Japan: Kishidanomics Vs Abenomics - Which is better? | Rajaram Panda

After Fumio Kishida won victory on the 31 October elections with a comfortable majority, thereby becoming Japan’s 101st prime minister, he has flashed out his grand vision to bring Japan’ economy back on track. It is to be seen how much his economic policies would be different from his immediate predecessors, Shinzo Abe and Yoshihide Suga, both of whom were seen to have violated basic political imperatives while in office. While acknowledged that there is no room for complacency in dealing with the on-going Covid-19 with effective strategy, Kishida needs to make sure that his strategy to tackle the challenge is effective. Kishida would remember that his immediate predecessor was criticised for lacking a political philosophy or vision for Japanese society upon which to base his policy programs and that he would not make similar mistake.

This commentary focuses on Kishida’s vision to address the country’s economic issues, particularly how to ameliorate the economic conditions of the people severely affected by the pandemic. The core component of his grand vision of economic revival is what he calls “new capitalism” and “a digital garden city state”. At the moment, there is no clarity if it does not remain as a mere slogan. [1] The advisory council that Kishida set up on his idea of “new capitalism”, has announced a set of emergency economic policy proposals. These are not enough and need further discussions. His other ideas such as realising a “digital garden city state”, “digital administrative reform”, “social security for all generations” and increases in the wages of nursing and childcare workers need to be explained further.

Like Abenomics, Kishida’s new economic ideas have been dubbed as Kishidanomics, according to which he promises “virtuous growth cycle” with redistribution of wealth, which is the centrepiece of his economic policy. He is seeking a stimulus package in the hundreds of billions of dollars to end deflation. At the same time, Kishida has also signalled the status quo in many areas, such as sticking with Abenomics to defeat deflation. [2]

Kishida is a top leader of Kochikai, one of the most influential LDP factions. His diplomatic philosophy is consistent with the tradition of the faction. Kochikai was created by former Prime Minister Ikeda Hayato, who, like Prime Minister Yoshida Shigeru, prioritised Japan’s economic recovery over a rearmament policy. It was Ikeda when he was in office between 1960 and 1964 put in place the so-called “Income-Doubling Plan” and achieved miraculously rapid growth in post-War Japan. The main architect to achieve this goal much before the target was reached was Saburo Okita. Since then dovish leaders including former prime ministers such as Ohira Masayoshi, Suzuki Zenko and Miyazawa Kiichi, who cherished the country’s peace Constitution in their commitment to work for economic development of Japan. Since then the region’s security environment has undergone dramatic change exposing Japan’s own security and making it vulnerable. Keeping this important dimension in view, Kishida’s policies could see a clear departure from the Kochikai principle. He is more inclined to follow path Abe had chosen during his long tenure. He is already seeking a substantial hike in defence expenditure, even if it breaches the self-imposed ceiling of not exceeding one per cent of the GDP. The challenge for Kishida would be how to balance his economic policy with his defence policy with implications with foreign partners. 

Under his concept of “new Japanese capitalism”, Kishida wants to change the neoliberal policies left in place by his predecessors but it remains unclear how he plans to achieve this. Kishida feels that deregulation and structural reforms initiated by former Prime Minister Junichiro Koizumi, though led to economic growth, created inequality and social division. What Kishida wants is to implement a “Reiwa income doubling-plan”. [3] This refers to the current Reiwa era under Emperor Naruhito and the 1960 income-doubling plan of former Prime Minister Ikeda. While Kishida’s ‘new capitalism’ raises economic reform setback fears as he considers hiking tax on investment income, he wants to continue with Abenomics that consists of monetary easing, fiscal stimulus and structural reforms, the three arrows as they are called, and which strengthened the economy. 

In continuing to fight the battle Covid-19, Kishida has plans to employ active fiscal policy and promised to spend several trillion yen before December-end, besides giving government subsidies to help small-and medium-sized businesses.

How does Kishida view Abe’s Abenomics? Under Abenomics, Abe first emphasised regulatory reform as he believed that profits from major business corporate would trickle down to the rest of the society. But when Abe shifted to a “virtuous cycle” of growth and distribution, the reverse happened. Abe had asked companies to increase by at least 3 per cent to spur economic expansion and to treat regular and non-regular staff equally. What Kishida wants to do is to speed up redistribution by revising Abenomics. Moreover, relying solely on the market and economy in the wake of a rising China does not seem to be the right approach. Therefore, Kishida focuses on a new form of “state capitalism” by deepening cooperation between industry and the political leadership.

