"Kurodanomics" : It's Progress and Evaluation

Ⅰ.   Introduction

  “Kurodanomics” implies the monetary policy which Mr. Haruhiko Kuroda, chairman of the board of Bank of Japan, has earnestly pursued since April 2013 soon after he took the office in March. Although Kurodanomics is not as commonly used expression as “Abenomics,” which means the package of economic policies of the administration led by prime minister Shinzo Abe, let me use this expression to represent the package of financial policies led by Mr. Haruhiko Kuroda for 6 years since spring of 2013.

   The principal aim of Kurodanomics has been to get Japanese economy out of the prolonged deflation, and attain the pace of stable 2 percent annual inflation. Since financial policy is crucial economic policy managed by the central bank of the country side by side with the government’s fiscal policy. The series of policies conducted by the leadership of Mr.Haruhiko Kuroda for the last 6 years have been unique and critical to determine the performance of Japanese economy for the period, I picked this topic with special interest.

  In this essay, I would like to review the basic objectives of Kurodanomics, its process of implementing critical policies and evaluate its performance. I will also discuss challenges of Kurodanomics for years to come.


Ⅱ.  Why “Kurodanomics?” economic and political contexts

   Mr.Haruhiko Kuroda was appointed as chairperson of Bank of Japan in March 2013 following his predecessor Mr. Masaaki Shirakawa. Mr.Kuroda has been appointed by Abe administration at the time when Japanese economy has been viewed as trapped in a prolonged deflation and economic stagnation.

   In spring 2013, Mr.Yoshihide Suga, Minister of Cabinet of Abe administration, kindly showed up in the special seminar of Shimada Juku to give a talk to the members. He said that the principal target of Abe administration was to overcome this prolonged deflation. He criticized the previous administrations saying that they have been relying on bureaucrats of ministry of finance on financial policies, and on BoJ experts when it comes to financial policies, and its consequence has been prolonged deflation and stagnation of the economy. He emphasized that Abe administration would take the initiative of economic policy by themselves, namely political leaders supported by experts.

   It is known that in preparing for competing to take prime ministers office, Mr.Shinzo Abe organized a small strategic study group of politicians and experts to formulate basic policy of Abe administration much ahead of the election of president of Liberal Democratic Party which was in September 2012. To the meeting of this study group, Mr. Haruhiko Kuroda, the then chairperson of Asian Development Bank, has participated frequently flying  often from Manila.

   When Mr. Kuroda was nominated as candidate for chairperson of BoJ, he testified in the Diet session of the House of Councilors saying that the fact that Japanese economy has been suffering from the deep deflation as long as 15 years since the 1990s must mean that BoJ did not conduct its responsible policy to overcome the problem. Incidentally, from 2008 to 2013, the period when BoJ has been chaired by Mr.Shirakawa, CPI(excluding fresh foods) declined by 1.4% and real GDP shrank by 1.2%. He obviously meant to take a leadership to overcome this serious issue of prolonged deflation and stagnation of Japanese economy as chairperson of Bank of Japan.


Ⅲ.  An extra-ordinary dimensional monetary easing

  Mr. Haruhiko Kuroda made a widely publicized declaration of his major policy in April 2013, which he himself termed “extra-ordinary dimensional monetary easing. He appealed to the press using the magic number of 2, i.e. attaining 2 percent inflation within 2 years. For that purpose, BoJ will increase the supply of base money by 2 times. His message was so clear and straightforward and also unprecedented in the sense that chairperson of the central bank commits the target of his major policy with quantity and time limit, it was broadly publicized across the world.

   In the community of financial experts, this policy is phrased as “QQE, “ namely, quantitative and qualitative monetary easing. The concept of “qualitative” easing is added in this policy since BoJ takes into account of the mix of financial commodities in addition to the total quality in order to carefully manage the effect of easing by adjusting the mix of heterogeneous financial commodities such as ETF.

   To be specific, his declaration of the policy has 3 major commitments:
(1) To attain the stable pace of inflation of 2 percent per annum within the time horizon of 2 years, hopefully, as early as possible. In fact, this target is included in the Accord between the Government led by prime minister Shinzo Abe and Bank of Japan led by chairperson Mr.Masaaki Shirakawa signed in January 2013.
(2) To achieve this target, BoJ will double the stock of base money and also double the stock of long-term Japanese government bond(JGB) and ETF(exchange traded fund) within 2 years.
(3)  Prolong the average remaining period of long term JGB by twice.

  The basic aim of this policy of QQE was to change the mindset of Japanese people from deflationary to inflationary. Since Japan has been sunk in the depth of deflation for nearly two decades, people have been used to deflationary economy where prices gradually fall or at least to not increase. Under such pattern of expectation, people tend to wait until prices fall before purchasing, and investors hesitate to invest because returns are expected to decline. This is a serious symptom of prolonged deflation which may well shrink the economy as time passes.

   What Abe administration aimed at was to get rid of this deflationary mindset of people, and instead, drive people to have inflationary mindset. Under inflationary mindset, people tend to buy things as soon as possible to enjoy merit of relatively cheap price, and investors tend to invest early in order to recoup large gains in the inflationary future. Whether such change of mindset will take place is the critical strategic intent of “Abenomics” and more specifically “Kurodanomics.”
 
   This declaration of QQE appealed strongly to financial experts in the world. Major investors and speculators rushed to bet on the declared increase of money supply, and sold huge amount of futures of exchanges at the current price, and only a few months later obtained huge gains. They also bought massive amount of shares of Japanese corporations, particularly of export industries, expecting that reduced exchange rate of the yen realized by expected massive increase of money supply will increase exports of such corporations and hence jerks up prices of their shares.

   Speculations and investments based on such expectations hit the top of the nail. Exchange rate fell rapidly as much as 20 percent in a few months, and share prices started to increase. Forerunning speculators and investors must have obtained large gains. Many others including Japanese investors followed. As a result, share prices of Tokyo Stock Market increased as much as 80% half a year later. This rapid increase of share prices and corporate profits seem to have given an optimistic momentum for Japanese economy.

    However, this momentum did not quite lead to increases of wages, and not to increase of prices. Since wages did not rise, people were not encouraged to spend, and stagnant movement of prices did not meet the strategic intent of the government and Bank of Japan to change the mindset of people from deflationary to inflationary.

   On the top of such stagnant behavior of wages and prices, the increase of consumption tax rate from 5% to 8% which was executed in April 2014 gave a profound shock to the government because after the increase of the tax rate, consumption dropped sharply. In fact, consumption increased markedly prior to the tax hike in the first quarter of 2014 as much as 4.9% of GDP per annum, but dropped dramatically as much as 7.1% of GDP in the following quarter in the wake of the increase of the tax rate. Ever since, the consumption has been stagnant until now which has dragged the performance of Japanese economy. This drastic drop of consumption in the wake of tax rise appears to have remained as a serious trauma for Abe administration making its tax hike policy reluctant.

   The boom siphoned by Kuroda QQE in 2013 was short lived although it still remains somewhat in share prices and corporate profits so that the strategic intent of altering mindset from deflationary to inflationary seems to be getting increasingly difficult to be satisfied. In this sense, the evaluation of 2013 QQE is mixed. It was successful in increasing share prices and corporate profits but failed to achieve its strategic intent of fostering inflationary mindset.


Ⅳ.   The second “Bazooka” and its meaning and effects

 Economic conditions have become more adverse for forging inflation in 2014 since consumption has not recovered from the sharp decline in the wake of the increase of consumption tax rate in April, economic growth has been sluggish. And above all, the sharp decline of oil prices since summer 2014 suppressed general trend of prices.

   At the policy committee of BoJ held on October 31, 2014, a surprising decision was disclosed. BoJ announced that drastic measures to fortify monetary easing to be executed as massive increases of purchase of JGB and relevant investment funds implying strengthening monetary easing measures both in terms of quantity and quality, featured mainly by an increase of purchase of JGB by 30 trillion yen annually and also increase the
purchase of investment trust 3 times. This package is nicknamed as “Second Bazooka, “ which is symbolized by the magic number of “3.”

  To be specific, the announcement included:
   ーIn terms of quantity:
     ・Increase the supply of base money by approximately 30 trillion yen to reach the
        annual pace of 80 trillion yen,
     ・This is done mainly by an increase of purchase of long term JGB by 30 trillion yen
         to reach the level of 80 trillion yen per annum.

   ーIn terms of quality:
  ・Extend the remaining period of JGB up to 7 to 10 years
      ・Purchase of ETF(Exchange traded fund) by the pace of 1 trillion yen to reach
         3 trillion yen.
      ・Purchase of REIT(real estate investment trust) 3 times more to reach 90 billion yen a year.

    It was reported later that there has been a harsh debate within the policy committee of BoJ between pros and cons about this decision. Those who propose this choice argued that the supply of a sizable additional base money is needed to show a strong will of BoJ to overcome deflation, while those who criticize argued that the impact of supply of additional base money is limited and such a massive supply may be interpreted as de fact BoJ’s fiscal
finance, which is prohibited by the fiscal law. After 4 hours of harsh debate, the decision was made by voting at the policy committee with 5(including the governor) who supported and 4 who opposed.

   The announcement of BoJ to add a major supply of base money had a positive surprising effect to the international financial market. This had a positive effect particularly the its timing was shortly after the FRB’s statement of ceasing the massive monetary easing which has been repeated three times until then. Share prices of stock exchanges of NY and other places in addition to Tokyo have risen markedly indicating welcoming response of international financial market to this surprise move of BoJ. However, this positive response has been only short lived.


Ⅴ.   The introduction of minus interest rate

  Since 2014, negative interest rates have been adopted by central banks of several EU member countries, and ECB also adopted negative interest rate. There have been some influence of negative interest rate of Europe to Japan through the international flows of funds. Declining oil prices have had a major global influence for depressing the prices and the economic conditions for BoJ has been quite adverse in terms of generating inflation.

   Arguments have risen toward 2016 in financial community in Japan that additional major action of easing is needed. Governor Haruhiko Kuroda has been quite cautious about such arguments.

   However, on January 29, BoJ made an epochal announcement that it will introduce negative interest rate. This decision was made in the policy committee held on January 29. Again the issue of introducing negative interest rate has called forth harsh debate within the committee. It was reported later that those support minus interest rate argued that downward risk of prices has been increasing, it is necessary to direct the funds of banks for loans, and introduction of minus interest is only limited. Those who against it argued that economic conditions are not bad and no compelling reason to provide major additional easing, and minus interest rate will suppress profits of financial organizations. And finally decision was made with 5 for and 4 against.

   Mr. Naoki Tabata explains that the basic intention of BoJ to introduce negative interest rate was to bring down the “yield curve” as a whole by pulling down the yield of short term fund by introducing negative rate. This is because commercial banks have had a tendency to concentrate their loans  in short term in order to avoid long term risks. This tendency has disturbed the intention of BoJ to bring down the long term rate indirectly by arbitration by its usual purchase of short term JGB. See Naoki Tabata,”Achievements and lessons of Quantitative and Qualitative Easing” in “Kuroda BoJ: Economic Analysis of Extra-ordinary Monetary Easing.” 2018 Japan Economic News Paper Co.Ltd.

 Introduction of minus interest rate intended to bring down the yield curve as a whole and solicit commercial banks to lend their funds more to businesses making use of lowered long term interest rate, rather than paying interest on their reserve deposit kept in BoJ. Also, in order to minimize the negative effect on profits of commercial banks, the amount of reverse deposit on which minus interest rate is imposed was limited as 23 trillion yen.

 Unfortunately, however, such intentions of BoJ was not well understood by private financial organizations for some period after the introduction of minus interest rate. Worried about the suppression of profitability, mega banks reacted by reducing interest rate for depositors rather than attempting to increase loans to businesses. Commercial banks criticized BoJ rather harshly complaining about the pressure imposed by BoJ to suppress their profits.

   Half a year later, the intention of BoJ seems to have been understood more by private financial organizations. The yield curve as a whole apparently has been pulled down and as a consequence housing loans and corporate investment increased taking advantage of the lowered long term interest rates.


Ⅵ.   The QQE with minus interest and the yield curve control

   Although housing loans and corporate investment for productive equipments have increased thanks to the lowering of long term interest rates, long term interest rate such as of 10 year JGB has been reduced unexpectedly much to even to minus zone so that management of insurance and pension funds have been disturbed substantively.

   Worrying about such substantive disturbances, BoJ began to consider controlling directly both short and long-term interest rates in order to secure reasonable opportunity for insurance companies and pension funds to secure their profits as well as ascertaining profit margins for banks.

    On September 22, 2016, BoJ held policy committee meeting with a special theme entitled “Comprehensive Inspection” of monetary policies. BoJ’s intention was to hold a comprehensive review of environmental changes as well as monetary policy itself and then to arrive at adequate policy directions upon such comprehensive considerations. BoJ’s strategic intent was to justify what it intends to do as note above after the ritual of such “comprehensive review.”

    As a comprehensive review, the meeting identified the major reasons why targeted price increase has not been attained as follows:
  ・Falling down of oil prices,
  ・Stagnant consumption in the wake of consumption tax rate increase
  ・Slow down of developing economies and instability of international financial market
  ・Excessive lowering of interest rate has suppressed profits of financial organization,
       particularly of yields of insurance and pension funds,
    ・price expectations tend to be influenced strongly by the past price performance so that
       it tends to take time to increase price expectation.

    On the basis of such comprehensive review, the committee arrived at the following policy decisions:
   ーQuantitative and qualitative easing will be introduced to control both long term and
       short term yield rates.
 ーAiming at keeping the long-term yield rate in the neighborhood of zero percent, BoJ
      will control purchase of JGB.
   ーContinue the minus interest rate.
   ーContinue monetary easing until 2 percent level stable prices increase will be attained.

  These policy decisions deriving from the comprehensive inspection of financial policies arrived at the policy committee meeting of Sept 22, 2016 meant to keep 10 year JGB yield rate around 0%(within the range of plus and minus 0.1%) by applying a limit order method so that guiding yield rates for longer than 10 years in the positive rate zone and pulling up the yield curve as a whole, and at the same time, making the yield curve for shorter than 10 year terms more steeper so that securing the normal interest rate gap between longer and shorter terms.

   The policy decision arrived at this time included also continued purchase of JGB at an annual pace of 80 trillion yen. This is often called “overshoot commitment” implying that BoJ makes a strong appeal of its unchanged commitment to attain 2% level stable price increases.

   The policy package announced as a result of the comprehensive inspection of monetary policies conducted on Sept. 22, 2016 is generally called  “The quantitative and qualitative easing with minus interest and the yield curve control.”


Ⅶ.   The second term Kurodanomics and fine tuning

 Since Mr. Haruhiko Kuroda was appointed as chairperson of Bank of Japan in March 2013, his term was to be completed by March 2018. There was some discussion about who would be an appropriate successor, but without much discussion Mr. Kuroda was regarded as the most appropriate candidate, largely because prime minister Shinzo Abe wanted Mr. Kuroda to continue.  He was appointed as chairperson for the second term beginning in March 2018.

   During his first term, he has accomplished certain results such as making Japanese economy getting rid of prolonged deflation. Since overcoming deflation was the single most important policy objective of Abe administration, BoJ led by Mr. Kuroda may be said to have contributed this national objective positively.

   At the same time, however, Mr. Kuroda’s policy objective which he publicly committed in April 2013 that BoJ will realize 2 percent level stable inflation within 2 years has been far from being realized. While CPI increased appreciably in 2013 and reached the pace of 1.4 percent in late 2014, it has been disappointingly sluggish since then until recently. As of summer 2018, it remained only 0.8 percent.

   Since BoJ has been obliged to postpone the timing of attaining the target of 2% inflation rate at least 3 times, BoJ changed the policy of announcement at the policy meeting of April 2018 as not to publicly commit the timing. Incidentally, at the policy meeting of January 2019, BoJ predicted that price increase for 2019 would be only 0.9%, far from the target of 2%, implying that it will be a long way until the target will be attained, if any.

   In view of the accumulating huge volume of base money supplied by BoJ which grew as large as Japan’s GDP recently, there arose discussion at various corners as to the need to taper the BoJ’s extra-ordinary monetary easing. With the adoption of normalization policy by FED of the US since 2014 and the inclination of ECB toward the normalization, the argument has been intensified that BoJ, too, needs to normalize its extra-ordinary monetary easing policy before long.

   At the policy meeting of July 31, 2018, BoJ announced a decision to modify its stance of regulating the 10 year yield rate from the zone plus and minus 0.1% to somewhat broader zone of plus and minus 0.2%. This seemingly modest revision implies to control the flow of funds to land and financial assets not to aggravate “bubbles” on the one hand, and still to continue monetary easing to propel economy on the other, by allowing a greater discretion of controlling long term interest rate.

  In allowing for a slightly higher limit of 10 year yield rate with a purpose of mitigating asset inflation, BoJ still remained very nervous and cautious as not to let market players easily interpret that this move implies the tacit action toward the normalization of monetary policy. To ascertain that BoJ continues to commit to extra-ordinary monetary easing until 2% inflation is attained, BoJ stresses to increase purchase of massive JGB, namely, over-shooting policy. The latter policy is also meant to keep the support of reflationary proponents both within and outside of BoJ. Some speculate that BoJ is bound to take this stance at least until October 2019 when 2% increase of consumption tax is committed by Abe administration.


Ⅷ.  Some evaluations

   Having reviewed the progress of Kurodanomics for the last 6 years, let me make some personal evaluation.

1.Mixed achievements of Kurodanomics
     As the primary objective of the initiating Abe administration was to overcome the prolonged deflation, it is fair to say that Kurodanomics has contributed significantly to achieve this goal of Abe administration.
 
     To attain this outcome, BoJ led by Mr. Kuroda exploited a policy mix which has been developed step wise, namely, quantitative monetary easing associated with qualitative easing, then negative or minus interest rate has been introduced at least partially, which is then empowered by introduction of yield curve control. This comprehensive policy mix is vouched by the policy stance of “forward guidance.” To ascertain that BoJ continues to commit strongly to the 2% inflation target, it adopted so-called “over-shooting” policy of committing a voluminous purchase of JGB as much as 80 trillion yen a year since 2014.

    Mr. Naoki Tabata provides a clear, systematic and fair explanation that the policy mix adopted by BoJ led by Mr. Kuroda has been all indispensable and effective to achieve the policy goal to make Japanese economy get rid of prolonged deflation. He quotes an interesting comment by Mr. Benjamin S.Bernanke that whether quantitative easing is  really useful for generating economic growth is not understood. Mr. Tabata clarifies that the monetary easing policy as adopted by Kuroda’s BoJ was indeed useful to generate growth in terms of theoretical analysis. See for details, Tabata, Naoki

 On the other hand, the public commitment of Mr. Kuroda that he would achieve 2% stable pace of inflation within two years since spring 2014, if not earlier, has not been attained at all. In fact, having elapsed 6 years, the reality is far from the target, as reviewed earlier. Nevertheless, Mr. Kuroda strongly commits to this goal, and exploits every possible means to achieve that goal such as voluminous bazooka and overshooting commitments.Ironically enough, the more Mr. Kuroda commits to this promise of attaining the goal, the amount of the stock of base money increases which has recently grew as much as the total amount of GDP. This provokes the question as to how to normalize the situation, or to put differently, what and how the exit will be realized. Another serious question is worries about, which is the danger of economic crisis incurring possibly from this abnormal accumulation of base money, or the asset of BoJ.

2.   Is 2 percent inflation goal divine?
   The primary issue associated with the negative aspect of Kurodanomics, it seems, is his strong commitment to 2% stable inflation rate as his target. The historically and internationally unprecedented and even dangerous amount of accumulated stock of base money has been basically arising from the stubborn commitment to achieve the 2% inflation goal. Can this quantitative goal not be changed or modified, particularly in view of various drastic changes of global and Japanese economic conditions since the outset of Kuroda regime.

   In fact, the commitment to the 2 percent goal has been made between BoJ and the government in January 2013 in the Accord of the Government and BoJ, prior to the time Mr. Kuroda took the office of BoJ. This means that the commitment to the 2% goal cannot be changed unilaterally by BoJ. One may ask whether the government and BoJ consult with each other seriously as to change this commitment. This seems unlikely in view of the fact that both prime minister Abe and Mr. Kuroda stated recently on different occasions that they respect the Accord and has no intention to change.

   However, the Accord has a more comprehensive content rather than sheer commitment to the 2% target. It emphasizes that fiscal policy and monetary policy need to support with each other to achieve this goal. Interpreting this notion honestly, the Accord asks the duty of fiscal policy which the government is responsible as well as the duty of BoJ. One may ask whether the government is satisfying the required task of achieving and maintaining the healthy fiscal conditions. Some observers have speculated how much Mr. Kuroda was shocked by the prime minister’s announcement of postponing the timing of consumption tax rate from 8 to 10 shortly after Mr.Kuroda executed the second bazooka in October 2014.

  FED of the US and ECB of Europe have altered the massive monetary easing policy much prior to achieving the targeted inflation rate, perhaps by considering changes of economic conditions flexibly. One is left with a question why only BoJ cannot change the commitment more flexibly with changes of important economic conditions.

3.   Exit strategy:what to plan and how to proceed?
   With the huge accumulation of the stock of base money in the process of extra-ordinary dimensional monetary easing, the size of balance sheet of BoJ has increased extra-ordinarily, too. The aggregate size of base money grew as much as the size of Japan’s GDP recently.

  The US FED expanded supply of base money massively after the Lehman shock, but the total amount relative to US GDP when FED started normalization remained only 20%. The normalization process of the FED has taken several years since, and is expected to take another several years until it attains the reasonable equilibrium. In view of the experience of FED, the exit prospect for BoJ is unimaginable.

   The size is a problem because in the process of exiting the huge asset of BoJ will have to be absorbed by the global market. Given the size as much as GDP, selling the huge amount in a way not to incur excessive reactions on the market within a reasonable time horizon is extremely difficult. We need to plan the process very carefully mobilizing all the possible expertise and information.

   In the case of BoJ, there is a more serious problem than a problem of sheer size. That is, the most of the JGB purchased by BoJ from commercial banks are kept as checking account of BoJ. The negative interest rate imposed on the deposit of commercial banks and other financial organizations kept as checking account was only a very minor portion of the total amount of their checking account. The total amount has reached the amount of 300 trillion yen. The problem is that the most of it is paid a modest interest rate as 0.1% by BoJ.

   When BoJ tries to initiate the process of normalization, the market interest rate will increase. If the interest rate increases sizably it will increase the loss of BoJ dramatically. For instance, if the interest rate goes up to 1%, the interest payment to the checking account of commercial banks and other financial institutions will increase up to 3 trillion yen.

   Since the equity capital or net worth of BoJ is not that large, this massive payment may well threaten the healthy financial balance of BoJ. Although BoJ may not bankrupt as some critiques comment, this may well jeopardize the credibility of Japan’s central bank. Lowering of credibility of the central bank may well lead to many undesirable consequences such as falling down of exchange rate etc.

