Author: Yuri Okina, Japan Research Institute
Prime Minister Shinzo Abe led the Japanese government for seven years and eight months from December 2012 until August 2020. Under the Abe administration, Japan experienced 71 months of consecutive growth from December 2012 and a consequent improvement in the country’s job market. This was the second-longest period of economic expansion in Japan’s post-war history.
The Abe administration promoted free trade, signed agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (TPP-11) and the EU–Japan Economic Partnership Agreement, while also advancing corporate governance reform and cutting the corporate tax rate. Japan’s business environment thrived, allowing Japanese companies and their profits to grow. These efforts were supported by a sustained commitment to bold monetary policy.
The Abe administration also attempted to reform Japan’s regulatory environment, social security system and labour policies, advocating various slogans such as the ‘Dynamic Engagement of All Citizens’ and ‘Social Security for All Generations’. But many of these efforts are yet to yield results. In particular, the government has not succeeded in defining a long-term growth strategy or addressed the myriad of structural problems.
The potential growth rate for example, the foundation of economic growth, is estimated to remain below 1 per cent. This figure is likely to decline further due to COVID-19. The Abe administration announced that the digitisation of medical care should increase the productivity and effectiveness of Japan’s medical services. But online medical care has become widely used only after the government permitted it as a special case due to COVID-19. The real reason that progress on such regulatory reforms has been insufficient is a series of barriers presented by vested interests.
The more serious problem facing Japan is the declining birthrate, which has not improved. While the Abe administration set a target fertility rate of 1.80, the actual fertility rate has remained low, dropping to 1.36 in 2019.
The reality is that Abenomics was too dependent on monetary policy, and efforts for both structural reform and fiscal consolidation were insufficient. Under the Abe administration, the consumption tax rate was raised twice, but once baby boomers reach the age of 75 and older after 2022, social security expenditures will balloon. COVID-19 has also forced Japan into a situation requiring repeated massive outlays of public funds.
It is under these circumstances that the administration of Yoshihide Suga took office in September 2020. Prime Minister Suga said that the establishment of a digital agency and the advancement of regulatory reforms would be the most important policy issues for his administration. He also declared on 26 October that Japan would aim for a carbon-neutral society in 2050, positioning a virtuous cycle of economy and environment as a pillar of Japan’s growth strategy.
Towards the end of the Abe administration, as COVID-19 infections spread and remote work and online education became more widespread, the lives of many Japanese people underwent a dramatic transformation. Many people came to realise that Japan lags behind in digitalisation, and now there is momentum to produce a digital transformation of society.
The Suga administration must not only promote digitalisation of the government, but accelerate the move towards online services in fields such as education, medicine and the private sector more generally. If the government transitions away from a ‘paper culture’, it will provide the private sector with an opportunity to shift its course to complete digitalisation, with a consequent increase in productivity. Over the next few years, companies must use digitalisation to adapt their business model to the challenges presented by the pandemic. This will hopefully raise the potential growth rate.
Suga has also spoken about the importance of rebuilding regional banks and small- and medium-sized enterprises, both of which have been battered by COVID-19. As the post-pandemic resuscitation and restructuring of local businesses will require the support of regional banks, the government must relax restrictions on the scope of business for banks, and regional banks must strengthen their management base, including through mergers. These efforts could aid in correcting the longstanding overconcentration in Tokyo and the revitalisation of local areas.
The COVID-19 pandemic has put immense expansionary pressure on public finances. While it is important to respond to the immediate crisis by mobilising public funds through the issuance of government bonds, looking towards the future the government will need to pursue wise spending and fiscal consolidation efforts for sustainable growth based on a realistic growth outlook. According to the government’s long-term economic and fiscal outlook released in July, the primary balance will be in equilibrium in 2029, but the assumptions underpinning it are optimistic, with a nominal growth rate of 3 per cent.