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2019年2月

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.
 

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