   Japanese economy is entering into an extremely critical phase in these years where it   needs alert, sensible and responsible policy determination and execution, especially because the global economic conditions are getting worse since the abnormally long prosperity of the last decade is expiring and drastically destructive events are taking place such as Mr. Trump’s selfish and ultra-nationalistic policy, Brexit and increasingly unstable European economy, rapid decline of Chinese economy, deteriorating economic conditions of emerging economies. And, lagged response of Japanese economic policies to tackle  issues of aging of population, dramatic technological change and dangerously accumulated government fiscal debt. Facing with these issues, the challenges for Japan’s financial policy are getting ever more critical and pressing.

Free Education Policy and Its Evaluation

Ⅰ.   Introduction

   Free education policy is a hot issue in Japan both as an important economic strategy as well as a political agendum.

   What exactly is meant by “free education policy”?  Japanese education system as prescribed by Article 1 of the Basic Education Law comprises of 6 years of elementary school, 3 years of junior high school, 3 years of senior high school and normally 4 years of college or university. Since Japanese constitution stipulates education in elementary school and junior high school as compulsory, publicly established these schools are free of charge.

   Education of other levels such as nursery schools and kindergarten for the very young and senior high schools and college and still higher levels such as graduate schools for higher education charge fees for students.

   The policy proposal for “free education” therefore means in Japan to make education for the very young and students for higher education free of charge or reduce fees or tuitions by subsidies.

   Prime minister Shinzo Abe has expressed his keen interest to promote free education as an integral policy of the nation’s human resources development strategy. He advocated free education increasingly vocally in recent years. He picked this policy as a major public promise of Liberal Democratic Party in its campaign for the general election, namely, the election for the House of Commons, in October 2017.

   Interestingly, in this election, all the political parties who nominated their candidates upheld “free education” as an important public promise for voters.

   Since LDP won a land-slide victory in this election, they had a strong momentum to realize the free education policy after the election. It took more than a year to materialize the details of the policy with backing of the budget ready to implementation.

    The policy was formulated so hurriedly that the discussion at the Diet, by experts or even within LDP on examination of its needs, implications and empirical evidence for effects has been scarce and much less than needed. 
     In this essay, I would like to review the intent of Abe administration to implement free education policy and its background, and then review the process of policy formulation and finally evaluate the need, effects and issues of the policy which is going to be implemented from this year.

 
Ⅱ.   Strategic intent and background of free education policy

   The strategic intent of Abe administration for free education policy is that free education is a primary means to promote human resource development. Abe administration put up human resource development strategy as an integral pillar of economic strategy package of the third phase of “Abenomics.”
 
    Abenomics is a well known package of economic policies launched from the beginning of Abe administration since December 2012. The first stage of Abenomics comprised of three arrows, namely, monetary policy of extra-ordinary dimensional easy money, active and dynamic fiscal policy and growth strategy.

   The second stage of Abenomics started since the end of 2015, which consists of new three arrows, namely, growth strategy to attain 600 trillion yen GDP in 2020, policy to increase labor force participation of females of child rearing age, and policy to enrich old age nursing system to reduce burden of family care so that relatively aged people can participate to labor market. In short, the second stage Abenomics emphasizes strengthening supply side capability of the economy by means of encouraging labor supply and productivity increase by facilitating technological innovation.

   The third phase of Abenomics was initiated at the end of 2017 in the wake of October 2017 general election and formulated somewhat more explicitly at the outset of the third term Abenomiccs after the election of LDP president in September 2018. The third phase of Abenomics has not been expressed as systematically as the first and second stages. It has been prepared during the second stage and focussed more specifically on human resource development and technological innovation.

   To shape its focus, there have been two major background factors: one is the increasingly severe labor shortage and the other is the rapidly intensifying global competition of new technologies.
 
   Labor shortage in Japan, both in terms of quantity and quality, is stemming from two reasons. One is an increased demand for labor arising from demand for reconstruction of areas devastated by major earthquakes and  Tsunami in North-eastern part of Japan and for enriching infrastructure for Olympics and Paralympic games in 2020. The other is a more fundamental issue due to a long-run reduction of population which reduces particularly supplies of young labor force.

   Intensified global competition of new technologies, particularly of the so-called 4th industrial revolution and more specifically 5G technologies provides another critical background changes. Still another is the prevailing trend for a longer span of working life in the era of longevity of 100 years, which heightens the need for continuous upgrading of skills for a prolonged life career.

   These background factors aggravate the need for well-skilled young labor force. Having been increasingly aware of these factors, Abe administration began to emphasize the need to increase labor supply of the current labor force and to increase birth rates on the one hand, and upgrading skills of people, particularly of the young,  on the other.

   Free education, it seems, is believed to be by prime minister Shinzo Abe and his policy staff as one of the most important and effective means to meet theses demands, namely, increasing the labor supply, increasing the population and enhance skills of people.


Ⅲ.   The process of formulation of free education policy

   In this section, let me review the development of policy ideas and the process of policy formulation of free education.

   In March 2017, LDP committee to think about  economic and fiscal policies after 2020, headed by Mr.Shinjiro Koizumi, proposed an idea of children insurance to finance the cost of providing free education.

  In April 2017, LDP committee for fiscal consolidation rejected the idea of issuing government bond to finance free education.

  On June 2, 2017, the government disclosed the draft for the Basic Direction of Economic Fiscal Policy Management for FY 2018 which states that free education for children younger than age of elementary school needs to be implemented soon.

  On September 25, 2017, prime minister Shinzo Abe declared that he will invest 2 trillion yen to promote “Human Resource Development Revolution”, the new catch-policy of Abe administration.

   Prime minister Abe’s declaration obviously intends to appeal to voters for the forthcoming general election. Indeed, Mr. Abe explained the reason why he calls forth general election in October 2017 as he wants to change the use of the expected increased tax revenue accruing from increased consumption tax rate from the ongoing 8% to 10%.
    The increased tax revenue which is expected to be 5.6 trillion yen was supposed to be used mainly to repay the government fiscal debt. Mr. Abe appealed to the voters that he wants to spend much of the increased tax revenue to finance “free education” and to partially enrich social security. In order to ascertain the support of people for this changed use of the tax revenue, he told that he will ask the public endorsement by means of conducting general election.

   Toward the general election of the House of Commons, scheduled for Oct.22, 2017, all the parties which put up candidates put up “free education” policy.  Let me quote, LDP free education for the very young, financed by increased tax revenue accruing from increased consumption tax rate. “Kibou” (hope) Party for the very young and senior high students financed by taxing on internal reserves of corporations, Komei Party for the very young and senior high students by increased tax revenue accruing from increased consumption tax rate, Communist Party for the very young up to college students financed by new taxes on large firms and rich people, Constitutional Democrats, Ishin(new restoration), and Social Democrats also propose “free education” policies.

   On October 28. prime minister Abe asked the industrial community to pay 300 billion yen to supplement the budget for free education, which Mr.Abe said to cost some 2 trillion yen.
 
   Following prime minister Abe’s lead, several task forces of LDP discussed to determine policy details such as whether or not income ceiling be set, whether or not unapproved nursing schools can be made eligible for free education. The government also asked some scholars and knowledgeable people to set up experts task force to discuss policy details and propose recommendations.

   By June 2018, basic ideas for policy details have been more or less specified by the government both free education for the very young and also for senior high school and college students.

   Toward the end of 2018, these plans have been formulated specifically which are to be written in the annual budget for FY 2019. These plans are vouched by 2 legislations: namely, “Amendment of Children Bearing and Fostering Assistance Law,” and “College and Higher Education Study Assistance Law.” And the final plan with budgets was authorized and determined in the cabinet meeting in the morning of February 12, 2019.

   The government expects that the total annual cost of providing free education will be 1.5364 trillion yen, of which for young pupils 776.4 billion and for students of higher education 160.0 billion yen. Let me describe main points as follows:

  For kindergarten and nursery school pupils:
     Age 0 to 2, free education(for unapproved, free up to 42000yen a month. Given for households exempted from house tax. Starting October 2019

      Age 3 to 5, free education(for unapproved, free up to 3700 yen a month. Given for all households. Starting October 2019

    For senior high school students:
        Senior high schools study assistance(annually 120 to 300 thousands yen) for households with less than 9.1 million yen annual income,   
         Senior high schools grant scholarship(annually 30 to 140 thousands yen) for households with less than 2.5 million yen annual income.
     For colleges and universities:
         Grand scholarship( annually,  350 to 910 thousands yen) for households exepcted from residents’ tax. starting from April 2020.
         Tuition waiver( annually 170 to 700 thousands yen) for households with less than 2.7 million yen income
         Reduction of entrance payment( 70 to 280 thousands yen)

 
Ⅳ.   Critical evaluation of free education policy

   Having reviewed the process of policy formulation and the contents of the free education, let me make a few points of critical evaluation.

   The total annual cost of proposed free education for FY 2019 is 1.5364 trillion yen, which is a huge amount of money. Provide education free or with as low burden as possible itself is valuable and meaningful since education of the population is a very important policy objective to manage the country.

   The important question is whether the way such huge amount of money paid by the public is effective and meaningful for the purpose of the policy.

    Since in Japan, the ratio of people who attend schools is rather high even among the advanced nations, i.e. 56% of youth are attending 4 year or 2 year colleges, and 95% of children younger than the enrollment age of elementary school are attending nursery school and kindergarten.  Given this high rate of attending which is already attained, increasing the quantity or the number of attendants is not as an important objective as much as enhancing the quality of education.

    Given this high attendance ratio, providing free education or subsidies to reduce the cost of education as is proposed by Abe administration may well yield unintended mal-effect of increasing differentials particularly of the quality of education, acquired knowledge and skills, among the same cohort of students. This is because relatively wealthier families will spend the additional income provided by the government to further enrich the ability of the children while relatively poor families may well use the additional income to supplement their limited family income.

  Ms. Makiko Nakamuro of Keio University reports the results of their empirical research on human capital investment across different age classes which shows that the effect of investment is much higher younger age cohort. She infers from such research findings that the policy to enrich human and other endowments on education for young children of particularly the area where people are relatively poor will be more cost effective as education policy. She worries the debate in Japan which is often made on casual observations rather than reliable empirical research. Makiko Nakamuro, “Free education is a wrong policy to enlarge differentials” Bungei Shunjyu August 2017.

   The problem of “free education” policy of current Japan is that the objectives of the policy is not well defined and the huge amount of precious money paid by tax payers  is used on casual observations or subjective conviction without reliable evidence of  research. The policy was formulated hurriedly with hardly any solid and systematic discussion or debate. I wish that the “free education policy” was not intended simply to appeal to voters by scattering additional money to attract their votes.

Belated hike of consumption tax and its implications

Ⅰ.  Introduction

   Following the declaration of prime minister Shinzo Abe in October 2018 to increase the consumption tax from the ongoing rate to 8% up to 10% at the beginning of October 2019, the necessary budget to accommodate this tax increase has been written in the annual budget plan for FY2019 which was disclosed at the end of 2018. With these steps, the consumption tax hike which would have been realized much earlier finally will be executed in October 2019.

  In this essay, I will review the prolonged process to prepare and execute the increase of consumption tax from 8% t0 10%,  the current policy package to execute the consumption tax increase and discuss its implications.

 
Ⅱ.  Review of the process of consumption tax hikes

   Consumption tax increase has been a major home work left for Abe administration from the preceding two Democratic Party administrations led by prime minister Naoto Kan and prime minister Yoshihiko Noda. 

    At a G7 conference of finance ministers held in Canada in 2010, the then minister of finance Mr. Yoshihiko Noda of Naoto Kan cabinet made an international commitment that Japan will increase consumption tax from then 5% up to 10%. This was the response of Japanese government to the international community of fiscal policy who were deeplyconcerned about Japan’s excessive accumulation of government debt in a way to show the determination to enhance fiscal discipline of Japanese government. Mr. Noda’s commitment also had an implication to alter the compositional balance of direct and indirect taxes by way of increasing the proportion of tax revenue of consumption tax vis-a-vis income tax in the increasingly aging society of Japan.

   In that year, Kan administration also set forth the fiscal consolidation plan in which the government plans to reduce fiscal debt from 2010 and attain zero of the primary balance by 2020. To achieve the goal of the plan, appropriate increases of consumption tax has been regarded imperative.

   To pursue that goal, three party agreement has been attained in 2012 by Democratic Party of Japan, Liberal Democratic Party and Komei Party in which they agreed to increase consumption tax rate from 5% to 8% in April 2014 and 8% to 10% in October 2015.  In December, Mr.Shinzo Abe took the office of prime minister and Abe administration stared. Abe administration naturally was supposed to attain the plan of
3 party agreement. In other words, increases of consumption tax have become the home
work for Abe administration.

   Abe administration executed the committed increase of consumption tax rate from
5 to 8% at the beginning of April 2014. Since 3%point increase was a major increase,
consumpers reacted dramatically as expected. Prior to the tax increase, they rushed to
buy goods and services which increased the GDP of first quarter of 2014 as much as
4.9% at annual rate, and then the trend was reversed after the tax hike. Consumption shrunk sharply in the second quarter of 2014 as much as minus 7.1% of GDP annual rate.

   Consumption has remained quite weak for a long time since then and the economy seems
to have lost its viability. This phenomenon of a negative effect of tax hike on consumption  apparently has become the serious concern of Abe administration. While the increase of
consumption tax was regarded as an important step toward the comprehensive reform of
tax and social security, only one percent worth of the increased revenue has been used for social security, the basic aim of enriching and fortifying social security has barely been satisfied.

   Prime minister Shinzo Abe grew increasingly nervous about the effect of tax increase
on economic performance. He ordered ministry of finance to coin a good idea to mitigate
the impact of tax increase on consumers, particularly of low income consumers. Ministry
of finance proposed an idea of partial refunding to lower income people utilizing the tax
payer identification number system which was to be introduced. However, this requires
low income consumers to prepare necessary documents to ask for refunding. Warring
about cumbersome burden on such consumers, Komei party strongly opposed against
the idea of ministry of finance.

    Komei Party instead strongly proposed to introduce reduced tax rate for necessity items such as food. This reflects their notion that low tax rate for foods is helpful for low income
people who the party regards their critical supporters. This idea has been reportedly pushed
forward strongly by female segment of the party which often has an important influence on the party decisions. The reduced tax rate of food in effect has a regressive impact since
the wealthier people spend much more money on food. In the political process, however,
the strong recommendation of Komei party’s reduced tax rate was adopted as a political compromise even in spite of critical advices of tax policy specialists. This debate ended
up with introduction of reduced tax rate for foods for prospective tax increase for 10% in the form of LDP and Komei party agreement.

   Prime minister Abe stated that he will decide the next tax hike in November 2014.
Many experts such as Ministry of finance officers,  economists including IMF specialists
argue that consumption tax should be increased to 10% as soon as possible on the ground
that economic performance is good, there is no guarantee that the economy will be better later and no important election is scheduled.

   However, on November 18, 2014, prime minister Shinzo Abe declared that he will postpone the timing of increasing consumption tax rate to 10% for a year and a half to
April 2017. He also announced to call for a general election to ask the view of the people
because he changed the public promise of the date of consumption tax increase and declared to resolve the House of Representatives on Nov.11 and set the voting date
on December 14.  The result of the election was a land slide victory of LDP and Komei
party.

   In spring of 2016, prime minister Shinzo Abe began preparing theoretical reasons to
possibly postponing the timing of increasing consumption tax rate further including inviting
eminent economists such as professors James Stiglitz and Paul Krugman. Having listened to their views Mr.Abe told that he learned that the world economy entails downward risks,
monetary means have limits to counter such risks, fiscal spending is necessary, therefore
there remains little room for an economy like Japan to raise taxes.

   On June 2, 2016, prime minister Abe announced to postpone once again the timing of increasing consumption tax rate to 10% to October 2019. He said it is necessary to prepare for countering probable global downward risks. In July 2016, prime minister Shinzo Abe hosted G7 summit at Ise-shima national park in Mie prefecture. He urged to the leaders of
the world the necessity of fiscal stimulus which many leaders did not quite appreciate. Mr.
Abe said that if the world economy suffer from a major shock such as the Lehman’s class,
the timing of increasing consumption tax will be postponed further. While many national
leaders and experts did not really listened to Mr. Abe’s warning, he is lucky enough that
a major shock hit the global economy after June 23, namely, British national referendum
for “Brexit,” which exerted at the moment even the larger downward shock to stock market
than the time of the Lehman shock.


 
Ⅲ.  Policy package to increase the rate of consumption tax

     In October 2018, a year prior to the planned timing of consumption tax increase,prime minister Abe reportedly made up his mind to execute the planned increase of consumption tax rate from the ongoing 8% to 10%. He has also been ordering the relevant government offices to prepare policy package to mitigate the likely negative impact on consumption due to the increase of consumption tax rate.

   In the evening of October 15, prime minister Abe declared at the extra-ordinary Cabinet
meeting that he will execute the increase of consumption tax rate up to 10% as planned.
And now openly assigned all relevant ministers to prepare economic policy package
to prevent negative reactions after the tax hike.

   The issue of introducing reduced tax rate for foods gives rise to many problems at
the shops as well as the ministry of finance. For small businesses dealing with dual tax rates, the government has been advocating to equip themselves with necessary cashing machines and relevant ordering and receiving facilities.

   The ministry of finance is faced with the problem of how to secure budget to make up for the reduced tax revenue due to reduced tax rate for foods.  The forgone revenue is estimated as much as 1 trillion yen. The ministry plans to carve out 700 billion yen from
increasing tobacco taxes etc, and the rest of 300 billion yen from hopefully increased
revenue from small businesses, who have been exempted from reporting of consumption tax revenue, now begin to report consumption tax revenues in order to secure business
with large firms after introducing “invoice” system.

   The exempted small businesses are about 5 millions. Since they are exempted, they are
unable to issue invoice. Since large firms cannot write off consumption tax spending in transacting with exempted small businesses who cannot issue invoice, they tend not to
have business with such exempted small businesses. However, once the invoice system is
widely introduced, some of these small businesses will shift to non-exempt businesses in order to secure business transactions with large businesses. Ministry of finance expect that
the shift of such small businesses will increase tax revenue as much as 300 billion yen.

   In early November, Komei party presented a policy proposal to mitigate the negative impact of consumption, particularly of low income consumers.Their proposal includes:
 (1) implementing reduced tax rate system surely, (2) providing gift certificates to reduce the
burden of households, (3) tax reduction for those who buy houses and cars after the tax hike, etc. While Komei party apparently had a strong influence in preparing economic
policies to mitigate the likely negative effects of tax hike, there remained some skepticism among LDP members about the effects of Komei proposals.

   On November 23, prime minister Shinzo Abe talked about 5% refund for the consumers who bought things without using cash, the idea which has been developed and included
as one of the important items of the final policy package. In the process of preparing the consumption tax related policy package, reduction of taxes of purchasing cars was also
included as an important item.

   On December 22, 2018, the budget plan for FY2019 has been disclosed. The necessary
budget to execute consumption tax hike has been included thereby the increase of consumption tax rate has been formalized.
   The total fiscal budget for FY2019 is 101.4564 trillion yen. In which policy package to
mitigate the possible negative effects is accounted for 2.0280 trillion yen.

    The expected increase of tax revenue arising from 2% point increase(8% to 10%) of consumption tax rate is 5.7 trillion yen, which tax payers are supposed to pay if nothing else has done. In reality, 1 trillion yen is subtracted in the form of reduced tax for foods.
Also, 1.5 trillion yen is substantively subtracted in the form of tree education for very young
and higher education students. After such subtractions, the net burden on tax payers due to
2%p increase of consumption tax rate is 3.2 trillion yen.

   On the other hand, the government stipulates as policy package to mitigate possible or likely negative effects of consumption due to tax hike the following items. They include:
 (1) Refunding for cashless purchases, for 9 months from Oct.2019 till June 2020.
     Refund rate is 5% for small shops and 2% for shops of large chain store networks
(2)  Gift certificates for low income families and infant raising families.
      Up to 25000 yen worth certificate for 20000 yen purchase.
(3)  Housing subsidy, for relatively lower income households, up to 0.5 million yen
(4)   Subsidy for next generation housing such as energy conservation houses.
(5)   Houses imposed 10% consumption tax, income tax deduction eligible period extended
       from 10 to 13 years.
(6)   Reduction of car taxes, cars bought after October 2019, yearly up to 4500yen reduced
(7)   Reduced tax rate for foods for all consumers.

The policy package to mitigate possible negative impacts of the tax hike altogether will amount to 2 trillion yen. Adding tax reductions for house and car purchases would total
approximately 2.3 million yen.

Interpreting this package as additional income for tax payers, the net burden of tax payers arising from the tax hike of October 2019 will be only 1 trillion yen.


Ⅳ.   Implications of this hike of consumption tax and evaluation

   Having learned about the prolonged process of increasing the rate of consumption tax
and the policy package planned by the government accompanying the tax increase, let us
consider their implications.

1.  The prolonged process of consumption tax increase.
    To raise the rate from 5 to 10%, it altogether will have taken 5 years and a half.
Prime minister Abe postponed twice the planned timing of tax increase from October
2015 till October 2019.

     The most pressing issue for Japanese economy, in my view, is the rapidly accumulating
government fiscal debt. Tax increase is an important measure to reduce or control the pace
of increase of the debt. During the four years elapsed by prime minister’s repeated postponing of tax increase, the total accumulated fiscal debt increased by the amount as much as 100 trillion yen. Although the forgone tax revenue during this period which would have been gained is some 20 trillion yen, this repeated postponement certainly aggravated the worsening of the fiscal debt situation for the country.

2. Effects of policy package accompanying the tax hike
   Abe government planned various policy measures to mitigate possible negative effect on consumption due to increase of tax rate. The package altogether amounts to 2 trillion yen.
If subsidies for houses and tax reduction for purchase of cars are added, the total amount would be some 2.3 trillion yen. The government also provides reduced tax rate for foods and free education for certain ages of children and youths which altogether amount to
2.5 trillion yen. These measures make the net increase of tax revenue only 0.8 trillion yen
out of the total of 5.6 trillion arising from 2 %point increase of consumption tax.
 
  Question is what can be done by only 0.8 trillion yen accrued from the precious increase
of consumption tax rate this time. The original purpose was to use the increased tax revenue for fiscal consolidation on the one hand, and enriching social security on the
other. With only 0.8 trillion yen, only very little can be done to pursue these goals.

   Another question is whether such measures would be really effective to increase consumption. Most of measures will certainly increase household income of consumers marginally but its effect of increasing consumption additionally is highly skeptical. Moreover, too much short term incentives provided by such measures may induce negative reactions when such incentives are terminated after a certain period.

3. Negative effect of tax increase and long term strategy to reconstruct the country
   Prime minister Shinzo Abe appears to be so fearful of possible negative effect on consumption by the tax rate increase. He may be preoccupied by the “trauma” of the negative reaction of consumption in the second quarter of 2014.

