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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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