Kishida has abolished the Committee on Growth Strategy and created in its place a Committee for a New Japanese Capitalism to develop a vision for a post-pandemic economy and society. He also rebranded the Regulatory Reform Promotion Council on the Cabinet Office by rechristening as Digital Extraordinary Administrative Research Council. Since the upper house election is due in the summer of 2022, Kishida needs to speed up his visions for the economy and foreign policy so that he can present his case before voters appropriately. 

Kishida is aware that there is an anomaly in taxing the companies and the individuals, where tax rates are highly disproportionate. While taxes on salaries and wages progressively increase to 55 per cent but gains from stock transfers and dividends are taxed at a flat rate of 20 per cent. Kishida believes that this low tax on investment income benefits the wealthy and increases inequality. Kishida instead wants to create a “virtuous cycle in which raising the income of a wide range of people stimulates consumption and acts as a catalyst for the next stage of growth”. He wants that workers like caregivers and child care staff are adequately compensated. Related to the above, he has called for a “revival of the Reiwa middle class” with more support in education and housing costs for families with children. Opposed to Taro Kono’s idea to fully fund basic pensions and health insurance, Kishida believed in the concept of “social insurance for all workers” whereby workers both full-time and part-time jobs shall be covered under this scheme. As a consequence, burden of insurance premiums on companies will increase.

The truism is that the country’s public finance is in real bad shape. Japan has the largest outstanding long-term debt among leading countries. The situation will become more critical as social welfare spending is set to increase as more elderly join the aged club. The cope for the government to curb spending remains limited and this is going to be Kishida’s biggest challenge. There is also an increasing perception among the people that they are heavily taxed, though Japan’s tax rate is the lowest among major countries. The peoples are also sceptical whether the taxes they pay will be redistributed as welfare and so the distrust of politicians remains. If such feelings intensify, it could have negative impact when elections are held for the upper house in coming summer. Given this tricky situation, the government might find hard to implement policies aimed at redistribution of the nation’s wealth. The situation becomes more problematic as Kishida has resolved not to increase consumption tax for a decade. If tax rates are not hiked and consumption tax remains untouched, it is difficult to visualise how Kishida is going to get the finance to resuscitate the country’s economy. Bringing spending under check is one option but that might not be enough and also may not work.

As an immediate measure, the ruling coalition took the decision to distribute cash and vouchers each worth 50,000 yen ($443) to people aged 18 and younger to address the economic fallout of the pandemic. [4] The proposal to exclude higher income households could be problematic as dissatisfaction might increase. Excluding higher-income households stems from the fear of criticism that the government is splashing cash in the run-up to the Upper House election in the summer of 2022. It was decided to exclude households with an annual income of 9.6 million yen or above. Under the scheme of cash handout to households with children, the burden on the government would be to the tune of 2 trillion yen ($18 billion). [5]

Where from Kishida government is going to get funds for this stimulus package? The government hopes to tap on the reserves in state coffers and hopes that it would not lead to huge issuance of government debt. Even during the lockdown period, the Suga administration had made cash payment of 100,000 yen to all households, including foreigners residing in Japan. But this time, Kishida hopes that the cash handouts could be funnelled into consumer spending because it targets those in need of cash. 

As Kishida debated Japan’s economic future, he seems is convinced that Abe’s signature economic program Abenomics has run its course and a new approach was needed, which is why his “new capitalism” aims to distribute wealth and ease inequality that has grown for several decades.

Kishida is new to the office and it is premature to come to any definite conclusion on the possible outcome of his new policies. He needs time. Any new policies when adopted have normally a gestation period of at least two to three years to judge the outcome. In first hindsight, his ideas appear doable. Japanese people should not pre-judge Kishida on his new ideas and need to support him when elections are held to the Upper House next year. Since this commentary does not deal with Japan’s foreign economic relations, the impact of Kishida’s economic policies on India is not analysed. The author however remains optimist that Kishida seen as a friend in India shall deepen bilateral ties further in all fronts on the same lines pursued by his predecessors.

(Author: Prof. Rajaram Panda, an expert on Japan, is currently Senior Fellow at Nehru Memorial Museum and Library, New Delhi. E-mail: rajaram[dot]panda[at]gmail.com )