   But is this economic fluctuation such important to overlook the issue of structural
deterioration of fiscal balance of this country. The enormous accumulation of fiscal
debt for the size of economy may well lead to fiscal or economic collapse of the nation
if the economy is hit by serious shocks. For detailed explanation of this issue, see Haruo Shimada “Aging and Possible Fiscal Crisis: Are There Remedies? FPCJ Press Briefing in the afternoon of Oct. 3, 2018, contained my blog essays “Japan Topics

   One of the reasons why Japanese population is uncertain for the future and cannot be
confident to spend is their worry about the pessimistic notion of fiscal condition of the country. Although most people do not know much about details of the problem, many
of the population have a vague worry and uneasiness for the future of the country.

   It is my view that prime minister Shinzo Abe should have courage and determination to
talk to people the real picture of the fiscal situation of the country honestly, and seriously,
and ask their understanding and cooperation to raise taxes to reconstruct the fiscal health
of the country. The public of Japan must have ears to listen to such serious talk of the leader of the country and particularly his positive view to reconstruct the country for the
future. For my policy recommendation for a long range plan to transform Japan, see Haruo Shimada “Aging and Possible Fiscal Crisis: Are There Remedies? FPCJ Press Briefing in the afternoon of Oct. 3, 2018, contained my blog essays “Japan Topics

Open doors more widely for foreign workers

Ⅰ.  Introduction
 Introducing more foreign workers is viewed as the most urgent and important
issue for Abe administration.
   Toward the end of last year(2018), the law which amends the entry control and
refugee recognition law was enacted. This amendment introduced the new categories to authorize foreign workers to work in Japan. Since the amendment
was carried out hurriedly, there remain many problems to be clarified or decided
to make the revised law work properly when it becomes effective at the beginning
of April 1, 2020.
   In this essay, I would like to explain in some detail the content of the amendment of the entry control and refugee recognition law, discuss its meaning with some
historical perspective and finally present my personal view as to what the legal and
policy system for Japan should take to handle the issue of foreign workers properly
for national interest.
Ⅱ.  New legislation for expanding introduction of foreign workers
   In the very early morning of Dec 8, 2018, the bill to amend the entry control
and refugee recognition law passed the House of Councilors and enacted as the
revised law of the entry control and refugee recognition law. Needless to say,
the bill passed the general assembly of the House of Commons earlier so that
the passage at the House of Councilors finalizes the process of legislation.
   The thrusts of the revised law may be summarized as the following:
 (1) To create the two new categories to authorize the stay of foreign workers including some unskilled workers, namely, “specific skill of type 1” and “specific skill of type 2.”
 (2) To review the revised law 2years after the enforcement taking into account opinions of local governments and others.
 (3) To establish “Entry-Exit Control Agency” to manage the control of entry, stay and exit of foreign workers.
 
   The gist of the new system is the new two categories for workers who can stay and work in Japan.
   One is “Specific skill category 1.” Workers in this category are expected to work in one of the proposed 14 jobs such as agriculture, construction, old age nursing etc. They can work at longest 5 years. They are not allowed to bring their family. There are basically two sources for this category: one is those who spent 3 years of experience in the system of “Training and Working, “ which I will explain in some detail later. The other is those who wish to work in Japan and passed exams of
Japanese language and skill aptitude.
   The other is “Specific skill category 2.” Workers classified in this category are
skilled workers. They can bring their family. The limit of their stay is 5 years but they can extend it. Eventually, they could practically be permanent resident. While Japanese prospective employers are looking forward for category 1, they are somewhat less enthusiastic to category 2.  The workers who experienced stay as
category 1 can be upgraded to category 2 if they pass the the required test.
   Let me show here the number of foreign people who work in Japan. As of
July 2018, the total number is approx. 1.28 millions. Of which, permanent residents
and those who marry the Japanese are 459 000, working students are 297000,
trainees under “Training and Work System” are 258000, highly skilled such as
medical doctors and lawyers are 238000, and others.
   Incidentally, the number of foreigners staying in Japan as of the end of June 2018 is 263, 7251, increased by 7,5403 relative to last year. Of this total, permanent residents are 75,9135, special permanent residents are 32, 6000, students are
32,4000, and trainees enrolled in “Train and Work Program” are 28, 5000persons.
   The government wishes to bring in eventually some 340000 workers utilizing the framework of newly created two categories. The government expects to introduce
in the first year, namely, from April 2019 to March 2020, 47550 workers into jobs of 14 selected industries: namely, agriculture, bldg cleaning, food processing, construction, old age nursing, restaurants, metal fabrication, ship building, manufacturing machines, hotels and inns, car repairs, fishing, electronics and
information, and airport and air craft services.
   In the first 5 years, the government expects to accept 18000 to 36000 foreigners for agriculture and 7300 for FY2019 7300, 28000~37000 for bldg cleaning and 2000 to 7000 for 2019, 26000~34000 for food processing  and 5200 to 6800 for 2019, 30000 to 40000 for construction and 5000 to 6000 for 2019, 50000 to 60000 for old age nursing and 5000 for 2019, 41000 to 21500 for metal fabrication and 3400 to 4300 for 2019, etc.
   The government plans to conclude agreement of accepting workers by March
2019 with governments of 8 prospective countries such as Vietnam, China,
Phillipines, Indonesia, Thailand, Myanmar、Cambodia.
   Prior to April 1, 2020, when the revised law will be made effective, there are
many things which the government will have to clarify or decide. They include,
for example, (1) basic principles to implement the system. The government will
have to decide policies as to avoid excessive concentration of foreign workers in
major cities such as Tokyo, and programs to restrain activities of bad brokers etc.
(2) guide lines for managing the system for 14 industries such as control of the numbers, contents of qualification exams, and specific rules, (3) comprehensive
policies for acceptance of foreign workers such as consolidating receptions,
enriching introductory Japanese language education, and (4) guidance and rules
such as comparable wages relative to Japanese, and other relevant rules.
     There remain a whole host of problems, tasks and hurdles to be solved or overcome not only by the government and municipalities but much more so by
employers who wish to hire foreign workers and local communities in order to accept foreign workers under the newly legislated categories before the law will be enforced at the beginning of April 2020.
 
Ⅲ.   Development of discussions for introducing foreign workers
   Let me briefly review how Japan has been handling the issue of accepting foreign workers in the recent history, and examine somewhat more closely the recent development of handling the issue under the leadership of Abe administration.
The recent action of Abe administration to introduce foreign workers including unskilled or simple skilled categories is perceived to be the major change of the
policy stance of the Japanese government on this issue, particularly by international
community, since the Japanese government has been regarded as having preserved “seclusion” on this issue.
    While Japanese government has resorted to mobilize foreign workers soliciting
from Asian countries particularly of Korea and China during the period of Japan China war and the Pacific war for about a decade prior to Japan’s defeat in 1945. this issue should be discussed separately in the different context from our discussion
of foreign workers of this essay.
   During the postwar economic development period since the mid-1950s, Japan has faced at least three phases in which the need to introduce foreign workers was keenly felt.
1.  The first phase: 1960s
    The first was the 1960s when Japanese economy grew rapidly as often quoted ad Japan’s economic miracle in international community. The economy grew by in average 10% for more than a decade from the beginning of the 1960s until 1973
when the economy collapsed by the “oil shock.” During this period of rapid economic growth, labor demand expanded dramatically to supersede even the
ample supply of young labor force at the time. The need for introduction of foreign workers was voiced strongly from industrial community.
   The government took the situation not lightly and seriously examined whether Japan should accept foreign workers. The conclusion reached particularly at the
summit of Labor Minister Hirohide Ishida and relevant ministers was not to open
the country for foreign workers.
    I happened to have been working closely with government experts on this issue as a young scholar of labor economics shortly after returning from the US where I took PhD in labor studies. I was assigned as chairperson of the task force to examine and make a policy proposal. The task force was comprised of responsible officers of 4 ministries, namely, Labor, Justice, Foreign Affairs and Trade and
Industry. At the end of study period, we proposed a policy entitled, “Train and Work
Program.” This has been the prototype of the policy scheme which has been used to control the foreign workers until now. And our task force has become the core of the subsequent body, JITCO or Japan International Training Cooperation Organization, to administer the operation of the program. The operation of JITCO
started toward the end of the 1960s.
   I, as chairperson, drafted the initial paper for the policy. In my mind, I had a keen feeling of caution not let employers to abuse foreign workers. Before drafting policy proposal, I visited many countries both of sending workers such as Philippines and accepting workers such as West Germany. West Germany was well known for having accepted a large number of foreign workers from Turkey and other countries, but they suffered serious problems subsequently of their social integration and financial burden of social spending to take care of them.
   In my view, if Japanese employers who want to make use of foreign workers can easily hire them, they may well abuse them by poor working conditions and low payment. This is because these employers want to use foreign workers because they cannot afford good working conditions for even to Japanese workers. To minimize such problems, I proposed to impose the employer to pay for 2 years to train the trainees and then can make them work by the expression of letting them experience the real work. With these conditions imposed, the employers who dare to participate to the program would be quite limited, and this is exactly my intention to eliminate unqualified employers.“Training and Work Program” for foreign workers  which the Japanese government adopted by our recommendation has been quite
stringent, perhaps the most stringent in the world.
2. The second phase: 1980s
   Second was in the 1980s. Japanese economy grew rapidly after having emerged from the damage of the oil shock. Particularly after the mid-1980s, the economy
expanded by the wave of the “bubble.” The bubble has its root by the notorious Plaza accord. This was imposed by Mr.Nicholas Brady, who later became treasury secretary of the US by which Japan was forced to increase exchange rate of the yen. Fearing for its depressive effect on export, Japanese government massively increased fiscal spending and BoJ decreased interest rate to create the domestic demand. This created the bubble since the liquidity created was too large for the
economy to absorb. The bubble economy inflated pseudo labor demand which
solicited the argument of introduction of foreign workers.
  Employers of construction and low skill services wished cheap foreign labor. In
fact, the number of illegal foreign workers has grown large to the order of even a million although there were not accurate and reliable estimates. Debate on the issue of foreign workers was heated. Some argued that Japan should open its labor market for foreign workers, while others warned about demerits of hasty introduction. The bubble collapsed at the beginning of the 1990s, and the debate and even interest on the issue of foreign workers diminished accordingly.
 Incidentally, I wrote a book “Japan’s Guest Workers” published in 1994 by University of Tokyo Press to explain my thought partly to participate to this debate. I was and still am a part of the proponents of opening the market for foreign workers. However, I emphasized that the country should provide full fledged
human rights as a precondition of accepting foreign workers. I will discus my
view in some detail later. If you are interested to know what I assert, please look up my book.
3. The third phase: 2010s
   Third has been the more fundamental interest and concern about introduction
of foreign workers which emerged gradually and grew increasingly keen in the 2010s, largely reflecting the intensifying labor shortage stemming from increased labor demand arising from reconstruction of devastated area by the gigantic earthquake and Tsunami in Northeastern Japan in 2013 and also preparing for the forthcoming Tokyo Olympics on the one hand, and long-term demographic change
of Japanese diminishing population on the other. It is in this context under which
Abe administration proposed to create a new system of introducing foreign workers.
4. The process of legislation by Abe administration
   Shortly after Abe administration started, the government held a conference of
related ministers on the issue of introducing foreign workers in April 2014 and
decided emergent measures to extend the period of authorized stay in Japan from
3 years up to 6 years. To do so the government proposed to expand the “Train and
Work Program” which has been practiced for 40 years.
  In September 2015, private sector advisors of the government committee of
Economic and Fiscal Policies prepared a plan to extend the authorized period
of stay up to 8 years.
  In November 2016, the entry control and refugee recognition law was amended
to add a category of old age nursing service and expanded the restriction of “Training and Work Program.”
  In February 2018, prime minister Shinzo Abe declared in the committee on economic and fiscal policies that he wants to show by summer the direction to
expand acceptance of foreign workers.
  In the report of the government committee on  Economic and Fiscal Policies
which was disclosed in June 5, 2018, new directions have been written that
the number of foreign workers who work in Japan and possibly stay for a long period should be increased, and legal arrangement should be made to enable
this goal. This statement in the report became the official starting point to
expand the acceptance of foreign workers by amending the current “the entry control and refugee recognition law.”
   In October 24, prime minister Shinzo Abe emphasized the need to introduce
foreign workers who can be productive force right away. Following prime minister’s
strong message, the issue was debated intensively in the general affairs committee of Liberal Democratic Party and finally agreed that the entrance control law should be amended.
    On November 11, 2018, the issue was debated in the budget committee of the House of Commons. In that committee, Mr. Nagatsuma, the deputy representative
of Constitutional Democratic Party asked the prime minister if the amendment he
proposes is to assimilate foreigners to the Japanese. Prime minister Abe answered
sternly that he never think of “immigration” policy.
    Opposition parties proposed various alternative plans for introducing foreign
workers. It took about a month for the debate in the Diet. At one point, it was
revealed that one of the reports prepared by Ministry of Justice on the issue of
disappeared trainees due to poor working conditions had some mistakes, and
the debate has been suspended for some time. Nevertheless, LDP has never
changed their basic assertion throughout the process. And eventually, in the very
early morning of December 2018, the bill was passed in the general assembly of the
House of Councilors and enacted as a law to amend the previous law of the entry
control and refugee recognition as noted at the beginning of this essay.
    As can be seen well in the above, the process of this legislation was short and the debate was not thorough or sufficient, which opposition parties criticized repeatedly.
But the law was enacted hurriedly within a short period. The process was hasty and the discussion was not comprehensive nor deep in spite of the nature of the proposed amendment which is effectively change the basic stance of the government in the postwar period. Abe administration must have had a special reason to hasten the process, possibly to appeal to the voters of the forthcoming House of Councilors election in July 2019.
Ⅳ.   Remaining issues and Shimada’s proposal.
     Since the discussion was not enough and the period given for the debate in
the Diet was rather short, there naturally remain many problems to be examined further and necessary remedies or policies need to be given or formulated. Some
of those problems will be taken up and taken care of, hopefully, during the remaining period until April 2020 when the amended law will be enforced. Or
one may hope that such remaining problems will be picked up and discussed
by April 2022 when the law prescribes to be reviewed.
   Without going into details of these issues, let me conclude this essay by
introducing my own idea about the fundamental and basic problem of Japan’s
way of handling the issue of foreign workers. That is, in short, the absence of
immigration law in Japan.
   Instead, Japan currently has only two pieces of laws to control and govern the issue of foreign workers, namely, the entry control law and refugee recognition law.
The former is a law which prescribes the procedural rules and has nothing to do
to the basic principle or spirit of accepting foreigners who would like to come to Japan to become citizens of the country, and the latter is a law which prescribes
rules to handle refugees for largely humanitarian viewpoint.
   The current amendment of the entry control and refugee recognition law is
practically the expansion of the government program of “Train and Work,” which
I myself have involved in writing the preliminary draft as I mentioned earlier.
The important point about this program is that it deals with foreign workers as
a temporary help and not the permanent resident. The readers of this essay may
have been noticed that I never used the word “immigration” or “immigrant” to express entering foreign people or workers. This is because the foreign worker
discussed in the process of legislation were “worker for temporary help” and
not an immigrant, namely a candidate for the permanent resident or a member of Japanese society.
   In a Diet session, prime minister Abe decisively answered to the question of Mr.
Nagatsuma that by this amendment he never means to permit “immigration.”
   What I would like to propose is that Japan must accept those who want to work
and stay long in Japan and become permanent resident as “Japanese citizens” and
the member of Japanese society.
   To accomplish this goal, there are two basic prerequisites: One is appropriate
qualifications for them to become Japanese citizens and the other is to provide them with full-fledged human rights for them.
   On the question of qualification, it is natural that any country which accepts foreign people want them to have possibly highest qualification such as skills,
abilities, academic achievements, special talents and assets etc. This is because the nation state is not a social welfare organization. For the country to accept foreign people as the members of the country, the incumbent citizens must be prepared that
they marry with them or their children so that the blood will mix and they occupy
part of the assets of the nation or inherit assets of the incumbent citizens, therefore,
they naturally wish to share such rights and opportunities as citizens of the country with the possibly highest qualified people.
   On the question of human rights, I would like to emphasize that incoming foreign people should be provided full-fledged human rights, for example, right to receive unemployment benefits, receive injury compensation, pension benefits, rights not to be discriminated in obtaining housing, no discrimination at the workshop and not for children’s education, and voting right in local elections etc. If any one of these rights are unavailable, one cannot enjoy the life of an ordinary citizen. Only right which may not be given without relevant conditions is voting right for national elections.
    It is my view that when these rights and qualification requirements are evidently written in the comprehensive law of immigration, many issues left without resolved
about introducing foreign workers will be solved and clarified. The current law of
entrance control is only a law of procedures without any philosophy or strategy
to deal with foreign workers. What Japan needs now is to have national consensus
as to what kind of country we should create and what kind of people and workers
we wish to invite from from foreign countries. To form such consensus the whole population of Japan should spend enough time to discuss and experience ample
opportunity to associate foreign people. This is perhaps much more important
task for the government should lead than a topic like amending article 9 of the
current constitution which Abe administration is sticking to.
     It is curious that why Japan does not have immigration law which many
advanced nations have. Incidentally, Ms.Min Jeong Lee, Bloomberg News, kindly informed me that Korea does not seem to have the immigration law either. I do not know why Korea does not have it and have no idea to assess the reasons why for
Korea. For Japan, there has been no need to have immigration law as such
during the early period of industrial development of the country until the mid-
20th century because Japan has been a country having excessive population
and kept sending people to such countries as the US, Brazil and Manchuria
in China. It was only after the beginning of the 1960s when Japan began to
need foreign workers to support the economic growth and more recently to supplement labor supply which has been shrinking due to a long term
population decline.
    There may be multiple reasons why Japan does not have, or not even intend to
have as prime minister stated in the Diet debate. Cultural resistance may be one
reason, which is also seen recently in many European countries where people resist acceptance of foreign immigrants or refugees. In Japan, I wonder if people after the defeat of the WWII has a psychological resistance against
grading people because of their historical trauma of war time control of foreign people by Japanese military. This is an important issue to be studied for the future.

Prime Minister Shinzo Abe and his Prospective Legacies

Ⅰ.   Introduction

  1.  Prime minister Shinzo Abe and his ambition for legacies

       Prime minister Shinzo Abe won the election for the president of Liberal Democratic
      Party. Since the next election will be 3 years later, he will continue to be the president
      of LDP until September 2021, and if nothing destructive happens, he will most likely
      continue to be prime minister until then. If he will complete the prospective three
       yeas as the prime minister, he will make a record of the longest service as prime
       minister in Japan’s constitutional history.

         For any political leader who stayed in the office for a long time, he or she would
       usually like to leave legacies which the public will remember for a long time or leave
       his or her name in history of the country. Mr. Shinzo Abe will probably not the
       exception. Let me propose some subjects for prospective legacies which Mr. Abe would
       most likely to consider, and examine whether they will become good legacies for him.

2.  Achievements of his predecessors

        Prior to considering prospective legacies for Mr. Shinzo Abe, let me remind of some
       memorable legacies which his predecessors have left.

         In the sphere of international politics, Prime minister Shigeru Yoshida signed the San
       Francisco Peace Treaty, which permitted Japan to re-enter the international world as
       an independent country, Prime minister Ichiro Hatoyama restored diplomatic relations
       between Japan and Soviet Russia, Prime minister Eisaku Sato realized the reversion of
       Okinawa, Prime minister Kakuei Tanaka restored diplomatic relations with China, and
       Prime minister Jun’ichro Koizumi agreed the joint Pyong Yang declaration with Kim
       Jon Il and successfully made some abductees return to Japan.

         In the aspect of Japan’s domestic policy or economic policy, Prime minister Kakuei
       Tanaka accomplished the reconstruction of Japanese archipelago, Prime minister
       Yasuhiro Nakasone attained privatization of the national railway system, and Prime
       minister Jun’ichiro Koizumi realized privatization of the postal system.

          How about prime minister Shinzo Abe?  Let me pick up several subjects which Mr.
        Abe seems to or may wish to consider as his legacies.


Ⅱ.   International legacies
      In the area of international achievements, there would be three major subjects:
     namely relations with the US, China and Russia.

  1.  Relations with the US
       When it comes to relations with the US. PM Abe worked hard to establish good
     personal relations with presidents Barack Obama and Donals Trump. His memorable
     speech at the joint session of  US congress in 2015 received good reputation. Mr.Abe’s
     extra-ordinary effort and its results should be appreciated.

       PM Abe worked also hard to accomplish institutional changes such as amendment of
     Japan-US security legislation in such a way that Japan can work to protect the US force
     as an allied force using weapons under the specified limited conditions, reinforcing
     Japan-US cooperation by relaxing the rigid principles of limiting weapon exports, and
     review and revision of basic security rules to expand weaponry import from the US.
     All of these actions are highly welcomed by the US. While strengthening and
     development of Japan-US relations such as these are important and meaningful.
     However, these achievements may not be “legacy” as much as improvement of
     routines.

 
  2.  Relations with China
        Since the incidence of Senkaku islands conflict in 2015, political relationship of
      Japan and China has been stalled. Only in 2018, the year of the 40th anniversary of
      Japan-China restoration of diplomatic relations, Chinese prime minister Li Keqiang
  visited Japan which led some improvements of diplomatic relations between the two
      countries.  In 2019, President Xi Jinping would reportedly visit Japan. All these 
      development have been promoted not as much by genuine improvement of relation
      ship of these countries as much as the side effect of increasing threat of Mr.Trump
      against China.

         In October 2018, prime minister Shinzo Abe visited China and had meetings with
      President Xi Jinping. Both sides agreed as a result of the meetings to enhance relation
      ship of the two countries. However, there has been hardly any substantive progress.
      For Japan, China relation will become undoubtedly important both economically and
      politically, and it is imperative for both sides to deepen mutual understanding thereby
      enhance mutual trust. However, Chinese leaders undeniably have skepticism against
      political stance of Mr. Abe, and whether of not Mr.Abe himself wishes to foster mutual
      trust in the true sense of the word remains to be seen. Under these circumstances,
      there is hardly any element in China relations to be identified as the source of Mr.
      Abe’s legacy

      3.  Relations with Russia
          Prime minister Abe has met president Vladimir Putin 25 times, thereby fostered
        close personal relations with him. Mr.Abe has a strong interest in the issue of return
        of Japan’s Northern territory, namely, four islands. He seems to have a high priority
        to make “return of the four islands” as his political legacy.
           However, Mr. Putin is a renowned tough and shrewd negotiator, and whether
        the islands would be returned is highly unpredictable. Prime minister Abe took up
        Mr. Putin’s sudden solicitation to discuss Peace Treaty without any preconditions,
        which he made in the meeting of Eastern Economic Forum held in September 2018 in
        Vladivostok. He added to discuss about Peace Treaty on the basis of the 1956 joint
        declaration of the leaders of the two countries. The joint declaration said that after
        concluding Peace Treaty, two of the four islands will be returned to Japan.

