Beware of Japan's 'new capitalism'

Beware of Japan's 'new capitalism'

Japanese Prime Minister Fumio Kishida survived the election on Oct 31, which came just weeks after his arrival in office as the new leader of the nation. Losing only 15 seats, the Liberal Democratic Party performed better than expected and will maintain a comfortable majority in the House of Representatives.

The relative loser was the largest opposition party, the Constitutional Democratic Party, which lost 13 seats, leaving it with 96. It performed worse than predicted.

A major winner was the Restoration Party, which gained 30 seats and now holds 41, making it the third-largest party, after the LDP and the Constitutional Democrats. It attracted voters who are critical of the LDP's management of the Covid-19 crisis but reluctant to support the Constitutional Democrats, owing to their cooperation with the Communist Party during the campaign.

Mr Kishida appears to have benefited from a fortuitous decline in the Covid-19 infection rate. His immediate predecessor, Yoshihide Suga, was not so lucky. In late August, Japan's seven-day average of new cases skyrocketed to the highest level since the start of the pandemic. By early September, Mr Suga had announced his resignation.

Since then, however, new infections have fallen rapidly. Experts have yet to agree on all of the factors underlying this dramatic turnaround, but an increase in the vaccination rate from 40% to 70% in the same two-month period surely helped. Whatever the full explanation, Mr Kishida was fortunate.

But Mr Kishida also managed to head off the Constitutional Democrats by adopting a more left-wing economic platform. During the campaign, he promised to place special emphasis on income redistribution, and to supplant the prevailing neoliberal approach with what he calls "new capitalism". These promises defanged the Constitutional Democrats' claim that past LDP policies under Prime Ministers Shinzo Abe and Mr Suga had widened the income gap.

The Restoration Party, however, was able to fill some of the void on the centre-right by criticising Mr Kishida's emphasis on redistribution, arguing that what the country really needs are structural reforms to boost the growth rate.

Now that Mr Kishida and the LDP have prevailed, the big remaining question is what "new capitalism" will mean. The early signals do not bode well. Mr Kishida's first concrete policy decision was to disburse ¥100,000 (29,000 baht) to each person aged 18 or under. And though this programme contains a means-testing provision, the ceiling is so high that 90% of all Japanese minors qualify.

Then, in response to the criticism that cash disbursements will merely increase household saving rather than consumption, Mr Kishida declared that half of the benefit would come in the form of shopping coupons. But this change hardly guarantees that household consumption will increase, because the coupons can simply substitute for cash that will then be saved.

Ultimately, while Mr Kishida's goal of helping working parents is laudable, his chosen method is misguided. Worse, another initiative under consideration would subsidise (by tax rebate) firms that raise wages under certain conditions. Such incentives may tilt wages and employment upward, but they are hardly the most efficient way to achieve that goal.

A more sensible approach would be to focus on increasing worker mobility within the labour market. That starts with abolishing the deferred payment structure (increasing severance pay with tenure) and seniority wages (with tenure), together with financial assistance for retraining mid-career workers. Moreover, the best way to raise productivity and wages in the long term is to devote more of the high-school curriculum to STEM subjects, and to abolish the system of determining college majors at the time of an entrance exam.

Another idea that Mr Kishida's government has floated is to subsidise oil wholesalers when the retail gasoline price hits a certain threshold. But this sounds like the kind of fuel subsidy that most economists abhor. One usually encounters such policies in emerging economies, where they are meant to buy the political support of low-income families. Once introduced, the programme, with all its inefficiencies, will be politically perilous to reverse. A better alternative is the textbook approach of providing direct targeted support to low-income families and essential businesses.

Early indicators suggest that Mr Kishida's new capitalism is in fact plain old socialism. That will not serve Japan well. The economy needs structural reforms to support its development, not subsidies that will merely distort markets. ©2021 Project Syndicate


Takatoshi Ito, a former Japanese deputy vice minister of finance, is a professor at the School of International and Public Affairs at Columbia University and a senior professor at the National Graduate Institute for Policy Studies in Tokyo.

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