacity to work must be encouraged to continue supporting society rather than being supported by it.
The eligible age for claiming public pension benefits is scheduled to be raised to age 65 by 2025 for men and by 2030 for women. Compared to other advanced economies, the eligible age, and the pace of its increase, is lower in Japan — especially given the longer life expectancy among Japanese. Earnings-tested pension benefit programs need to be abolished to mitigate the disincentive to work. Such a labour market policy would widen the fiscal space for social security benefits and enhance economic growth potential — both of which would eventually contribute to fiscal consolidation.
To avoid fiscal collapse and sustain confidence in fiscal and monetary policy, the Japanese government needs a more aggressive but prudential strategy of fiscal consolidation. This strategy has to call for containing government spending, the expansion of labour force participation among the elderly and increasing tax and social security contributions. Equally important, it needs to be based on much more realistic assumptions about economic growth.
Takashi Oshio is Professor at the Institute of Economic Research, Hitotsubashi University.
Perhaps it was a lack of space but this analysis left out some other relevant factors which could boost productivity and consumption. First has been the growing percentage of people employed in so called temporary, part time jobs. These pay significantly less than so called permanent, full time jobs. If PM Abe were to genuinely and actively persuade corporations to reverse these tendencies, people would have more disposable income. That could boost growth.
Second, women in Japan continue to make 70% other what men do. They are inordinately employed in these lower paying temporary, part time jobs. They are nowhere near represented equally in higher paid supervisory or management positions. Abe’s so called Womenomics has largely been a PR campaign of !ittle real substance. If/when women can advance to higher paying jobs, that would also boost consumption.
Finally, no mention was made in this piece about the potential contribution which immigrants might make to the Japanese economy. Abe has finally begun to talk about the need to allow more foreigners to liveand work in Japan. But this, too, is too little to make any significant change. Immigration is admittedly a very complex and delicate issue in Japan. When will the country’s leaders begin to tackle it more actively?
Japan’s demographic time bomb continues to tick. When/how will it deal with this more effectively?
Since publishing my comment I learned that Abe had proposed making immigration easier for some foreigners with high tech or other valuable work skills. Instead of a 5 year waiting period to apply for permanent residency these people can apply after only 1 year. While this is a move in the right direction, a Japan Times article noted that those who have received this approval have found that Japanese language challenges still are significant. Ie, why does the central government not do more to provide Japanese language training for these people to facilitate a better transition to/assimilation into Japanese society? Israel has been doing such things for its immigrants since its founding in 1947.
The JT article also noted that Japanese corporate culture is still too rigid and in some respects unaccepting of these highly skilled immigrants. And the children of these immigrants struggle with peer group acceptance in school. Why does Abe not do more to try to change these dynamics?