          Accepting Mr. Putin’s appeal means to deny and reverse the conventional stance
       of Japanese government which is to talk about the peace treaty only after the four
       islands were returned. Prime Minister’s response to Mr. Putin’s appeal seems to
       violate this conventional stance of Japanese government. It is curious that prime
       minister Abe seems to have responded quite positively to Mr. Putin’s appeal without
       serious discussion that this will alter the basic attitude of Japanese government up
       to now.

           If everything went well, the end result of this negotiation would likely to be only
       nominal return of two islands without Japan’s sovereignty and massive economic
       contribution from Japan to Russia. The basic question about this issue is whether
       the attempt of demanding the return of the islands this time bearing a huge cost
       will really contribute to the national interest. In case some islands were returned
       with huge cost, I wonder if such action will be worth “legacy” to be remembered
       by the public.


 
Ⅲ.   Domestic legacies
  1.  Constitutional Amendments   
        This is probably the matter that prime minister Shinzo Abe wish to accomplish
      as his legacy with the highest priority. To the extent that the determination of
      Japan’s constitution by the hands of Japanese is one of the objectives of
      establishment of Liberal Democratic Party in 1955, wish for amending the
      constitution to make it a “legacy” can be sympathized. However, I wonder
      if pursuing it hurriedly at this time would really contribute national interest.

         What Mr. Abe concretely suggests is to add the sentence of formally admitting
       the existence of the Self Defense Force leaving item 2 of article 9 as it is.
       This is probably the compromise to Komei party and also to critical views
       among the public. However, since item 2 states that Japan will not have any
       means such as relevant industry to build military, the above amendment itself
       is self-contradictory. In contrast, Mr. Shigeru Ishiba’s view which admits Self
       Defense Force or Japan’s Military in a full-fledge way by abolishing item 2 is
       more straightforward and understandable. However, this view should not be
       pursued hurriedly.

          Since contemporary history has been hardly taught at schools, understanding
       of the public is extremely shallow or absent. Asking the public to vote for
       constitutional amendment will only stir up and accelerate futile debates
       between  the right and left-wing people, and far from attaining national
       interest. If political leaders really wish to change the constitution, I think
       they should pursue seriously enrichment of contemporary history of Japan
       and the international community.

  2.   “Abenomics”

          The basic economic strategy, commonly known by the slogan of “Abenomics” is
      an important policy mix, and has attained some appreciable results. I would like to
     spend some space here to examine whether the Abenomics can be worthwhile to be
     regarded as Prime minister Shinzo Abe’s legacy.

         Since Mr. Abe’s administration has continued more than 6 years as of the beginning
     of 2019 and Abenomics has been characterizing the basic economic strategy of the
    administration throughout the 6 years, it is appropriate to examine basic features of
    Abenomics and evaluate them.

        When Mr.Abe took the office of prime minister at the end of 2012, he declared that
    the basic economic aim of his administration is to overcome the deep and chronic
    deflation of preceding period and realize powerful and continuous economic growth
    while at the same time reconstruct the fiscal structure which is ridden by huge
    government debt. To realize such objectives, the administration launched a
    comprehensive package of economic policies, widely known by “Abenomics.”

        Abenomics can be largely sub-divided in two periods: the first phase covers the
    former 3 years from 2013 to 2015, and the second covers the latter  3 years.

        The first phase is comprised of 3 arrows: Arrow 1 is monetary policy by which
    the bank of Japan conducts “extra-dimensional” monetary easing aiming at promoting
   inflation of the rate of 2% within 2years. After 6 years, we discerned that while stock
   prices and corporate profits increased sizably, inflation has not been attained, so that
   the achievement of the first arrow may be graded at best mixed.
      The second arrow is positive and dynamic fiscal policy by which not to hesitate
   massive fiscal spending whenever necessary. While the active fiscal policy has supported
   the basic stability of the economy, the fiscal spending grew to be excessive for the
   government to restore the fiscal balance which the previous administration committed
   in 2010 that the primary balance will be restored by 2020. Therefore the result of the
   second arrow would be evaluated also mixed.

     The third arrow is growth strategy by which the government plans and executes a whole
  set of structural reform policies which are deemed necessary or conducive to economic
  growth. The government issued policy package plans three times:2013, 2014 and 2015.
  These policy plans delineated hundreds of concrete policies for structural reforms. Out
  of them, policies to reform capital markets, corporate governance, agriculture have
  achieved some tangible results but many others such as labor, social security, medical
   service etc did not attain meaningful results, so that overall evaluation is “mixed.”

       The second phase was introduced with an overall catchphrase of “activating all 100
    million people.” By such a slogan, the government meant to emphasize the importance
    of mobilizing the entire working population including marginal female and old age
    people to become a part of active labor force. The government announced a new set
    of 3 arrows: namely, arrow 1: building a strong economy to achieve 60 trillion yen
    GDP by 2020, arrow 2: enriching nursing care for kids so that childrearing females
    can join the labor market, arrow 3: assisting middle aged people to get rid of the
    burden of old age caring so that they can participate to the labor market.

        Increasing labor supply is an important policy for maturing economies such as Japan
     and many “advanced” economies which are suffering from reduction labor supply
     because of population decline. For this reason, Japan’s attempt attracts of attention
     of policy makers of advanced economies. It is notable that Japan has been enjoying
     a marked increase of labor supply of child rearing age of females and old age males
     for the recent decade. This is a positive sign and result.

        In an attempt to increase labor supply, Abe administration has hastily enacted revision
     of “entrance control law for foreign people” in the sense that the government admits the
     new 2 categories of unskilled and skilled workers to stay several years as workers in
     Japan. Whether this new law will help increasing labor force effectively is yet to be seen
     because the law will become effective in April 2020.

         Abe administration has tried hard to enact a new package of laws, with a
       comprehensive name of “Work-way Reform.” This package of laws has initially been
       intended to help increase Japan’s labor productivity which is one of the lowest among
       major economies in the world. The basic reasons are in Japan (1)workers are paid by
       hours and not by outcomes and(2) reshuffling workers are almost impossible. These
       legal restrictions are detrimental for productivity increase in service economy.

          Abe administration proposed to introduce new wage legislation to allow “pay by
       outcomes”and “pecuniary compensation for dismissals.” While the process of debate
       for legislation took 5 years to be enacted in June 2018 and resulted in basic denial of
       these two proposals and,  in contrast, regulation of working hours and for compressing
       wage differentials between regular and non-regular workers has been reinforced much
       more rigorously. Naturally, the overall effect of such a legislation will mostly likely be
       negative for productivity increase in the service economy.(For further details, see
       my blog, 「Workway Reform」, Haruo Shimada, 2018.10.18/
       http://www.haruoshimada.net/blog/2018/10/workway-reform.html)

          A positive advancement has been made as an important policy item of Abenomics
       which is promotion of free trade with other nations. While, Mr. Donald Trump pulled
       the US out of TPP(Trans Pacific Partnership) on day one of his service in the White   
       House, Japanese government led by Mr.Abe worked hard with the remaining 10
       countries for nearly two years and finally at the end of 2018, TPP was basically
       agreed by 11 member countries. This will create a major economic area of free
       trade composing of 600 million people. This will certainly contribute economic growth
       of member economies and will have positive spillover effect to the rest of the world.

         Another major achievement is Japan-EU Free Trade Agreement. This will be agreed
        between Japan and EU in February 2019, which will open free trade relations in a
        large economic zone of 500 million people. This will certainly have positive effects
        to contribute economic growth of member countries as well as the rest of the world.

    In evaluating Abenomics, let me refer to the long-term performance of economic
       growth of the economy. The Japanese economy has enjoyed a continuous growth since
       December 2012 till January 2019, this marks the longest sustained growth in post-war
       period. Incidentally This period exactly matches the first and second term Abe
       administration.

          Many people say that they have not felt “economic growth” or “prosperity.” This is
       not surprising because the average growth rate is only slightly more than 1%. However,
       to the extent that the achieved growth performance is greater than the estimated
       potential economic growth, the economic growth performance of Abe administration
       is certainly appreciable.

           As has been reviewed, Abenomics has attained certain appreciable achievements.
        This has been planned and executed by Abe administration and brought about
        some positive outcomes, though not as much dramatic as one might wish, for
        Japanese economy and the public. Whether one might remember this as Mr.
        Abe’s legacy is up to people who judge.

 
  3.   Fiscal reconstruction

         Finally, let me discuss the most serious problem and challenge for Japanese economy
     and the government.  That is the issue of hugely accumulated government debt relative
     to Japan’s GDP.

 
         Currently, the government accumulated fiscal debt to GDP is 220 to 240 percent. The
     difference of 240 to 220 is up to different definition and measurement of fiscal debt. At
     any rate this is the worst debt in the world, and the worst even in Japan’s history. For
     instance, the same ratio measured shortly after the defeat of the war, namely, 1946,
     it was 205%. It is also expected that the ratio will grow sharply more in the coming
     decade when aging of population will be accelerated because the postwar baby boom
     population will grow more than age of mid-70s when medical cost for the cohort will
    grow discontinuously.

        This much of mushrooming government debt may well lead to fiscal crisis of even
    economic crash under certain conditions. In fact, many countries such as Russia,
    Argentine, Mexico etc have experienced fiscal and economic crisis in recent history.
    Japan cannot claim as an exception. Indeed, shortly after the defeat of the Pacific   
    War, Japan faced a serious crisis of most likely be trapped in default. The government
    at that time conducted a serious of radical measures such as deposit freeze, issuing new
    yen, extra-heavy asset tax as high as 90%. By these measures, the government avoided
    to be swamped in “default” but the majority of population were sacrificed to have to
    lose most of their assets.

       There can be several incidents which trigger such fiscal or economic crises such
    as acute decline of exchange rate of the currency such as recent experiences of Turkey
    and Argentine. Political struggles, natural disasters can also trigger crises. What the
    Japanese economy is currently experiencing suggests a long to medium term trigger
    which may well lead to fiscal and economic crises. That is the shrinking the difference
    between the aggregate net financial assets of households and government fiscal debt.
    The former is currently about 1300 trillion yen, and the latter about 1200 trillion yen.
    The former is gradually ceasing to grow and soon begin to decline because of
    aging of population, while the latter tends to grow more also due to aging of
    population. It seems likely that these two figures will be reversed in 10 to 15 years.

 
       When the economy is faced with this situation, the government will not be
    able to issue new government bonds because the economy will have no net financial
    asset to buy them. Under such circumstances, Japan will have to ask foreign investors
      to buy Japanese government bonds. They will not buy bonds at the current level of
      price which is jerked up by the massive purchase of Bank of Japan. If the bonds are
      purchased at much lower prices, the interest rates will rise and perhaps accelerate   
      once the momentum operates to that direction. It will make the government incapable
      of organizing the budget and private businesses obtain funds to invest, which will lead
      catastrophic collapse of the economy.

         There are 3 major measures to avoid falling into such crises:  they are (1)
       streamlining of government spending, the largest of it is to reduce social security
       spending which is not easy, (2) economic growth, we need a substantive high
       growth which is hard to realize, and (3) increasing tax, which people resist.
       While all three measures are not easy to accomplish, but the most reliable and
       effective is to increase tax.

          Prime minister Abe has been postponing increases of consumption tax twice which
       he has officially promised which resulted in the elapsed four years as much as 100
       trillion yen of government fiscal dept. He declared to increase the promised tax
       increase of 2 percent point in October 2019, but he spent as much as 4.5 trillion yen
       in counter measures to mitigate the possible negative effect of increase of tax, free
       eduction and reduced tax rates for food etc, which left only 1.1 trillion yen, out of
       expected increase of tax revenue of 5.6 trillion yen, to be used for reconstruction of
       fiscal structure.

          Tax increase is very unpopular in any countries, and this is a challenge for any
       politician. Mr.Abe seems to have a deep trauma by his experience of having increased
       consumption tax rate from 5 to 8% in April 2014 when consumption dropped sharply   
       and quarterly GDP dropped as much as 7%. This is probably the reason why Mr. Abe
       is particularly sensitive about the possible negative effect on consumption arising from
       the proposed increase of consumption tax from the ongoing 8% to 10% in October
       2019.

           Japanese economy, however, faces problems of much larger scale: one is the
       possible fiscal crisis as has been discussed above. Another is the deterioration of
       conditions of life of relatively low income people of the population. In fact, the
       living conditions of relatively low income strata of people, which roughly comprises
       about a quarter of population has been getting worse during the period of so-called
      “lost decades” from 1990 till 2010 or so. The major reason behind is the worsening
       of employment conditions. For instance, up to the beginning of the 1990s, the relative
       proportion of non-regular employees has been at most 10%, while around 2010, the
       ratio increased to nearly 40%. Their working conditions both in terms of wages and
       stability of employment are much worse than regular workers. This worsening of
       employment and working conditions have proceeded due to the prolonged stagnation
       of the economy as well as intensified international competition with low wage
       countries.

          Because of their low income and hard living conditions. they find it difficult to
       provide decent education for their children, difficult even to have children and
       further more difficult to even marry. In other words, a large proportion of Japanese
       people are now losing the capability of reproducing themselves.

          To counteract such an issue, we need a much more comprehensive social support
       system for the people. The traditional system of social security, which comprises of
       old age pension, insurance unemployment and medical care, and more recently
       adopted old age nursing is not enough to take care of this kind of social problems.
       We need to provide a much more comprehensive and seamless care for people
       from bearing babies, giving births, nursery cares, education, employment services,
       in addition to unemployment, medical and old age pensions etc. Providing this
       kind of comprehensive cares, which I would name the seamless social safety and
       security system, would need a huge fund.

          Finally, let me propose an idea for solution. This is a 50 year plan to change
       the entire social system of Japan from the young rapidly growing old system to
       the comprehensive welfare system of aged and matured country, like an average
       European welfare state. To realize such a large scale social transformation,
       consumption tax and inheritance tax can play the major role.

          To achieve such a transformation, consumption tax should be increased one
       percent from 2019 until the tax rate reaches 20%. 20% of consumption tax yields
       50 trillion tax revenue. If we continue this level of consumption tax, which is
       equivalent of many European countries, for 25 years, the total tax revenue will
       be about 1200 trillion yen which is large enough to offset Japanese accumulated
       fiscal dept.

           At the same time, it is imperative to provide the comprehensive and seamless
        social safety and security system which provides services for free to the people
        to secure their agreement and support for such a large scale transformation. If
        we spend another 25 years of 20% of consumption tax levy, the country can finance
        such a comprehensive social service system. In other words, if we continue 50years
        of 20% consumption tax regime, we can realize fiscal reconstruction and
        establishment of life-long safe and secured society. If we make use of revenue of a
        remodeled inheritance tax which covers much greater proportion of people at much
         less tax rate, hence a much greater total revenue, we can only shorten the time we
         spend to create our ideal society. (reference:  My blog 「Aging and Possible Fiscal
    Crisis: Are There Remedies? 」Haruo Shimada written on March 13, 2018 for the
   blog “Shimada Talks” /http://www.haruoshimada.net/blog/2018/03/aging-and-
         possi.html)

           This is my proposal for prime minister Shinzo Abe to pursue. This is a worthwhile
         challenge to bet his political life. This is a genuinely valuable and worthwhile legacy
         which will be remembered by Japanese population for centuries in the future.
 

Workway Reform

Ⅰ.  Introduction

 Workway reform. This is the most important element of structural reform which constitutes the growth strategy of Abenomics. The package of laws which delineate the regulations and rules to promote workway reform was legislated on June 29,2018. It took more than three years to be enacted since the act has been presented to the Diet.

   In this essay, let me explain the content of the law, importance of “work way reform” for the growth strategy of Abenomics, and why it took such a long time to have been legislated, and finally evaluate the effectiveness of the legislation to realize the workway reform in Japanese industry.


Ⅱ. Workway Reform Legislation

   The package of workway related acts was legislated in the morning of June 29 at the general assembly of the House of Councilors. Since this package has passed the   House of Commons a month ealier, May 31, this package of laws have been formally legislated and put to effect.

   The package comprises of three major components:
1. Upper limit of overtime work hours
      Over time is allowed maximum 720 hours a year. Should be less than 100 hours a month. Severe penalty is imposed if violated. The regulation becomes effective from April 2019 for large firms, and from April 2020 for SME(small and medium enterprises).
 
  2.Same wage for same work
        Unjustifiable difference of working conditions such as basic wage and allowances between regular and non-regular employees should be abolished.The regulation will be effective from April 2020 for large firms and from April 2021 for SMEs.

   3.  Introduction of hour-unrelated wages
         The new system is to allow paying wages on the basis of performance of the worker rather than the length of work hours. A limited number of professional workers can be applied this system so that they are exempted from the existing work hour regulations.

           These workers are still required to take at least 104 days off a year. The worker applied this system of exemption can leave the system at his or her will. The system will be in effect from April 2019.

    An important defect of this legislation is that the government failed to include the crucial item of “the expansion of the category of workers to be applied discretionary work hour system.” 

  Discretionary work hour system is the system by which the worker is regarded to have worked certain hours which was determined by the employer and the worker before hand, regardless of actual hours worked afterwards. For example, if the employer and the worker determined to work 10 hours before hand, and if the worker worked actually 8 hours, he will receive overtime pay of equivalent to 2 hours. This system has been planned by the government(MInistry of Labor)to use for such workers as professional workers like designers and those engaged in planning or research.

  The reason why the expansion of the coverage was not included in the legislation this time was the trouble in the process of Diet debate. While opposition parties have been strongly against the expansion on the ground that the expansion will increase long-time work. Debating against this argument, PM Abe argued at the Diet session that there exists the data which shows that workers of this category work actually shorter hours than the ordinary workers.

   The opposition party members asked the source of the data and asked Ministry of Labor which has conducted the work hour survey to explain it. It was found then that the questions asked for the two types workers were different. The question for ordinary workers was the overtime work of the day when they worked longest hours, and the question for the focused category of workers was the average hours worked for a day. Naturally, the data obtained from such different questions are not comparable so that PM Abe’s argument was accused to be non-sense.

   Having apologized for this lousy handling of the data at a meeting with opposition parties, Ministry of labor asked them to accept the rescheduling of submission of this item for a year. The opposition party representative fiercely against such a proposal, and consequently, this important item of expansion of category of workers was not included in this package of laws for legislation this time.

  Later from mid-July, Labor ministry announced to resume the whole process of examination of this item hoping to enact for the future.

  The process of workway reform legislation took more than three years, which is  extra-ordinarily long for legislation of this type of laws. Let me review briefly how it went in the process.

   As early as April 23, 2013, prime minister Shinzo Abe appealed at the joint meeting of advisory committee of Economy and Fiscal policies and the committee of Industrial Competitiveness, the highest body to determine Abenomics, to examine to formulate the new working hour system in which reward is determined not by the hours worked but by the outcome of the work. Prime minister’s proposal was followed soon by Minister of Welfare and Labor, Mr. Norihisa Tamura on May 28 that the government launch official examination for introducing “white collar exemption” in Japan’s work hour regulatory system.

   The debate on introduction of new work hour system had to cover many items, as I will review in the follows, and took a long time. And toward the final stage of long-lasting debate, in February 2018, the trouble on the nature of the data which was referred to by PM Abe as the evidence took place. This trouble wasted a few months and resulted in dropping an important item from the legislation.


Ⅲ.  Abenomics and Workway Reform

   It was emphasized by Abe administration and agreed by many experts that the workway reform is crucial as a structural reform to promote economic growth of Japan.

   Let me explain why. Japan’s workers productivity has been one of the lowest among major advanced economies of the world for the last few decades. For example, according to the survey of Japan Productivity Center for the period of 2010 to 2012, Japan’s labor productivity in service sector was only 38.4% of that of the US. While Japan’s labor productivity has been rising moderately during the recent decade, its pace has been much slower than that of US and Germany.

The main reason for this is the poor productivity of service sector. While the delay of IT application in this sector has been dragging the productivity improvement, the outdated work system particularly of hour linked pay system is another important reason.

   While average working hours of Japanese workers as a whole has been aroung 1700 hours a year, which is more or less comparable with major advanced economies of the world. But this is the average of temporary or non-regular workers who work short hours and regular workers. The regular workers working hours remain longer than 2000 hours a year. This reflects that Japanese workers, whose majority work in a broadly defined service sector, tend to work long hours with rather low productivity. And this related critically with the out-dated work hour regulation of Japan.

   In order to understand why the current work hour regulations are outdated, we need to look back Japan’s historical development of labor standard regulations.The current labor regulations have been formulated largely shortly after the defeat of the Pacific War in 1945. Under the control of the Supreme Commander of Allied Forces(SCAP), many aspects of government regulations have been overhauled and newly determined. Labor standard regulation was one of those.

   Prior to the defeat in the war, Japanese labor regulatory system was somewhat similar to the Western model, particularly, separate treatment of white-collar and blue collar workers. Since white collar workers were regarded as reservoir of the management class, they were not controlled by the labor law which regulated blue collar workers. In other words, they were “exempted” from labor regulations, just like Western counterparts.

   This separated treatment of white-collar and blue-collar has been regarded as class discrimination which is a critical element of Japan’s quasi-feudalistic social structure which was condemned by the SCAP office which earnestly advocated “democratization” of Japan. The young bureaucrats who were also critical against pre-war militaristic and quasi-feudalistic system of Japan and adoring “democracy” worked hard to plan the new labor regulation system without class discrimination.

   They drafted the new labor regulation system under the supervision of SCAP office without differentiation by worker’s status such as white and blue-collars.  The new labor standard law, which prescribes work hour regulations, thus created was rather unique compared to many major Western countries where white and blue collar workers are treated differently. The Japanese young bureaucrats believed that this uniform treatment of workers regardless of status was “democratic.”

    This new system motivated tremendously Japanese workers, particularly of those coming from low social classes. This is because they were on the same start line with those coming from higher social classes who were always treated differently and favorably. Now, only rule of the game was to work hard and win the competition. This “egalitarianism” was not limited in the labor system but extended also to many aspects of the society such as education and land ownership. Under this new system, if you work hard and attain results you can be promoted even to the top of social structure.

    Under the new “democratic” system, the majority of Japanese workers worked hard, which was a crucial element why Japanese economy has recovered quickly from the fatal destruction of the defeat of the war and grew rapidly as was often described as “Japan’s economic miracle.” Japan grew rapidly taking advantage of ample and cheap young highly motivated workers, imported technology and expanding global trade market of the time.

    However, as Japan grew much as a manufacturing exporting country, the economy has been transformed to the structure dominated increasingly by broadly defined service industries such as trading, finance, consulting, medicine, education, research, tourism, etc. Workers working in such industries are not working along the belt conveyers. Their contribution is measured not by the hours of work but rather the outcomes of their brain work.

   Now, the conventional labor regulatory system which measures worker’s achievement by the hours of work and pays accordingly, gradually became impediments to productivity growth. Since the contribution of these brain workers were not evaluated by their outcome or performance, they were discouraged rather than encouraged. Also because the system pays workers by hours, even these white-collar workers had to stay at the office and waste their time idly to meet the target of long working hours. This is one of the major the reasons why Japanese labor productivity, particularly of service sector, has lagged far behind of major economies in the world. This is the reason why I name the current labor regulatory system is “out dated.”

    Abe administration has been well aware of this institutional defect. Prime minister Abe proudly declared right after the outset of his administration at the end of 2012 that he will initiated a comprehensive package of economic policies, often called “Abenomics.”  Abenomics is comprised of three arrows: (1) unprecedented monetary easing to get rid of deflation, (2)active and dynamic fiscal policies to support the process of major economic transformation, and (2) structural reform to enhance economic power for growth.

   And reform of labor regulation is considered as the crucial element of growth strategy, as I explained earlier. White Abe administration did not have enough time to prepare for a full-fledged growth strategy in its first year, namely, the mid-2013, the administration forthrightly tackled the task of planning the growth strategy for mid-2014.  The administration tried to prepare the ground to write the deemed reform plan mobilizing reform task forces such as Industrial Competitive Committee, and Regulatory Reform Committee.

   They focused particularly on (1) monetary compensation  for unjustifiable dismissals, (2) Pay by performance among others. Proposals of these reform task forces have been encouraged by business leaders and particularly by prime minister Shinzo Abe himself, but encountered strongly by opposition parties, labor unions, and curiously by an important segment of the government, Ministry of Welfare and Labor.

   Let me review in some detail the contents and process of debate on various topics which have been relevant to realize “workway reform” of Abe administration, and finally give my personal appraisal on this subject. Topics which have been debated include(1) compenated dismissals, (2) temporary labor law reform, and (3) pay by outcomes、particularly the issue of expanding the coverage of workers who are applied the pay by outcomes.

 
Ⅳ.  Progress and Failures

1.  Compensated dismissals

    Compensated dismissal is the system by which the worker who was dismissed by unjustifiable reasons as recognized by the court can receive due compensation rather than returning to the old workshop. There are two ways of paying the compensation: paid after the court decision and paid prior to the court decision.

 
    Since Japanese legal system of dismissal is very rigid so that it is virtually almost impossible to dismiss workers, and also the dismissed workers are victimized for loss of forgone opportunity and income, the compensated dismissal system is useful for employers to make dismissal a reasonable option, and for dismissed workers who are otherwise not reasonably compensated this is helpful to reduce economic hardship.

    For these reasons, Abe administration tried to legalize the compensated dismissals as an important element of workway reform legislation. Abe administration proposed to legalize this as early as August 2014 to make Japanese legal system of dismissals somewhat comparable with major advanced nations.

  On June 16, 2015, the regulatory reform committee submitted the report in which the committee recommended to organize experts’ committee to examine for setting up rules of compensated dismissals.

   Half a year later, on January 31, 2017 the experts committee of Ministry of Walfare and Labor finally started examine the legalization. On this issue, the management side appreciates because the cost of dismissals can be more readily assessed, labor side worries because this system may help increase dismissals, and SME employers oppose because the cost of dismissals will increase because of the rule of minimum compensation.

   After repeated discussions, the experts’ committee concluded that the legalization of compensated dismissals is not necessary though the usefulness of the system itself can be admitted. About a year later, at the meeting of Industry Competitiveness Committee held on May 28, 2018, Ministry of Welfare and Labor declared  their decision to pass this up. Consequently, the legalization of compensated dismissals was not included in the growth strategy of Abenomics.

2.   Temporary labor law reform

     Abe administration has been attempting to reform the temporary labor law which was made much more rigid during the rein of Democratic Party of Japan government.  However, the attempt to reform the law has failed to be examined at the Diet session on June 20, 2014 because opposition parties attacked severely the mistake in the sentence of the bill for amendment submitted by the government.The government was obliged to resubmit it a year later.

     The revised bill for the reform of the law was picked up in the Diet discussion for examination in the main assembly of the House of Commons on May 12.2015.This was regarded as an important agendum side by side with labor standard law revision in the comprehensive reform of labor legislation. The government viewed the reform as necessary element of growth strategy. However, opposition parties as represented by Democratic Party of Japan opposed the reform as worsening of the rule of employment.
   On September 11, 2015, the bill for the reform of the law passed the examination at the main assembly of the House of Commons and consequently enacted.
   The main points of the reform are:
1.  The employer can extend the period of employing the dispatched worker, whih
      was limited up to 3years.
2.  For the dispatched worker to continue working under the same employer, he or
     she has to shift to other sections
3.  Worker dispatching companies need to be permitted by the government.
    This reform makes it possible for employers to keep employing dispatched workers as long as they want, which helps increase the flexible adjustment fo workforce.
 
  3.  Pay by outcomes

   Pay by outcome is the issue which has been debated harshly between those who oppose and support. In May 14, when PM Abe was expected to join the meeting to focus on this subject, the meeting was cancelled because of increasingly tense confrontation between Ministry of Labor and Industry Competitive Committee, and the meeting was postponed.

   On May 28, 2014 Industry Competitive Committee decided to relax the work hour regulation of 40 hours a week. Prime minister Shinzo Abe stated his determination to introduce “white collar exemption.” Expansion of the types of workers broadly, who are applied “Pay by Outcome,” will be conducive to enhance productivity.
However, there are those who want to limit the scope only within a very small numbers within Ministry of Welfare and Labor.

  On July 7, 2014, Employment policy Committee of Ministry of Labor started discussion of employment reform centering around the new pay by outcome system.
On Sept. 11, Employment Policy Committee presented main points for revision of work hour reform including “white collar exemption.” Management side demands the expansion of the scope of workers to be applied the new system, while the labor unions oppose worrying about likely increases of forced overwork.

  On Jan. 15, 2017, Ministry of Labor presented a new plan for pay by outcomes  at the sub-committee of Labor Policy Commission. The ministry proposes the annual income level of at least 10.75 million yen, and suggested 5 jobs as researchers as appropriate jobs.

    On Feb 13, 2017, Ministry of Welfare and Labor officially determined to introduce “white collar exemption’ at the Labor Policy Commission. The ministry meant to submit related bills to the ordinary session of the Diet and intends to put into effect by April 2016.  This system is expected to be applied to professional workers whose annual income is at least 10.75million a year.

   On April 2017, Ministry of Welfare and Labor announced to expand the types of workers who can be applied “discretionary hour work” to include sales workers who propose new plans. It is expected that financial and IT businesses will hire such workers, and they are expected to total more than several hundreds of thousands.


Ⅴ.  Workway Reform Execution Plan

1. Nine areas of workway reform
    On August 6. upon initiation of the third Abe cabinet, the discussion on the workway reform, which Abe administration regards as the most crucial challenge, will start.

    On September 15, Mr. Toshimitsu Motegi, LDP Chairperson of Policy Research
Committee, pointed to the five major items for workway reform.
   1. Improvement of work conditions for non-regular employees
   2. Shortening long working hours,
   3.  Preparing for flexible workways,
        eg: shifting from “spouse tax deduction” to “husband and wife tax deduction
   4. Promotion of obtaining desired kind of jobs
   5.  Accepting more foreign workers.

     On September 27, PM Abe stated at the first meeting of Workway Reform Realization Committee to examine nine items.

    On March 28, 2017, at the Realization Committede ,the government compiled the execution plan consisting of 9 items.
   1.  Improvement of non-regular employees,  introduction of same pay for same
        work
   2.   Raising wages: raise the minimum wage by 3% annually to reach 1000yen
   3.   Correcting long working hours, Upper limit for overtime with penalties, and
          introduction of interval system
   4.   Assisting changing  and reobtaining jobs, financial and information assistance
   5.    Flexible workways: Tele-work, dual job holding, and side-job.
   6.    Encouraging female and young workers, re-learning of middle aged workers
    7.   Promoting woking of aged workers: Extending retirement age and assistance
    8.   Child rearing, nursing of the aged,:  Improve conditions for care worker
    9.   Accepting more foreign workers, involving all  relevant ministries.

  2.  Non-hour linked pay system
 
      On July 8, 2017, Rengo(Federation of labor unions) decided to present requests for improvement to the government on the bill for labor standard law reform. Rengo means to ask improvements on items on health protection.

      On July 10, the government responded to revise “white collar exemption"prescription on the basis of request from Rengo including imposing 104 days off  a year for employers, setting upper limit of overtime, and labor management consultation on determining continuous work offs.

      On July 14, Chairperson Mr. Rikio Kohzu of Rengo met prime minister Shinzo
  Abe and requested for improvement of the reform plan. PM Abe promised to 
  accept Rengo’s request.
      On July 22, many member unions of Rengo strongly criticized Mr. Kohzu for
  him to have met prime minister Abe by showing collaborative attitude.
      On July 28, 2017, Rengo decided to withdraw their initial acceptance of
  the reform plan of Labor Standard Law. The leaders of Rengo judged that the
  opposition of member unions were so strong that the entire organization may
  have to risk the collapsing of the organization.
      Witnessing the Rengo’s decision not to affirm the reform plan of labor standard
  law made business side worry about the possible delay of legislation and the likely
  change of the content in favor of strengthening work hour regulations.


Ⅵ.  Appraisals

1.  Much differed outcome relative to the initial intent

      The final result of workway reform, particularly its legislative form, is much different from what Abe administration wanted to achieve. As discussed above,the main intent of Abe administration was to utilize the workway reform as an important device to promote Japan’s economic growth as an integral components of its “growth strategy.”
    Japan’s economic growth has been slowing down in recent decades particularly since 1990s. While there have been macro economic shock such as the collapse of the “bubble” which triggered the acute slowdown of the economy. However, Japanese economy has been suffering from long term structural impediments: one is the declining trend of population and the other is a low productivity of service industry. The latter is serious defect in the era of “service economy” of advanced nations.

    The strategic intent of workway reform has been focusing on this issue. In Japan as a service economy, in which 70to 80% of workers work in a broadly defined service sector, workers contribution to the industry is not necessarity a coefficient of hours worked like manufacturing sector but rather the outcome of creative work.
Recognizing this trend, Abe administration attempted to reform the work system in which workers can work more efficiently to utilize their talents rather than bound by work hours.

    With strong advice of business related members of Industry Competitiveness Committee of Abe administration, primie minister Shinzo Abe himself took initiative to reform the conventional regulations of workways. Main objectives have been basically two:
  (1) Introduce a new workway in which wages are paid on the basis of outcome rather than hours worked. This is often refered to as “white collar exemption” borrowing the expression of Western countries where the white collar workers who are regarded as reservoir of management are exempted from ordinary labor regulation imposed on blue collar workers.

  (2) Compensated dismissals.  This is an important breakthrough in the rigid legal regulations against dismissals in Japan. With introduction of this system, employers can have a greater leeway to dismiss workers and increase flexibility of employment, and workers can have some compensation to minimize the loss of income due to dismissals.
  This has been and still is strongly demanded by employers of foreign
companies investing in Japan because they need flexible organization of their workforce partly because their time-horizon is not long as the local Japanese companies.

   The result of the campaign of workway reform as seen in the final product of the
workway legislation achieved at the end of July 2018 reveals three major points.
(1)  Reform to “pay by outcome” or “white collar exemption” was only very partially admitted. The new labor standard law permits highly professional workers whose salary is more than 1075yen a year can be applied the system of pay by outcome. The number of eligible workers in current Japan may be around 10000.
This is much too much smaller than what Japanese economy needs and can supply to increase the efficiency of large service sector. In my view, the law should have permitted at least a few millions of workers in this category.

    In fact, prime minister Shinzo Abe attempted to introduce this system during his first administration in 2006 but failed by strong oppositions from opposition parties  labor unions and relevant government branch. The accomplishment this time may be congratulated in view of this experience. However, since the coverage of eligible workers is so small that the new system will have only negligible effect to contribute to economic growth, if any.

  (2)  Reform for dispatched worker law is effective in making more flexible use of temporary workers and hence contribute somewhat to increase the efficiency of business. The original law was invented to make use of new types of workers who wish to work but not necessarily full-time in 1985. However, under the DPJ administration in 2009, it was revised much not to allow prolonged employment of dispatched workers as a temporary status. The revision this time is useful both for employers and those workers who want to work temporarily. This amendment will have some modest effect on increasing industrial flexibility and efficiency.

  (3)  Reform for compensated dismissals has been rejected almost outright in the process of examination without much meaningful discussion by strong opposition of labor unions, small firm employers and opportunistic Ministry of Welfare and Labor.
  (4)  In contrast, a major move has been achieved in fortifying the regulation system of working hours. One is imposing rigorous upper limit on overtime.
Over time is allowed maximum 720 hours a year. Should be less than 100 hours
a month. Severe penalty is imposed if violated. And the other is same wage for same work, which means unjustifiable difference of working conditions between regular and non-regular employees should be abolished.

   Although protecting fair labor conditions and workers’ health is undoubtedly the most important pillar of labor regulation and labor policies, the fortified regulations on working hours and working conditions as described above will increase the burden on Japanese business corporations and possibly their effort to increase efficiency.

   We may compare the workway reform legislation of this time with the comprehensive reform covering both labor and welfare regulations and corporate taxes which were conducted in 2003 in Germany, often referred to as “Shoroeder Reform or Agenda 2010.” This reform has been regarded as having triggered the dramatic economic recovery of German economy in the period of Merkel administration.

   The workway reform legislation by Abe administration could be much better if eligible workers were much more widely permitted to work under pay by outcome and compensated dismissals were legally permitted, and at the same time workers basic working conditions are more severely supervised and protected as done in the legislation this time, both for the economy and for the workers.

2.  Problems of Ministry of Welfare and Labor

   In the process of examinations, discussions and debate for the campaign to legislate workway reform, I am puzzled by two conspicuous problems: one is the time spent to arrive at the conclusion and the other is the lousy handling of the date prepared for official debate by Ministry of Welfare and Labor.

   The process of this campaign has taken more than four years counting from the initial proposition of prime minister Shinzo Abe to alter the labor regulation system, particularly work hour regulations, in the early 2014 until the enactment of law at the end of June 2018.

    As the reader of this essay may well be aware as reading of my chronological depiction of the process that the meetings of relevant committees take a long time between them. Much of this time management is up to the government office in charge, namely, largely Ministry of Labor. I myself has had much experience in this kind of work, I am not sure why they wasted that much time to reach the conclusion.

   Another, and more serious issue is that Ministry of Welfare and Labor committed a serious mistake by giving prime minister “wrong data” which led prime minister Shinzo Abe lose his credential in debate, and consequently the most important item to be included in the final legislation was scrapped.

    The reason why the expansion of the coverage was not included in the legislation this time was the trouble in the process of Diet debate. While opposition parties have strongly opposed against the expansion of the eligibility of the workers on the ground that the expansion will increase long-time work. Debating against this argument, PM Abe argued at the Diet session that there exists the data which shows that workers of potential eligibility work actually shorter hours than the ordinary workers.  The opposition party members asked the source of the data.  Ministry of Labor which has conducted the work hour survey found then that the questions asked for the two types workers were different so that working hours were not comparable, and consequently PM Abe’s argument was accused to be non-sense.

   This is a serious issue in the sense that Ministry of Labor not only abused but even demised the supreme leader of the government. This is the most primitive mistake that even college students would not commit to write a report. The ministry later reported that they found 117 cases of mistakes. The fact that this kind of lousy work is done in this most critical phase of the debate would make us even skeptical of some kind mal-intent at the side of the government branch in charge.  It is curious why reasonable punishment has not been given to the ministry on this serious mis-conduct.

   The strategic intent of Abe administration is clear, namely, make Japanese economy efficient, particularly, labor market. The actions that the ministry has taken in the process seem not quite supporting or even following it. We know that Ministry of Welfare and Labor must secure the understanding and support from both management and labor sides, unlike many ministries which only need to satisfy their clients. Nevertheless, the attitude of Ministry of Welfare and Labor seems curious and questionable under the given strategic intent of Abe administration.

   The opposition party members asked the source of the data and asked Ministry of Labor which has conducted the work hour survey to explain it. It was found then that the questions asked for the two types workers were different. The question for ordinary workers was the overtime work of the day when they worked longest hours, and the question for the focused category of wokers was the average hours worked for a day. Naturally, the data obtained from such different questions are not comparable so that PM Abe’s argument was accused to be non-sense.

   2.   Too much time elapsing and Lousy job of Ministry of Welfare and Labor
       ーintentional disturbance?

   3.  Productivity and Worker Protection
      ーLimited progress for flexibility
      ーIncreased control and inspection of working conditions
      ーProductivity increase by legal reform questioned
      ーLittle or no contribution for economic growth
  ーProductivity increase is up to corporate and individual effort
 
 

The Third Abe Administration and its Tasks

Ⅰ.   Abe’s victory in LDP presidential election

   On September 21, 2018, prime minister Shinzo Abe won the LDP presidential election and obtained the position of the president of Liberal Democratic Party, in principle, for another 3 years until September 2021.

   The only contender who competed the election against Mr. Abe was Mr.Shigeru Ishiba, who served as Secretary General of Abe administration for its first term since December 2012.

   The result of the election this time was that Mr. Abe obtained 69% of all the votes. The election was conducted by voting of the National Diet members and of local members of LDP who are not National Diet members.  Mr.Abe took 329 of DM and 224 of LM totaling 553, while Mr.Ishiba took 73 of DM and 181of LM totaling 254.

    During the election campaign of two weeks, prime minister Abe indicated that he would like to obtain two third of the votes of local members so that he will win the election by a land slide victory, which would highten his political cohesive force to enhance his leadership. The result of this election that Mr. Ishiba obtained as much as 45% of local members votes has been unexpected by Mr. Abe himself and his team members.

    The fact that nearly a half of local LDP members voted for Mr.Ishiba implies the depth of distrust against Mr. Abe. Since Mr. Abe, as prime minister, has been utilizing the current political system which strengthen institutional power of the prime minister and the party system of LDP to enhance his power for the Diet members skillfully, it is not surprising that he gained more than 80% of the votes of DM. In contrast he obtained only 55% of LM votes means he was not secured the support of the members who are less bound directly by the power of the prime minister.

   Now that Mr. Abe won the LDP presidential election this time, he will in principle keep the office for another 3 years. If he will complete the 3 year term without losing the office by any accidental happenings, he would experience the longest rein as a prime minister in the history of Japanese constitutional politics.

   This has been made possible by the change of rule of the LDP as to the  limit of the length of president from 2 consecutive terms to 3 terms which extends the limit up to 9 years. The idea to change the rule has been around since the beginning of 2016 and accepted increasingly widely within LDP, and officially determined at the LDP convention in March 2017.

   Let us remind ourselves a bit about Mr.Ishiba’s rivarlry against Mr. Abe. When Mr.Abe first attempted to organize his administration in December 2012, he had to win the presidential election at September 2012. There, Mr. Ishiba gained more votes from local members than Mr. Abe although Mr.Abe won the election by the aggregate votes including the Diet members.

    Acknowledging Mr.Ishiba’s achievement in the election, Mr.Abe assigned him the Secretary General, the most important job next to president. Mr. Ishiba is known to be an expert of defense issue. But when Mr. Abe suggested him to take a job of defense minister in a later occasion of cabinet formation, Mr.Ishiba rejected it and accepted to become minister of local development. And in the occasion of the next cabinet formation, Mr. Ishiba shied away from any post of Abe cabinet and became an outsider, meaning that he had free voice against Mr.Abe if he wishes, And Mr. Ishiba organized his political faction in 2015 shortly after Mr. Abe won the  presidential election the second time.


Ⅱ.   Debate between Abe and Ishiba

   During the two week campaign period, Mr.Abe and Mr.Ishiba had opportunities to debate on many issues at various occasions including TV show, public seminar,  media interviews and a few events at the cite of local cities.

   Throughout such exchanges, the basic views of Mr.Abe and Mr. Ishiba on various policy issues became more or less clear. Let me summarize major points of their  assertions.

    Mr. Abe emphasized repeatedly and strongly the economic achievements of Abenomics, namely, his administration has successfully maintained a persistent and increasingly empowered economic growth, if not at a high rate, powerful increase of employment as reflected in a historic high rate of job offer seeker ratio,  low rate of unemployment, voluminous increase of tax revenues, and much higher stock prices compared to the previous DPJ administration.

    He also emphasized that he means to ask the Diet to pass the constitutional  amendment during his term as a prime minister. His principal idea of constitutional revision is to write the name of self defense force as an additional item next to the second item of ariticle 9. The second item writes that Japan abandons to have any means to have military. Putting the name of self defense force, which is a de facto large and powerful military, next to item 2 looks self contradictory.

   Mr. Abe strongly wishes to formally and legally admit the name of self defense force, and worries the danger of losing this opportunity of revising the constitution by trying to delete the item 2 which is opposed strongly not only by opposition parties but also by Komei party which is LDP7s political ally.

   In contrast, Mr. Ishiba emphasized the big potential of economic growth of  local regions. He also emphasized big growth potentials of small and medium-size enterprises. He made such assertions obviously to make contrast with Abenomics which, he describes, depends upon so-called trickle down view.
   That is, charging policy emphasis on the relatively powerful sector such as large firms will eventually be diffused to relatively weak segments such as far away regions and SMEs.  Criticizing Mr.Abe’s claim of increasingly powerful economic growth,  Mr. Ishida said the better performance is largely due to the recent conspicuous improvement  of the global economy.

 Mr.Abe emphasized the importance and urgency of social security reform, which he promises to complete within three years. Although Mr. Abe and Mr. Ishiba do not differ much in terms policy goals, Mr. Ishiba tends to emphasize more of the importance of fiscal reconstruction. To achieve the goal, Mr. Ishiba proposes to organize more integrated committees assembling more experts and reps. relating to such major national strategies.

   Mr. Ishiba saids constitutional amendment is not the issue we should accomplish hurriedly. There are more important things to do before actually proposing the  amendment to the constitution, that is more discussion and foster more understanding among people.

   If amend the constitutional sentences, particularly of article 9, Mr. Ishiba proposes to drop the item 2 of article 9. Item 2 states that Japan does not have any weapons or means to help wage the war, which is obviously violated by the reality. He argues that the constitution has to be consistent. Mr. Abe criticizes such attitude of Mr. Ishiba who is as much like scholars who do not worry about the reality.

   Both Mr. Abe and Mr. Ishiba are not really much different in terms of eventual goals they are aiming at such as economic growth and self reliant national security. Mr. Ishiba saids while final goals may be common there can be many different ways and processes to reach the goal. And LDP should be open, if it is democratic, to such diverse arguments to stimulate discussions.

   Mr. Ishiba does not go into details of economic policies and achievements perhaps because this is the area where Mr. Abe is advantageous. Perhaps because of this, the detailed discussions on concrete policy measures have not been heard in the process of the election campaign, which is rather disappointing. Nevetheless, the fact that Mr. Ishiba, who has no official role to play either in the party or the government, gained as much as 45% of votes of LDP local members is impressive, which reflects a deep rooted distrust of people on Mr. Abe.

   In organizing his cabinet at the beginning of October, Mr. Abe gave no official position either in his cabinet or in the headquarter of the party to Mr. Ishiba, Mr.Ishiba perhaps secured a breachhead for the forthcoming presidential election three years ahead, if not sooner, by running against Mr.Abe this time and obtained a fair amount of support from the party members. However, this does not mean that the Mr.Ishiba’s advantage for the next election is guaranteed. There will be many contenders such as Mr.Fumio Kishida, Ms. Seiko Noda or even Mr. Shinjiro Koizumi.


Ⅲ.   Legacies and Desired Policies for Abe Administration

 
  Abe administration will have exceeded in terms of the length of its duration all of the previous administrations in the constitutional history of Japanese politics if it completes the forthcoming three year of its rein, it has exceeded already the well remembered administrations in the postwar period such as those of Shigeru Yoshida, Ichiro Hatoyama ,Nobusuke KIshi, Eisaku Sato, Kakuei Tanaka, Yasuhiro Nakasone, Jun-ichro Koizumi in terms of the length of their reins.
 
    The Abe administration which has the determined destiny, in principle, of final three years. will be faced two major issues. One is that it is a sort of “lame duck” administration. The political power whose final day is determined will lose attention of people. People will be interested in the question of who will be the next rather than the ending incombent. To fight against such a natural trend of losing attention, the “lame duck” leader tends to work hard to leave legacies which people will remember.

  In the aspect of international politics, Mr. Yoshida left the legacy of San Francisco Peace Treaty, Mr. Hatoyama left Japan-Soviet Union recovery of diplomatic relations, Mr.Sato left returning of Okinawa, Mr. Tanaka left Japan-China recovery of diplomatic relations, and Mr. Koizumi left Japan North Korea Pyonyang Declaration. What about Mr. Abe?

   Mr. Kosuke Takahashi comments(Web Ronza Sep 21,, 2018) that establishment of National Security Council, determination of National Security Strategy and New Defense Fundamentals, relaxation of Three Principles of Weapon Export under Mr. Abe’s initiative of “positive peace seeking.” However, these achievements are steps to build closer ties with the US in promoting mutual defense cooperation and appear not as major achievements to be remembered as “legacy”.

   In the aspect of economic policies, Tanaka administration is remembered with the legacy of “reconstruction of Japanese archipelago,” Nakasone administration is with “privatization of National Railways” and Koizumi administration with “Privatization of Postal System.” Abe administration is known to have been advocating “Abenomics.” But what has been the outcome of Abenomics?

    Its major goals were to shift people’s mindset from “deflationary” to “inflationary” with the target of achieving 2 % inflation annually. The outcome so  far is almost none. The other is  to bring the economy on the track of powerful growth.  The outcome so far is very modest which has been helped largely by the powerful recovery of the global economy rather than the power of Abenomics, as Mr. Ishiba criticizes.

   Another objective which was announed at the initiation of Abenomics was to reconstruct fiscal balance. As is well known, Japan’s government debt as measured by the accumulated debt relative to GDP is the worst among major countries of the world and even worse compared to the ratio immediately after the defeat of the Pacific War. Japan has made an  international commitment in 2010 that the government will attain fiscal balance by 2020.

  The outcome so far is that during the Abe administration the achievement has been much worse than Japan’s initial commitment. In fact, the government has been organizing increasingly larger amount of budgets, add extra-ordinary budgets, and prime minister Abe himself has repeatedly postponed the increase of consumption tax for various reasons.
  Mr.Abe has been quite successful in winning elections. He kept winning national elections five times consecutively and won LDP presidential election three times consecutively including the most recent one. To achieve such political goals, he makes skillful use of political organizations such as political factions. Organizing various factions to support Mr.Abe, he has to make many compromises. Consequently, he cannot conduct a decisive action as has been demonstrated by Mr. Koizumi who dared to fight against the postal system, the  most powerful supportive organization LDP.

   The list of members announced in the afternoon of Oct 2, 2018 was not impressive at all. It is described as ”inventory clearance” re-organization of the cabinet. Prime  minister Abe nominated figures from the factions who have helped him winning the LDP election. It is evident that he is interested in keeping support of factions and interest groups.

   Since the forthcoming three years is the final opportunity for his challenge as a political leader. He has an outstanding political capital among all the politicians. If he would bet his political capital to achieve the most important mission of statesman, namely, to leave the best country he can think of for the next generations, he is now in the best position and in the opportunity to achieve it. By doing so, he will be able to leave a great legacy for the country which will be remembered for years.

   Let me finally suggest a concrete plan for him to consider to achieve such a goal.


Ⅳ.   Aging and Possible Fiscal Crisis

   Japan is suffering from a serious issue of mushrooming government accumulated dept. Using a broad definition of the fiscal debt, it is 240 percent of GDP, which is by far the worst among major economies of the world, even worse than Greece, and worse than the serious debt left for Japan after the defeat of the WWII.

   It is interesting to realize that at the beginning of 1990s, Japan’s fiscal performance is much better. In fact, Japan’s government debt is better than the US and many of European economies then both annually and as accumulated amount relative to GDP. But Japan’s debt grew by far worse than these countries by the end of the 1990s. It has been getting worse and worse since then until now and for the foreseeable future. What are the reasons behind?

   The reason is as follows. The rapid aging which accelerated during this period since 1990s, which coincides with the very slow growth period of Japanese economy often cited as “the lost two decades.” The aging of population increases social security payment. However, since wages did not rise or even lowered during this period, social security contribution which relates to wages did not rise. Consequently, social security account began to suffer from a large deficit. Since it has been difficult to increase social security contribution by raising the rate of contribution, the government was forced to issue bonds to finance the deficit. Therefore, the government bond mushroomed during this period.

   With the current extra-ordinary high level of government debt has many potentially serious problems for Japanese population for the future. With this heavy fiscal burden on the economy, policies to empower Japanese economy through structural reform will be seriously hampered. Also, this huge debt means a huge differential among generations on their net social account, namely, the difference between the net life-long income and payment for individuals as has been formulated by professor Lawrence Kotlikov and others.  These are long-term structural issues.

   We need to be careful about the possibility of acute and could be fatal problem of fiscal collapse which will lead to economic collapse to damage life and activities of population seriously. With the current high fiscal deficit which is more than twice the size of GDP, there is an increasing danger that any fiscal developments or shocks may trigger the collapse of finance and hence the economy. Several triggers can be thought of. Within 10 to 15 years, it is likely that the aggregate government debt will surpass the aggregate net financial asset(saving) of population, which means that Japan will have no net asset to buy new JGB. Japan will have to ask foreign investors to buy them. They will not buy JGB at the current price which is lifted artificially by BOJ’s massive purchase. Thus, the price of JGB will drop, which will drive the interest rate high. High interest rate will make the government fiscal policy and private corporate finance difficult, and could lead to economic collapse.

    There are many risks which trigger fiscal and economic collapse such as a sharp drop of exchange rate of the yen, large scale attacks by speculators, natural disasters, military conflict, confusion of politics etc.

   To protect the life and activities of people, the critical task of the government to eliminate problems or sources of problems which may trigger such a catastrophe. The most important is to restore fiscal healthy balance. There are three major ways to achieve it: They are (1) reduction of government spending by streamlining government expenditure structure, (2) enhancing economic growth, and (3) increasing tax revenues.

   Almost all the administrations in the past have tried to accomplish all these objective, but they have not been successful to restore fiscal balance. Abe administration too has aimed at attaining the healthy fiscal balance. However, on the issue of reducing government spending, it rather increased spending in order to stimulate the economy, on the issue of enhancing economic growth, it deployed a policy package of “Abenomics” but the growth performance has been only modest and much less than the level to contribute to fiscal reconstruction. On the issue of tax increase, prime minister Abe shied away to increase consumption tax two times and lost opportunities from 2014 till 2019.


Ⅴ.    Shimada’s proposal to PM Abe.

    It is my view that prime minister Shinzo Abe should now challenge betting the rest of his political career to re-construct the country in which the next generations can live much more safely being protected from the dangers of fiscal and economic collapse and from the unjustifiable social and economic differentials.

   For prime minister Abe, I would like to propose for his reference a comprehensive plan to achieve such a goal. This is a long-term and fundamental reform of tax and social security systems and services.

    On the side of tax, I would like to suggest that the government presents a long term increase of consumption tax until the tax level reaches 20%, which is the level many European countries are practicing. Every year, the tax will be increased by at most 1% so that to minimize shocks to tax payers. Since the long term plan is shown to people, they will adjust their life plan accordingly.

   Also, inheritance tax is reformed to expand broadly its tax base by reducing tax rate structure from progressive to more or less equal so that the total revenue will be increased. This should be helpful to enrich the fund for reform of Japan.

   On the side of reform of social security system and services, the system will be fundamentally reformed to expand its services from the conventional set of pensions, health insurance, unemployment benefits, poverty support, and more recently added old age nursing care insurance to birth assistance, pre-school educational assistance, job training, basic support of working conditions, old age recurrent education and training etc.

    This sort of comprehensive social services are becoming necessary to assist the life of current population whose large proportion is facing a hardship of family maintenance and reproduction.  This kind of comprehensive social security and safety net of services is necessary in order for people to accept a long term continuous increase of tax burdens. Constructing such a system and providing such comprehensive services is highly costly.

     In order to construct a country in which the worries of fiscal and economic collapse and unjustifiable inter-generational differentials of life-long net income are wiped out and people enjoy comprehensive services to support their lives, it will take some half a century by continuing the consumption tax system of the level of 20%.

    Prime minister Shinzo Abe has to realize that the nature of the crucial issues that Japanese population is now faced after having enjoyed the two decades of postwar rapid growth and has been annoyed by the “lost two decades,” is something like this. This is a major challenge for Mr. Abe, but this is the challenge, perhaps, only such an outstanding political leader as Mr. Abe who will lead the country for the longest time in Japan’s political history can tackle. And it is worth challenging for him if he wants to leave the legacy of historic achievement.

Abenomics: A Critical Assessment of its 5 Years

Ⅰ.   Introduction

   Just about five years have passed since the economic policy package of Abe administration of Japanese government, often called “Abenomics” has been launched. Abe administration has been enjoying the one of the longest rein of Japanese history of politics. It started in December 2012 and has kept its operation for 5 years and 4 months by March 2018.

   The administration, soon after its formation, announced that it will deploy comprehensive economic policy package consisting symbolically by three arrows, namely, monetary policy, fiscal policy and growth strategy. The main objective of this package was to salvage Japanese economy from the long lasting period of deflation which has been continuing since the beginning of 1990s. The first arrow, the monetary policy, was the most symbolic to show this strategic intent of the administration. The main content of the monetary policy was disclosed dramatically in the first press conference of Mr. Haruhiko Kuroda, the newly appointed governor of Bank of Japan, which was held in April 2013. If we interpret this event as the initiation of Abenomics, just about 5 years has passed from its launch.

   In this essay, I would like to review the main contents and outcomes of Abenomics during these five years. I will first review the first stage of Abenomics from 2013 to 2015 consisting of the three arrows and then review the second stage of Abenomics from 2016 till now(March 2018), and evaluate the performance and outcomes of Abenomics for the five years.


Ⅱ.   Abenomics: the First Stage

    Shortly after the onset of Abe Administration, we, the members of Shimada-juku, a study forum of business leaders, had a luck of having been able to invite Mr. Yoshihide Suga, Minister of the Chamber, to our meeting. His following message was very impressive: he said that Japanese economy has suffered seriously by so-called “the lost decades” (20years of the1990s and 2000s)of extremely low or none growth and persistent deflation. He regretted that during this period political leaders really did not take initiative to fight the deflation. They  simply delegated their authority of monetary policy to Bank of Japan and fiscal policy to Ministry of Finance. Now, this is the time for political leaders to take initiatives to fight against deflation, and this is the prime objective of Abe administration.   

   To achieve this goal, Abe administration formulated a comprehensive economic policy package comprising of three major policies, namely, arrow 1: “extra-ordinary dimensional monetary policy, arrow 2: active and dynamic fiscal policy, and arrow 3: growth strategy pursued by structural reforms of the economy.

   Now, let me explain briefly what each of these three policies means and attempts to accomplish.

Arrow 1:  “Extra-ordinary dimensional” monetary policy

 Mr. Haruhiko Kuroda, the newly appointed governor of BoJ(Bank of Japan) declared at the first major press conference in April 2013 that within 2 years, BoJ will attain the normal pace of 2% inflation, and to achieve this goal, BoJ will double the supply of the base money for the coming 2 years, namely, the stock of the base money will be increased from the level of about 130 trillion yen in spring 2013 to about 270 trillion yen by the end of 2015.

  By this extra-ordinary monetary easing, he meant to brew up inflationary expectations among people to stimulate investment, side by side with the decline of exchange rate of the yen expecting the consequent increase of export which will help increase economic growth rate.

   Responding Mr.Kuroda’s declaration, major speculators sold the future yen expecting the decline of the exchange rate which indeed accelerated the decline of the yen. Within a few months, the yen rate declined as much as 20%. This stimulated the expectation of increase of sales and thus profits of Japanese export oriented companies. Major investors and speculators of the world invested huge amount of funds into stocks of such companies which drove up stock prices of Japanese market acutely. 

   Within half a year, average stock prices of Tokyo exchange increased by 80%. The stock prices have fluctuated since then. However, they followed basically the upward trend to reach more than 20000 yen recently from the level of 8000 yen at the end of 2012. Side by side with this trend, corporate profits increased markedly, which seemed to have given a confidence for business leaders and momentum for Japanese economy for a long awaited recovery. This is an appreciable success of the first arrow of Abenomics.

   Aside from this successful result, the basic intent of the first arrow has not been accomplished. The basic intent of the first arrow has been to promote inflationary expectations on the part of business and the public by attaining on-going pace of 2% level inflation, and thus expect them to consume and invest more which will lead to higher economic growth.  The prices seem to have increased somewhat during the first half of 2013, but then the movement became only sluggish and from the mid 2014 price levels began to decline, suspectedly reflecting the sharp decline of crude oil prices, and did not show upward movements  until 2016, making the inflation target of 2% look practically hopeless. Since 2017, prices began to show some upward changes, perhaps reflecting general upturn of global business trend. Although BoJ’s target seems to have been disturbed by external factors. it is undeniable so far that the most important aim of the first arrow has not been achieved so far.

   Another serious issue is the exit strategy. Due to repeated purchases by BoJ of JGB under BoJ’s extra-ordinary, the outstanding accumulated government debt in the form of JGB is  almost as equivalent of Japan’s GDP. How to exit from this situation is a very large and pressing issue for the management of Japan’s economy in the medium and long term horizon. The US has promoted extra-ordinary easing of money supply up to 2012, it is still carefully promoting the exit from the aggravated balance sheet of FRB even though the  accumulated debt was as much as 20% of US GDP at its peak time. The outstanding monetary base is just about the size of Japan’s GDP. It may well take as long as even  40 to 50 years to finally normalize the expanded BS of BoJ. The course to reach the  goal will not necessarily be smooth. This is much too much bigger cost for the policy of  trying to attain 2% pace of inflation which, though, has not been attained. Viewed in this way, the first arrow of Abenomics attained only a “mixed success.”

2. Arrow  2:   Active and dynamic fiscal policy

   Abe government kept large scale fiscal spending both as usual annual budget as well as extra-ordinary budget with special purposes as helping the recovery of flood hit North-east Japan or mitigating the negative reaction of increasing consumption tax rate etc. The large scale and “dynamic” fiscal spending has had some positive effect of supporting the stable performance of the economy during rampant economic changes stemming from external forces. However, it is becoming increasingly evident that achieving the target to attain normal fiscal balance is difficult, one of the primary objectives of Abenomics side by side with terminating deflation. Japanese government has committed as an international promise since 2008, at the time of the administration of Mr. Naoto Kan, to achieve fiscal balance by 2020. However, as even recent government reports predict, this objective will almost certainly not be achieved.

   More recently, there emerges within the Abe government new arguments that attaining fiscal balance is not an important policy objective, or the current objective as defined by the “primary balance” might be changed by a new index of the government debt relative to GDP, which can be improved with economic growth. This seems to reflect the weakening of the will of government leaders to tackle the issue of controlling the growth of fiscal debt. Such attitude of political leaders may well lead to a serious issue of fiscal collapse as I  discussed in the earlier essay of this blog entitled “Aging and Possible Fiscal Crisis: Are There Remedies? “

3. Arrow 3:   Growth strategies: structural reform

 Arrow 3 is growth strategy.  The growth strategy has been formulated in the form of a comprehensive package and announced three times consecutively, in 2013, 2014 and 2015. Let me briefly depict gists of the packages.

(1) The 2013 package. This package was admitted by Abe cabinet in June 2013, which consists of 3 plans, namely, 1) industry recovery plan which aims at renewal of industry and human resources. To achieve the goal, industrial competitiveness act was enacted, for example. 2) strategic market creation plan which means to foster industrial activities to promote health, energy, future generation infra-structure, and regional development to enhance regional earning capability, and 3) international development strategic plan which means to increase the proportion of Japanese trade which is covered by free trade agreements from 19% as of 2013 to 70% by 2018.These plans look nice. However, these plans are more of slogans rather than  substantial policy prescriptions, and have not been really well implemented.

(2) The 2014 package was revealed in June 2014 by the cabinet. In order to propel economic growth, prime minister Shinzo Abe took a strong initiative to organize a comprehensive package consisting of many concrete policy prescriptions. Foreign observers commented this package as “1000 needles” rather than an arrow. 

   Out of such many policies, let me list a dozen of major policies: 1) corporate governance and reform of capital market, 2) strengthening competitiveness act, 3) participation to TPP, 4) agricultural reform, 5) regulatory reform of work ways, 6) encouraging female workers to work, 7) renewing regional development, 8) social security reform, 9) medical reform, 10) designation of national strategic economic zone, 11) wage hikes, 12) reduction of corporate income taxes.

   Of these items, such items as 1), 2) 3) and 4) achieved some appreciable results, while most of others went a half way or ended up with negligible results. We need to understand, however, that structural reform takes time to yield any visible results unlike such macro economic policies as monetary and fiscal policies.

(3)The 2015 package was announced in June 2015. It consists of some major policies such as productivity increase, innovation, development of service industries, and local Abenomics, employment reform and strategic use of universities etc. which somehow resemble the content of the 2013 package although he naming is different. Frankly speaking, I was disappointed by reading carefully the package document. The content of the package did not seem to bring about the progress relative to the proceeding 2015 package, and if fact much of the policy prescriptions did not have concrete steps for execution.

   One of the members of the committee told me that it was difficult to write prescriptions which go beyond the statement of previous report because the previous prescriptions have been in the process of legislation. But this is an excuse for not writing something which go beyond the previous ideas. 2015 was the year prime minister Shinzo Abe spent much of his attention and energy to legislate “new National Security Law” by which to authorize the use of weapons to protect American force under special cases. Perhaps, Mr. Abe’s  interest and passion toward economic policies may have been weakened.

4.   Interim evaluation of the result of Abenomics

   What has been described above is the first phase of Abenomics which covers three years since the end of 2012 to the end of 2015. Before explaining and discussing about the second phase of Abenomics, let me evaluate the performance of Abenomics at this stage.

   On economic growth, the performance of Japanese economy has been very slow except until mid-2013 when the impact of Arrow I, extra-ordinary monetary easing,  jerked up corporate profits and promoted investments. Toward the latter half of 2015 the economy slowed down and at a point statistically recorded  minus growth, which was quickly corrected for the reason of statistical error and the record of the non-negative economic growth has barely been maintained.

   On real wages, the performance has been pessimistic for the most part of the first phase of Abenomics.  From the latter half of 2013, wages increases lagged behind price increases and real wages have been eroded. After the increase of consumption tax in April 2014, real wages have been further eroded by the amount of tax increase. It is amazing that workers and population in general did not quite accuse the government on this score.

   On fiscal balance, the targeted restoration of fiscal balance seems to be getting increasingly hopeless due to rather massive fiscal spending as discussed earlier in this essay, and also more deeply in the previous essay of this blog, entitled “Aging and Possible Fiscal Crisis: Are There Remedies? “


Ⅲ.   Abenomics: the Second Stage

  In November 2015, Abe administration put forth a new concept by the name of “100 million population all active.” This is a comprehensive social campaign of the Abe administration. The concept is defined as to make a society in which all people, men and women, young and all, normal or disadvantaged, can be all active and spend a good life of their own. To create such a society, the following 3 objectives are pursued 1) encourage people, particularly females, to raise kids while working in the market with public support of child care, 2) abolish discrimination and squeeze differentials between regular and irregular workers, 3) enrich public services for old age nursing so that relatively aged people will be liberated from family care and thus can participate to market work. 

   These objectives can be fulfilled by integrated actions of plural number of government branches. Mr. Katsunobu Kato, the closest and long time aide of Mr.Abe in prime minister’s office, was appointed as minister in charge of this inter-ministerial campaign. Under this umbrella of the campaign, three new arrows have been decided by Abe cabinet in June 2016, and this signifies the launching of the second phase of Abenomics. Let me explain each of the three new arrows.

    1.  Arrow 1: Strong economy

   Arrow 1 intends to create a strong economy which can grow up to the GDP of 600 trillion yen by 2020. To achieve such a goal, comprehensive policies to enhance productivity of many industries by utilizing the merit of advanced IT technologies.

    2.  Arrow 2: Supporting child rearing

   By enriching public services for child care which make child rearing easier than before, help and encouraging young mothers having children to participate to work in the market so that labor supply will be increased. Abe administration adopts an objective to increase TFR or total fertility ratio up to 1.8 from the current level of 1.3.

    3.  Arrow 3:  Build safer social security services

   By enriching public services for old age caring, liberate relatively old family members from in-house old age care so that they can participate to the labor market as experienced workers. This system will provide the society a  social safety network that they can rely on.

    4.   Emphasis of supply side: labor force and productivity

   Primary emphasis of the second phase Abenomics is on 1) expand and empower the supply side capability of the economic, the most important is quantity and quality of labor force, and 2) increase productivity of the economy by introducing advanced technologies such as AI, IoT, big data, robotics etc and create “society 5.0” where new and advanced technologies will be organized together to provide a distinctively nice and friendly social and economic conditions for people to enjoy their lives.

   The second phase Abenomics is the focus of attention of some international experts such as economists who are interested in knowing whether Japan will succeed in this challenge of increasing labor supply in a matured economy suffering from decline of labor force as well as population, a phenomenon  commonly experienced by matured advanced economies in the world.


Ⅳ.  Interim Evaluation of Abenomics after 5 Years

   Now, let us review the performance of Abenomics for its five year experience.

     1.  Stock prices and corporate profits   

   Stock prices are perhaps the indicator which shows the most successful achievement of Abenomics. Average level of stock prices increased from the level  of around 8000 yen at the end of 2012 when Abenomics has been launched, The level increased sharply afterward and has been staying at the level somewhat higher than 20000 since 2015. This sharply increased stock prices reflect the improvement in corporate profits and increased spending of luxurious consumption items.

     2.  Economic growth

   As noted above, economic growth has been very sluggish for 2013 till 2015. However, the growth performance began to be positive markedly from the mid-2016. One may say that this is a lagged effect of growth strategy of Abenomiccs, but more fundamentally, this is a spillover effect of the general up turn of the economic performance of the world economy for the recent few years.

     3.  Prices: inflation target

   Attaining 2% level on-going inflation has been a primary objective of Arrow I,an extra-ordinary easy money policy proposed by BoJ. This target has neither been attained or even has become closer until 2016. Only after 2017, prices began to show some positive movement. It is too quick, though, to interpret this recent movement as a sign of the success of Kurodanomiccs.”

     4.   Employment and wages

   Employment has been increasing markedly for the last few years. Unemployment rate has been kept extremely low. Strange is the fact that in spite of very tight and ever tightening labor market, wages have not increased appreciably except for marginal workers such as part-time workers and those for casual jobs. This rather puzzling phenomenon reflects the fact that large part of recent increase of employment is not for regular full-time workers but rather for irregular part-time workers.While Abe administration asks strongly with even some tax incentives employers to increase wages of their workers, it is more important for the government to squeeze differentials and abolish discrimination among workers of different employment status such as regular vs. non-regular by legal and institutional regulations.


Ⅴ.  The Appeal of the 4th Abe Cabinet

     1.   Human resource development strategy—Free education

   In October 2017, general election of the House of Representatives was executed. The result was an overwhelming victory of LDP or Abe’s party in power. LDP has been emphasizing the importance of human resource development strategy from the time of election campaign. This was shared generally by opposition parties. One concrete slogan which was shared more or less by all the parties was “free education.” 

   In Japan, education for elementary and junior high school students is compulsory.As far as you attend publicly financed schools, fee is free. This means that the slogan of “free education” is to make education for the very young prior to the age of elementary and for senior high and college students as cheap as possible.

   The 4th Abe administration, organized immediately after the election quickly formulated policy plans to reduce fees and tuitions for nursing schools, kinder gardens  and senior high-schools without much research and analysis of the new system. I personally feel worried that this policy will end up with simply a waste of precious tax revenues without intended effect of helping young people to receive education more universally.

      2.   All generation social security system

   Another outstanding policy proposal of Abe administration is to develop an “all generational social security system.”  It is true, as I discussed in some detail in my previous essay of this blog, Japanese conventional social security system is becoming increasingly deficient in satisfying much diverse needs of the current complex society with rapidly aging population. However, the “all generation social security system” as advocated by LDP and the new Abe administration is more of a slogan than a substantial concept. We need to think and discuss the desired new system of social security much more widely and deeply incorporating not only politicians but also experts and commoners of the entire society,

Aging and Possible Fiscal Crisis: Are There Remedies?

This essay is the summary of main gists of my recent book “How to Save Deadly Disease of Japanese Economy(Japanese language book) published by Gentosha Inc. at the beginning of March, 2018.

Ⅰ.     Introduction

   Japanese government’s fiscal debt has been accumulating acceleratedly for the last decades. The level of the debt relative to GDP reached recently around 240%. This is the worst of the countries in the world, and is much worse than the ratio Japan has experienced right after the defeat of Pacific War in 1945.

    The basic reasons behind this mushrooming fiscal debt are (1) aging of population which increases social security expenditures, and (2) slow or none growth of the economy since 1990s, often called, Japan’s lost two decades. The population aging is expected to continue for about another half a century, and to accelerate around the mid-2020s, and the economic growth is expected to be sluggish in the long run because of the decline of workforce, and consequently, the fiscal debt is expected to grow more.

    Unless major and fundamental changes take place in policy management in economy and society, this dangerous trend would continue. In fact, there are on going trends in government fiscal debt and aggregate household net saving leading to squeezing the net national saving within a decade or so which is the basic source of purchasing government bonds.

   Under such circumstances, in order to issue new government bonds to finance the government budget, Japan will need ask foreign investors to purchase Japanese government bonds(JGB). The foreign investors, however,  would not purchase JGB at the current rate which is artificially lifted by massive purchases by Bank of Japan(JoB). If they purchase at lower prices, the result would be substantive reductions of JGB prices, and hence sharp rises of interest rates. This would jeopardize government fiscal management as well as corporate financial management, and may well lead to fiscal and business collapse of Japan.

   The basic way to avoid such a crisis is to realize fiscal reconstruction which can be achieved by the three major ways: (1)reduction of fiscal expenditure, (3) enhancing economic growth by which to increase tax revenue, and (3)increases of taxes. The Japanese government has been attempting such measures for the last decades. However, many administrations have not been able to achieve desired results. The current Abe administration seems to have weakened its will to keep fiscal discipline.

   In this essay, I will describe the nature of the problems, and attempt to show possible remedies to overcome this issue hoping to provide a better country to the next generation.


Ⅱ.   Dangerous Accumulation of Government Fiscal Debt

1.  Rapidly growing fiscal debt: globally and historically worst

   Let us first take a look at what the level of accumulated government debt. Figure 1 shows the levels of the accumulated government debt for the recent half a century. The figure shows the data from 1965.

    Figure 1.   The secular and accelerated increase of accumulated government debt
Accj_figure14_2
    The fiscal debt prior to 1965 had been negligible because Japanese government followed faithfully the rule of stringent “fiscal law” enacted in 1947 which prohibits rigorously the issuance of government bonds without the legal commitment of redemption. The government issued a bunch of JGB for the first time after the war in order to support the economy which suffered from an acute recession in the wake of Tokyo Olympics of 1964.

    The amount of JGB issuance has increased secularly and the accumulated amount increased somewhat acceleratedly since then until now. Recently, the accumulated outstanding JDB amounts to as much as twice the GDP. This figures shows the data of JDB in a narrow sense. The data for more inclusive definition of the fiscal debt is currently around the level of 240%.

    Now, let us take a look at how the pace of accumulation of JGB as compared with other advanced economies in the world. Fig. 2 shows the data. We can see from this Figure that Japanese government debt was not as bad until the beginning of 1990 as today. During the 1990s, the level increased sharply and exceeded by an increasing margin the other nations.

     Figure 2:  Accumulated government fiscal debts: International comparison
Accj_figure4
 
    The 1990s is the first half of so-called “lost decades” of Japanese economy when the economy suffered from very low growth with perpetuating deflation, and when Japanese population was being aged much faster than other countries.

   Still, let us take a look at the data of Figure 3. which compares the changes of accumulated government debt relative to  GDP for two different periods: one is post WWII period and the other is pre-war period up to the end of WWII.  Surprisingly, the ratio for the recent year such as 2016 is much higher than the ratio immediately after the war when Japan was defeated in the war and the economy was fatally devastated. This fact shows how dangerously high the current level of accumulated government debt.
Accj_figure4_2
2.  Why and how the fiscal debt mushroomed?

   There have been two main reasons why the fiscal debt has been accumulated this much for the last few decades. One is the period of prolonged very slow or none growth and basically deflationary period since the beginning of the 1990s, which is often called as “ the lost two decades.” 

   During this period, since the economic did not grow and prices have been rather declining, wages did not increase or in many cases declined. Since the employee’s prescribed contribution to the social security is linked to their wages, the contributions from the insured people did not grow during this period.

   The other is rapid aging of population during this period. This is the period in which “baby boomers” who were born shortly after WWII have been aging from the middle to senior age brackets and their social security payment has kept increased somewhat accelaratedly. 
 
    The no increase of contributions on the one hand and rapid increase of social security payment on the other enlarged the gap between income and expenditure of social security fiscal account increasingly large, and increased the deficit of social security account. To the extent that this deficit could not be financed by contribution revenues from the insured people, the government had to make up the gap by deficit financing, namely, issuance of government bonds unvouched by legal redemption, which ended up increasing the accumulated government debt.

    Even in subsequent period such as 2010s, which presumably after the so-called  “lost two decades,” the economic growth has been still sluggish, wages did not increase and the populations aging is proceeding continuously rapidly. Therefore, the increasing trend of the deficit of social security continues, and the government is obliged to issue greater amount of JGB to finance the debt.

3.  Possible dangers of fiscal collapse
 
   The higher the level of accumulated debt to GDP, implying the higher risk of repayment incapability, the greater the risk of fiscal collapse.  There is a reason to believe that the level of accumulated fiscal debt will increase much more sizably  during the 2020s than now. This is because the postwar baby boomers will get older beyond the age mid-70s, when the medical cost per person will increase unproportionately after the threshold of the mid-70s, and will boost the increase of  medical cost, and consequently, the government fiscal debt.

   On the other hand, with the aging of population, the household saving ratio tends to decline because the aged people tend to dis-save rather than to save. The figure 4 compares the changes of the level of the aggregate net saving of households on the one hand, and the accumulated government debt on the other.

   Figure 4:  The changes of aggregate household net saving and the accumulated government debt
Accj_figure4_4
   Conspicuous is the fact that the margin of the excess of household saving compared to the government debt has been narrowing for the last few decades for natural reasons as stated above. And it looks that the excess of saving to the government debt will approach to zero around 2020s and is expected to be negative after a certain point of the crossing of the two orbits.

   This suggests a serious problem. It means that the basic funds for purchasing new government bonds run out. Under such circumstances, the Japanese government will have to ask foreign investors to buy JGB. Foreign investors will most likely be reluctant to buy the JGB at the recent price level since it is lifted artificially high by massive purchases of the Bank of Japan. Foreign investors  would purchase JGB at much lower prices, and this will cause serious problems to Japanese economy. 

   Since Japanese government relies heavily on issuance of JGB to finance its budget taking advantage of current extremely low interest rate, the substantive increase of interest rates would make it difficult for the government to finance its budget. Unless, Bank of Japan provides extra-ordinary lending directly to the government, the government will not operate normally. Business corporations would suffer from the similar problem since they have been used to rely on extremely low interest rate.   

   Unless, swift, effective and powerful rescue measures are executed, Japanese economy may well suffer from serious problems of fiscal collapse and consequently economic collapse which may destruct economic operations of both public and private sector victimizing the life and activities of the population.

   Given the current extra-ordinary mushroomed structure of accumulated fiscal debt, the risk is quite high that the economy will be led to collapse by impacts of any major stimulus or  so-called “triggers.”  For example:(1)the government debt   surpasses aggregate net household financial asset as mentioned above, (2) continuation of current account deficit which tends to lead to lowering exchange rate of the yen, (3) actions of major speculators taking advantage of market expectations for lower JGB prices, (4) military conflict, (5) political turmoil etc.

   Some argue that the government debt issue in Japan is over-emphasized. They say that the Japanese debt is not that much serious. They point to Japan still has much saving, most of JGB is owned by the Japanese, Japan has an economic viability etc.   

   However, one has to be aware of the fact that Japan is not an exceptional country.  Economic collapse or bankruptcy is not a rare phenomenon in the world. There have been ample experiences of economic bankruptcy in recent decades only to mention, for example, Venezuela in 2017, Argentine in 2001, Russia and Pakistan in 1998, South Africa 1985, Philippines and Brazil in 1983, Mexico in 1982, and Turkey in 1978 etc. 

   In fact, Japan has suffered the most serious case of quasi bankruptcy in 1946. In this case, Japan somehow avoided to be caught in the default by the incredibly large and painful expense of sacrificing people’s financial and non-financial assets.

   To the extent the risk is evident, it must be the task and duty of political and economic leaders as well as the public to try their best to avoid the risk and try to construct better economic and social structure to minimize such risks of sacrificing innocent people, particularly for the next generations.


Ⅲ.  Are There Remedies?

1.   Three main measures: spending cut, economic growth, and tax hike
 
     The single most important way to avoid such risks is to promote forcefully to reconstruct the healthy balance of the national finance. One may call such effort as strengthening fiscal discipline. There are basically three main measures to pursue  that goal.

   One is reducing the unnecessary expenditures of the government. One may put it as “stream lining” the government expenditure structure. This has been referred to and attempted over and over again by many administrations of the Japanese government for decades. One outstanding challenge has been attempted during the DPJ(Democratic Party of Japan)government in 2009. The administration claimed to carve out a few trillion yen of funds by stream lining government expenditures. But the result was not even one tenth of the target. 

   The most important area of spending cut is the area of entitled spending、most notably social security spending. Since social security expenditure is the single largest area of spending, many plans have been proposed to stream line the expenditures. Just to name a few: long-term reduction of pension payment, increase of the eligible age of receiving pension payment from the current age of 65 to higher ages, reduction of designated official prices of drugs and medical services and  promoting efficient operation of nursing houses etc.   

   Although one can propose many plans, there are certain limits of reducing costs in social security areas since social security services provide basic support for lives of people, and therefore they cannot be easily reduced since it may well hurt the basis of their life.

   The other is economic growth. If economic growth rate can be increased, it would certainly increase the tax revenue and contribute to promote healthy fiscal balance. Contemporary Japanese economy is, however, suffering from steady decline of labor force since the end of 20th century and recently of population as a whole. Since labor force is the basic factor to support the growth of the economy, declining labor force and population is a serious negative factor to reduce the potential of economic growth. Many economists estimate that the potential growth rate of Japanese economy for the coming decade or two would be around 0.3 to 0.5 percent. This is much too low for helping to restore fiscal balance.

  The third is tax hike. This is the most straight-forward and powerful means to restore fiscal balance. However,  tax increase is perhaps politically the most unpopular option in any country. Let me explain my proposal of tax increases in the next section.

2.   Recommendation: 1% annual consumption tax increase up to 20%

   There are several types of taxes to be possibly used to restore fiscal balance: individual income tax, consumption tax, inheritance tax and corporate income tax. Among them the most equitable tax which has a large tax base is consumption tax. Let me therefore focus on consumption tax as a strategic policy measure to restore the fiscal balance.

   Japan’s current consumption tax rate is 8%, which is much lower than many of European countries where indirect tax which is comparable to Japan’s consumption tax, commonly referred to as “value added tax,” ranges at the rate of 20 to 25 %.

   In 2010, Mr. Yoshihiko Noda, the then finance minister of DPJ government promised publicly in G8 finance minister conference to increase consumption tax rate from the then 5% to 10% in order to show the commitment of Japanese government to strengthen fiscal discipline. In 2020, three major political parties: DPJ, LDP(Liberal Democratic Party) and Komei party agreed to increase the consumption tax rate from 5% to 8% in  April 2014, and in October 2015 to 10%.

   In April 2014, prime minister Shinzo Abe increased consumption tax rata rate from 5 to 8 percent as scheduled. While the first quarter of 2014, prior to the tax hike, recorded 4.9 percent annualized increase of GDP by rush in consumption, but for the second quarter dumped as much as 7.1 percent. Perhaps because of this trauma, Mr. Abe postponed the scheduled consumption tax hike as scheduled in October 2015 till April 2017, and then he also postponed this scheduled tax hike till October 2019. 

   And more recently, he called abruptly a general election in October 2017 for the reason of shifting the usage of 4/5 of expected increase of revenue accruing from tax hike scheduled in October 2019 to provide free education rather than to spend for restoring fiscal balance as previously planned.   

    Such choices of PM Abe seems to suggest that he has (1) a strong trauma about the negative effect of the consumption tax increase for dampening economic growth, and (2) strong interest to buy the “browny’s point” of the voters by sprawling government money rather than to restore fiscal balance to create a more sound and strong economy for the future generations.

   Under such circumstances, I would like to propose the following plan of increasing consumption tax. Thai is, to raise consumption tax rate very gradually such as 1% or even less every year until it reaches the level of 20%.   

   By doing this, the shock effect that the increase of a few percentage points such as 3 or 2 will be minimized.  Since, also, the long-term plan of tax increase is given, people have to and will be likely to adapt their life plan accordingly. In other words, people will not rush to buy before the tax hike and dampen their consumption afterwards, they would rather try to adjust their life plan for a long-run.

   One percentage point increase of consumption tax will bring about, under the current economic structure of Japan, approximately 2.5 trillion yen tax revenue. When the tax rate is 20%, consumption tax revenue would be 50 trillion yen per year. If this tax rate is continued for 26 years, the current accumulated government debt will be absorbed by the consumption tax revenue alone. Since, it takes at least 12 years to reach this level starting from the current rate of 8%, it would take longer time to absorb the outstanding government debt.   

   But to the extent that there are other  tax revenues such as income taxes and inheritance tax, this time span could be shortened somewhat. In fact, in a aging society like Japan, inheritance tax will be an important tax revenue for the country for sometime. I urge to recommend to change the current acutely progressive tax rate structure of inheritance to reduce the general rate and expand the tax base so that greater number of people will be levied lower taxes and consequently total tax revenue will be increased substantially.

   If Japan can adopt this kind of long term tax increase plan, Japan will be able to get rid of the extra-ordinarily heavy burden of huge accumulated fiscal debt and establish a much more healthy and stable economic structure for the future generations.

    Also this will alter the current extremely unfair intergenerational differentials of life long net value of individual social account, namely, the gap between life long contribution and payment of social security and taxes, as formulated by professor Laurence Kotlikoff some years ago.   

3. Need to compensate high burdens by comprehensive social security services

     The story so far has been only one-sided. It was simply the story of increasing the burden on the tax payers in order to absorb the current huge accumulated debt of the government. People will definitely not accept this kind of one-sided story. People will begin to listen only when the other side of the story that such high burden will be offset and compensated by good and reliable social services to protect and stabilize their life for life-long period will be presented.

    Here, I would like to propose a new thoroughly comprehensive social safety plan. The conventional social security program covers only pensions, medical care, and  unemployment benefit. It was only 2000 when old age nursing care insurance was adopted. This kind of conventional social security system worked well for Japanese society during the high growth period of 1960s and 70s, and reasonably well until 1980s, when most of the people enjoyed stable employment as regular employees and secured married family life.

   Japanese economic, social and family structure changed drastically since then. During the so-called “lost two decades” from the 1990s and afterwards, the economy suffered from extremely low growth, nearly 40% of workers cannot enjoy stable full-time life long employment, and the family with parents and children living together became less than half of the entire families. Under such circumstances, the capability of maintaining stable life and family reproduction itself of relatively poor and disadvantaged people is jeopardized. The conventional social security services do not work effectively to meet the demands of these people. 

   People need helpful and powerful services ranging from assisting marriage, bearing babies, fostering children, schooling, providing appropriate vocational training, protecting working conditions and against status discrimination, in addition to conventional services of unemployment benefits, medical insurance, poverty assistance, and old age nursing. The comprehensive social safety program I am proposing will provide all these services effectively and seamlessly throughout the life cycle of a person.

   This kind of comprehensive social safety system is obviously highly costly. However, in order to secure the support of the public about the heavy burden of 20% consumption tax system, providing this kind of comprehensive social safety and security system is inevitable.   

   The most important  political agendum we are faced in order to construct a new country where future generations can live safely and comfortably is precisely to examine, discuss and choose the new model of our country for the future.


Ⅳ.   Political Leadership and Public Support

   There are some political leaders who think about the need and importance of such major reforms of our country. However, critical  for them is whether the public, particularly the voters, understand the importance of such agenda.  Voters are alert and sensitive about the issues of gains or losses in front of them but tend not to be aware of such major issues with a long time horizon. And with the absence of  voters who understand the major and long-run issues of the country, alert politicians cannot propose important policies because they will not secure votes.

   Such major issues need basic knowledge and relevant information to understand the meaning of the issue. Not only insufficiency of understanding on the part of the people, but often critical information is not provided to people nor even disclosed.

   For example, social security system is a complex entity. Ministry of welfare and labor maintains, for example, that Japan’s public pension system is durable for 100 years without convincing evidence. Also, Japanese government bonds are priced high largely because massive purchase of BoJ. The “Primary Dealers system” tied closely with the guidance of Ministry of Finance conceals the potential signal of more natural pricing.

   The general election held in October 2017 was a good opportunity to discuss such issues. However, the time was only a few weeks between the announcement of the election and the day of voting. Most parties quickly prepared shallow policy agenda  and voters hardly had time to think about them. 

   Under such circumstances, prime minister Shinzo Abe declared to spend 4/5 of increased tax revenue arising from2 percentage point increase of consumption tax schedule in October 2019 to provide free education for children and youths before and after the compulsory education age bracket. Whether such a proposal is meaningful for current Japan has not been carefully examined, and its obvious consequence is to delay the schedule for restoring healthy fiscal balance for the country.

   Important is political leadership on the one hand, and public understanding on the other. These two must be connected by full disclosure of information and serious and sincere dialogue between the two. We need to work for it together since the critical mission for political leader is to inherit a better country for the future generations, and it must be the desire of us, namely the voters of the current democratic society.

Sonjuku Okinawa Study Tour

「Sonjuku Okinawa Study Tour」November 11 to 13, 2017

  Some members of Shimada Sonjuku and myself went on to study tour of Okinawa for the period of November 11(Saturday) to 13(Monday), 2017.

   Study tour to Okinawa is the compulsory subject of Shimada Sonjuku for the following reasons. Okinawa is the place where we can learn an important aspect of Japan’s history, feel an unique culture different from cultures of Japan’s mainland, the history of miserable war symbolizing the end of World War II in  which Japan was defeated by the United States and also learn the current front guard of Japanese archipelago working with the US military stationed in Okinawa.

   Since main objectives of Shimada Sonjuku are to study history and cultures of major cultural zones of the world including Japan, Okinawa is an indispensable place and subject of our study. It is because Okinawa is the place where we can learn both the contemporary history of Japan of which the experience of war is the most important, and also Okinawa’s unique culture which suggests that Japan is the country of cultural heterogeneity.

   Okinawa is an island which occupies about 2% of the width of Japanese archipelago and inhabited by1.4 million people. On this small island, 70% of entire American military bases on Japan is located. Therefore, the existence of American military bases is the prime issue and feature of Okinawa: an issue in the sense that Okinawa people take it as an unfair burden imposed on them relative to the people of the mainland, and as an outstanding feature in the sense that it symbolizes the strategic importance of this island for the US-Japan security arrangement.

   For these reasons, the Shimada Sonjuku makes it a rule to visit a large base of American airforce located in the area of Kadena-town when the sonjuku makes a study tour to Okinawa. In fact we have visited the airforce base twice in the past. Each time, the airforce base has accepted our visit rather smoothly and promptly. However, this time it was somewhat different. It took considerable time to get their acceptance.

   It took longer time partly because our initial proposal of the date conflicted the holiday of the base, but perhaps also because there were other reasons. An increasing threat of missiles of North Korea has changed the entire geopolitical situation of this part of the world. Finally, the airbase office proposed another date and our visit was made possible. We are very thankful for the decision of the air force representatives and also for the earnest support of Mr. Nakajima, Koichiro, Director General of  Okinawa Defense Bureau, Mr. Morita, Haruo、Mr. Jyomura, Nobuyoshi of the Ministry to get approval of our visit.


   November 11(Saturday)

  The number of the team members has been 15 to 18. The number changed from time to time because of their own plan of the trip. We arrived at Okinawa Naha AP shortly before noon of Saturday. We took a bus to visit a nice traditional Okinawa restaurant, named “Yagiya”. The humble house of the restaurant was located in the midst of farming field. Dishes were delicious.

   Having finished lunch, we went on to visit Peace Memorial Park. This park was built in the mid-1970s for the purpose of reposing the soul of those who lost their lives in Okinawa war of 1945 whether they are civilians or soldiers. The park is located at the edge of Itoman city which is at the South end of the main island of Okinawa. 

   This was the final battle field of Okinawa war which ended on June 23, 1945. This was the most fierce fight between the US and Japanese military on the island of Okinawa. In the park, there located many rows of low memorial walls made of black granite on which names of those who lost their lives are carved. The total number is about 240000, and is increasing from time to time even now as the new names of the dead are identified.

  Beyond the park is the sea of East China sea. It was breezing. Watching from the cliff top, the bottom of which is washed by the waves of the ocean, I imagined many Japanese civilians jumped from the cliff edge to escape from the merciless attacks by the US force. Having spent some time there, we moved on to “Himeyuri no Toh” or the Tower of Young Lilies.

  The Tower of Young Lilies was located nearby. This is the memorial spot to commemorate those young female high school students who lost their lives during Okinawa war, mainly during the fierce battle fought in the Neighborhood of Itoman area in mid-June, 1945. These were the students of Okinawa prefectural No.1 Female High School. Some 300 students, teachers and staff were mobilized to help taking care of wounded soldiers. In the fierce battle, some 200 students lost their lives.

   In the memorial hall of the tower of lily, there displayed pictures of the students, their left over articles, and their notes of experience at the last minute. Watching these items makes us painfully feel the dreadful and desperate situation they were in.

   At the side of a display case, there was an old lady who spoke to the visitors as a story teller of war experience. Having listened to her story sometime, Mr. Yoshiyuki Goto, our member, asked her a question as to when and how she realized that the war was over.

  She replied slowly reminding of the moment when she felt that the war was over, saying, “An American nisei(2nd generation) officer came to us and asked if we were hungry. I noded. He said to us to wait there and said that he would come back to bring us food. Sometime later he came back to us with a basked full of foods of various kinds. Since I was very hungry, I thanked him and waited for the rest of our group came back.

   A moment later, other members of our group came back. A senior student among them asked me what this food was and who gave it. I explained all what happened. Then she got very angry and ordered strongly that I should dispose it. I felt very sorry but disposed the precious food in a drum can nearby.

   Some day later, again that nisei officer came to us and advised that we should move us to a safer place because the place we were was dangerous. We got on a truck he drove. It took some hours to get to the place. He said that this place was much safer. This was all what he could do for us. He told us that since we must have family, relatives and friends, we should go to find them on our own. He was very kind to us. I realized that the war was over.” I suspect that the  place she referred to must have been at or near the refugee or victims camp in Ishikawa-cho area.

   The lady was behaving very well and elegantly. The memory was precise and expression was thoughtful. It was hard to believe that she was age 89. She must have been age 17 when she was mobilized to join the rescue team for Japanese soldiers. Listening to her was a very special experience.

   We then moved on to “Kaigun-go”(Navy Resistance Cave) in the suburb of Naha-city. This was the cave digged using only hand shovel and pickax. The cave was digged amazingly long and functionally under ground. Toward the end of the Okinawa war, a navy troop who lost their ship in the battle escaped to the land and digged the cave in the rocky hill. Soldiers often attacked US military camps in the midnight. 

   When they finally realized that there could be no hope to win nor survive, the commander, a rear admiral, Mr. Minoru Ohta, sent a telegram to the Imperial Navy commanding headquarter. In the telegram, he wrote rather in detail how Okinawa people fought together with Japanese troops in the extreme hardship, and concluded the telegram saying, “Let us wish that a special consideration be given to the Okinawans in the future.”  After sending the telegram, Admiral Ohta and his fellow officers and soldiers all killed themselves.

   Admiral Minoru Ohta is one of a very few Japanese military officers who have been respected by Okinawa people. Walking through the underground caves, and watching the displays of hand shovels and pickax, chairs and tables, pictures of battles which were mostly one sided destructive attacks by US troops, tanks, ships and planes, we were caught in a special feeling. That is, why Japanese soldiers and civilians had to fight this kind of hopeless war sacrificing their lives.

  In the bus on the way from Kaigun-go to Kanutcha Resort hotel where we planned to stay over the night, we talked about this issue. It is known by now that many people including the high rank military generals and officers knew in those times that Japan would surely be defeated by the US which had ten times more productive capacity. The question is why then Japan plunged to wage the hopeless and desperate war against the US.

   We discussed that it must be due to the mal-functioning of  the decision making system of Japanese military, government and even the society which is influenced one-sidedly by the biased media. The Mal-functioning of Japan’s decision making was not only the case os the WWII time, but also often observed in many important organizations of Japanese society, government or even businesses alike. Then our discussion proceeded to the question of how Japan would react when North Korea finally succeed to develop and deploy nuclear headed ICBM. It is certainly a nightmare. But we unfortunately know that we are not prepared to think soundly how we should recognize and react or proact to such a serious situation.

   We arrived at Kanutcha Resort hotel in late evening. Mr.Eiichiro Nakamura, chief chef and general manager of the hotel had prepared a gorgeous dinner arrangement in the nice garden overlooking the sea. Incidentally, over a couple of hundred meters ahead of the sea, there locates Amrican Marine Corps Camp “Schwab.” On the coast of the camp Schwab, Japanese government plans to build a Marine Corps helicopter base. The project has been on the deadlock because of the strong opposition of the governor of Okinawa, Mr. Onaga.

   The dinner was delicious, the service was splendid, and the atmosphere was almost a royal dinner, thanks to dedication of Mr. Eiichiro Nakamura. We talked, enjoyed wines and ryukyu Awamori, local liquor representing Okinawa, and eventually sang songs. In the mid-night, we went back to our hotel rooms.

November 12(Sunday)

  We left Kanutcha Hotel at 9 am. We headed at a hill park at the side of  Futemma Marine Corp Base. When we arrived there, it started  to rain slightly. This is unusual because wherever I go, I usually encounter no rain. Something must be wrong! We walked up to the top of the hill from where we can have an overview of the runway of Futenma helicopter base. 

   The runway is surround densely by houses of Ginowan-city people. In fact, these houses have been built during the years of Okinawa recovery and development after the base was constructed in this area. Whatever the reason, the fact that the runway is closely surrounded by people’s houses makes the danger of any accidents serious. This is the reason why Okinawa people and Okinawa political leaders have been demanding strongly to move the base somewhere else.

   We were able to see the runway fairly well from far away. There were a couple of dozens of helicopters. There were no Osplays, which has been the target of citizen’s recent anti-base campaigns. 

  In 1996, in the wake of the citizens’ uprising accusing the rape of 12year Okinawa girl by Marine Corp soldiers. the then Prime Minister Rytaro Hashimoto flew to see President Bill Clinton at Pebble Beach in California to meet and negotiate directly with the president to relocate this base which is more dangerous than other bases because of the above reasons. President Clinton amazingly compromised to relocate the base. 

 Then the ball was on Japan’s court. The Japanese government had to find the alternative plane for the base. They located the new place at the side of Camp Schwab, which is in the area of Henoko village at the suburb of Nago-city. However, it took a long time to get agreement of Okinawa prefecture because of strong resistance of citizens and politicians of anti-base organizations.This anti-base campaign was aggravated by an unbelievably irresponsible message ofMr.Hatoyam in 2009, the then prime Minister of Japan.

  Mr.Hatoyama said that he would promise to move the base out of Japan or at least out of Okinawa. Given the official message of the prime minister, the anti-base groups have been extremely empowered. This irresponsible message left a serious scar afterward in spite of the earnestly positive attitude of Abe government to relocate the baee from Futemma to Henoko area.

  From the top of the hill overlookng the base we spent sometime watching the runway of the base, which is the focus of the most difficult problem which the Japanese government faces in relation with the US.

  We then headed to Ryukyu-village theme park. This park is managed by Uechi family. I have had a luck of having a close friendship relation with the family, particularly, Mr. Toshio Uechi, ex-president of the Uechi group company. The Uechi group manages several businesses in addition to this theme park at various locations of Okinawa mainland and also Ishigaki-island. Mr.Toshio Uschi is the brother of Mr.Choei Uechi, the head of the Uechi group. The Uechi brothers have been awarded “Tourism Carisuma Award” from prime minister Junichiro Koizumi. They were recommended by the award committee which I headed.

  The unique feature of Uechi group is, in addition to tourist attractiveness of their business, close cooperation of entire Uechi families which is rather unusual for many small business families of Japan and elsewhere. Thanks largely to this family culture, they and their employees work hard in good cooperation, which apparently contributes a lot to make their business uniquely successful in Okinawa.

  Mr. Uechi and his staff warmly welcomed sonjuku members from the moment of stepping out of the bus. They showed them around the park for about an hour. The park is constructed by old houses collected from various parts of Okinawa islands, and a whole set of amusing shows and activities are given to the visitors. Sonjuku members enjoyed traditional Okinawa cultures in the park. 

  They arranged a garden lunch, where they showed us special performances of traditional dances and songs. Stimulated and encouraged by such performances of Okinawa professional entertainers, Sonjuku members got excited and started sing songs by themselves.Their performance was amazingly good. Mr. Uechi and Okinawa staff were so much impressed by such performance of Sonjuku members’, which made this visit very hot and excited.

  We then returned back to Kanutcha resort hotel, where I gave a lecture for about an hour and  a half on such topics as the history of Okinawa, sad experiences of Okinawa war, post-war experiences of Okinawa people, Japan-US relations in the post war period particularly during the cold war,  Japan-US security arrangement, problems of US military bases in Okinawa, etc.

  I spent some time to talk about somewhat in detail about my own involvement in Okinawa as chairperson of Okinawa problem committee. Its full name is long, namely, “the committee serving to Cabinet minister, Mr. Kajiyama, to examine to give proposals on the question of the development of Okinawa”. Since the name is too long, this is usually called by a short name, ”Shimada Committee. ” And in Okinawa even shorter as “Shima Committee, sounding in Okinawa as the Island Committee.

  This committee was organized by the government in the wake of a sad criminal incident that three Marine Corp soldiers raped a 12 year old Okinawa girl in Kin-town in fall of 1996. This case was not made open by her family and close friends for a while considering of the shock of the girl. But soon afterwards, the case was known publicly, and made Okinawa peple angry against the US military and also against Japanese government. Hundreds of thousands of Okinawa people demonstrated around the US bases and surround the bases by their  human chains. They also went to Tokyo to protest. The then prime minister Mr. Murayama、Tomiichi of Socialist party and high officials of his government did not know what to do, and Mr. Murayama resigned from his position, which was succeeded by Mr. Hashimoto, Ryutaro, who took this case seriously. On the US side, president Clinton, Mr.William J.Perry, Defense secretary, and Ambassador James Forley took this incident very seriously.

  Prime minister Hashimoto, Ryutaro thought it extremely important to take care the anger of Okinawa people and give them some sensible relief. For this purpose,  he did three things immediately. First, he flew to the US to meet President Clington at Palm Beach to negotiated directly with him to move the Futemma Marine Corp base which is surrounded by citizens’ houses to somewhere else where population density is much lower so that the damage of an accident would be much smaller. He knew that Okinawa people are most nervous about the danger of Futemma base accident. Second, he set up a committee to examine and discuss possibilities of amending the agreement of the status of US military stationed in Japan. And third, establish the ministerial committee to provide special aid to promote economic development of Okinawa.

  In addition, Mr.Kajiyama, Seiroku, the cabinet minister of Mr.Hashimoto’s administration, proposed to organize a committee consisting of experts and local representatives which is to propose good plans for Okinawa people to have hopes for the future to develop their communities getting rid of the past practice of one-sidedly dependent on the subsidies of the mainland government. 

   Mr.Kajiyama emphasized that this committee examines and decides the plans from the viewpoint of Okinawa people and not from the bureaucratic eyes of the mainland government. This idea was suggested to Mr. Kajiyama by Mr. Okamoto, Yukio, an advisor to Mr. Kajiyama and also my good friend. Because of earnest request of Mr. Okamoto, I finally accepted to take a job of chairperson of this committee, which later became known by the name of “Shimada committee”.

  In order to fulfill the requirement of Mr. Kajiyama to make the committee determine things from the viewpoint of Okinawa people, Mr. Okamoto, committee members and myself went around the Okinawa island to visit some 50 sites where US bases or military facilities are located to examine the situation and talk to people and listen to their views and demands as carefully as possible. Having visited Okinawa a couple of dozen times within two months, I finally became reminding various site scenes of Okinawa even while I am sleeping. 

 After having learned the situation and wishes of people, we carefully planned projects which would encourage Okinawa people and give them hopes for the future. Since the projects proposed by this committee would be given the budget only once and never repeated, the projects must be successful. To make the projects successful for people, I went around the island to visit communities and persuaded young local community leaders with various professions to organize a team to do PDCA for each project. I named it, “Team Future.” Eventually for each of some 40 projects, a Team Future was organized. 

  The largest of these projects was the redevelopment project of Kadena-town. This is the town which was first attacked most severely by the US troop which landed on April 1, 1945 Okinawa main island, namely, Kadena shore and was later developed as the strategic airport for B29 bombers to bomb mainland cities. 

   When inhabitants returned to their hometown after the war, 83% of their land was taken away by the US occupancy troop as their military base. The inhabitants who lived there before the war had to live densely in the narrow area of 17% of the old town area left for them to live.

   Because of this situation, the town after the war has been extremely narrow and congested. The living conditions in the town were poor and business opportunities in the town were very scarce. Having listened people’s voices of all the areas where US bases and military facilities were located, we judged that the conditions of Kadena-town were the worst and needed to be taken care of most urgently. We proposed a major plan of reconstructing the central part of the town thoroughly.

   Mr. MIyagi, Tokuichi, the town mayor, and his staff and town people worked very hard to reconstruct the town by their own planning and work. The budget was large but they accomplished the project marvelously mostly by their own initiative of “Team Future”.

  At the end of their work, Mr. MIyagi, Tokuichi and his staff proposed to display the copper relief of portrait of Mr.Kajiyama, Mr. Okamoto, and myself at the entrance hall of the newly built large town hall to thank our effort to contribute to the town. It was an unexpected honor. 
   We plan to visit Kadena town tommorow and surely visit the town hall in which Okinawa bureau of Defense ministry has its headquarter. On the way, Sonjuku members must pass by the copper relief of my portrait. I finished my talk on Okinawa finally referring to this copper relief episode in order to not let them surprise when they see it.
   After my lecture on Okinawa’s history and its role on contemporary defense, we had a wonderful Chinese dinner at Kanutcha hotel restaurant.

November 13(Monday)

 Early in the morning at 8:45am, we left Kanucha resort hotel heading at Kadena US Airforce Base. The driver of the bus predicted that it would take an hour and probably 15 minites. Amazingly, the bus arrived at the gate of the base almost exactly at 10:00 am, the timing that the airbase office advised us to arrive.

  At the gate, one of the sonjuku members, Ms. Mayuka Matsui joined us. She has had a different trip plan in Okinawa until today. Ms. Higa, Sayaka、who works for the base kindly guided our bus to arrive at the entrance of the office building of the base. Mr. Nakajima, Koichiro, Director General of Okinawa Defense Bureau was waiting for us at the entrance. It is unusual that such a high official of Defense ministry escort us. We were very thankful for hie earnest and kind support to make our visit of the base possible this time.

   Several US airforce officers have welcomed us. I learned later that they were Colonel、Oldham,Paul M, commander of 18th Mission Support Group, Mr.Townsend、Paul P. Lt.Colonel, commander of 18th operation support squadron, and Mr. Potter, Donovan K. Public Affairs, 388th Fighter Wing.

  They guided us to enter a conference room. We sat around the big table in the center of the room. Mr. Oldham gave an opening remark to welcome us representing the 18th Wing of US airforce. They received us very friendly. Then, a lady officer gave an introductory briefing on the history and basic missions of the 18th Wing troop in Okinawa using projected pictures of various aspects of the base. This briefing was followed by the explanation by Mr.Townsend on various functions of the troop stationed in Kadena base.

   Of their speeches and presentations. there were several points which are particularly interesting for me. The 18th Wing troop has a long history even before the WWII. The members of this troop seem all proud of the achievements and glorious tradition of this Wing. Having been stationed in Okinawa, they played integral roles in some of the major wars like Korean War in the early 1950s and the Gulf war and subsequent wars in the middle East around the end of 1990s and the beginning of 2000s.

   The 18th Wing troop has many functions in addition to fighting and reconnaissance in the air, but also many supportive actions such as delivery of needed items, rescue and medical cares etc. Impressive was the fact that they spend much effort at various occasions to associate with local people to enhance mutual understanding and respect with each other.

  Having spent about an hour by listening to briefing and enjoying Q and A session, the officials suggested us to move on to a brief tour of the base. We stepped on a bus the base prepared for us. We soon arrived at a space in front of hangers for jet fighters. Several F-15 jets were staying in the hanger designed to accomodate one hanger for each jet plane. Stepping out of the bus and we went much closer to the jet. 

   Mr. Townsend gave us many interesting and eye opening explanations. F-15 is one of the most cherished models of jet fighters by airforce pilots. The basic model of F-15 was created almost 40 years ago. Since then, F-15 jets, with some occasional improvements,  have been heavily used by the airforce as the most usable plane. Mr.Townsend has a record offlying on F-15 for some 1800 hours which took 20 years. He occasionally teaches and trains young pilots. In fact, training is, in his view, perhaps the most important to build war capacity. Human resource management is critical to keep and enhance fighting capability of the airforce. 

  We moved on further along the row of hangers. We passed by the jets which look much different from F-15. They were F-35. F-35 is the latest model of jet fighters which has the non-detectable feature. Unlike a crane looking good shape of F-15, F-35 has a rather fat and low body. Watching F-35, the senior looking gentleman who has been on the bus with us gave us useful knowldege about the get. He is Mr.Potter, a PR officer of F-35 having travelled together with F-35 from the main base of F-35 in the US mainland. 

   The unique shape of F-35 is perhaps because F-35 is equipped with many complex devices of information handiing. In fact, F-35 has the most advanced capability of surveilance, detection, and communication. Its main function is not fighting but rather giving useful and necessary information to other colleague jet fighters to make their fight more advantageous and efficient by providing useful information on time. His explanation made me imagine that the air fight nowadays is more like a TV game rather than a real fight as represented by “dog fight” in the past.

  About a dozen of F-35s are now on duty at Kadena airbase. They have flown from the main base in the US mainland and plan to stay at Kadena for some period with relevant mission. This must be a special case. Although none spoke about the relation to North Korea issue, we imagined that this was probably the case. It was the time that US military has been carrying out the major drill operation working with South Korean military vouched by three major aircraft carriers deployed in  the area of Japan Sea.

  Having watched F-15s and F-35s in the hangers and driven around some area of the base, the promised  time of leaving the base came closer. When we stopped by the office before leaving the base to thank for the cordial reception and guidance they provided to us, Mr.Oldham came out to see us off and handed me his medal. I found later that this was a special medal given to him from the 18th Wing. I was deeply felt by his goodwill. We left the base almost punctually at noon as planned.

  We then moved to a nice and cozy restaurant at a beach where they serve thinly sliced pork meat. We eat it dipping briefly in hot water tother with vegetables. This local dish is tasty and also healthy. Since we had time, we strolled along the beach and took some rest on benches, then, we went to the town hall of Kadena-town which is quite near from the restaurant. In the town hall, Okinawa bureau of Defense Ministry is located.

  Since we arrived at the hall somewhat earlier than our promised time of arrival,  I brought the members to the entrance hall of the town hall. On the wall of the entrance hall, copper relieves of portraits of Mr. Seiroku, Kajiyama, Mr. Okamoto, Yukio and myself were hung. Sonjuku members were astonished as well as apparently impressed by looking at directly my copper relief portrait which I referred to last evening in my lecture.

  We then went up to the office floor of Okinawa Defense Bureau. Mr. Nakajima, Koichiro, Director General of the Bureau, cordially welcomed us to the meeting room. He prepared a set of information sheets for each of us. He explained briefly history and the locations of US military basis in Okinawa.

   Okinawa bureau seems to perform a complex of variety of jobs. In addition to the liaison function with main office of Ministry of Defense and other relevant government offices, it takes care of on the spot questions of Self Defense Force, US military stationed in Okinawa, and perhaps most importantly, prefectural government and people of Okinawa.

  When we referred to F-35s we saw this morning in Kadena Airbase, Mr.Nakajima told us about the complaints and demands given to the Okinawa Defense Bureau. They complained strongly about abnormal noise given most likely by F-35. Mr.Nakajima told us many different cases and instances of such complaints given to the bureau. The job of the bureau is to transmit such complaints or demands carefully to the US military office and return answers or responses, if any, of US military back to them. We imagine that this kind of job sometimes becomes pressing and nerve breaking.

   When talking about the return of the land of the military base to the owners, which takes place time to time, he told about some curious practice. Incidentally, the following kind of problem is rather unique to Okinawa. This is because in Okinawa, US military bases have talen much of their land from private land owners, while in mainland Japan military bases use mostly nationally owned land. 

   The story is that, when the owner loses the opportunity to get rent payment from the Japanese government because of the return of his land from US military which he had been renting to the government for US military use, the Japanese government usually keeps paying some amount of money almost equivalent to the amount of rent which he was getting earlier for quite sometime until he will find someway to gain income from the returned land. It sometimes last several years. The government does it in order to mitigate the impact of drastic change for the landlord. We were particularly impressed by an extremely good care given to Okinawa people by the government.

  We then walked to town office of Kadena-town. We were cordiary welcomed by Mr. Tohyama, Hiroshi Mayor of the town, and a few town executives. They talked about how helpful the Shimada committee was to reconstruct the town to make it look as it does now. I am glad that they appreciated the job of our committee.

  Since time was limited, we did not have enough time to talk about many topics. Within the limited time, they talked mostly the problem of noise given from F-35 which arrived recently at Kadena airbase.  They said that they have kept measuring the noise for some time in order bring the data to Okinawa Defense Bureau asking them to transmit their complaint to the relevant office of US military. We realized that the noise of F-35 has been the major issue in this area of Okinawa.

   Thanking their hospitality, we left the town office, and headed for Naha AP to return to Tokyo in the evening.
 
 
 
 

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