Beware of the “new capitalism” of Japan by Takatoshi Ito

Fresh out of an election victory, the new Japanese Prime Minister, Fumio Kishida, is already giving a glimpse of what his economic policy agenda will look like in practice. Unfortunately, early signs suggest that while its goals are sound, its policies are not.

TOKYO – Japanese Prime Minister Fumio Kishida survived the October 31 parliamentary elections, which took place just weeks after coming to power as the nation’s new leader. Losing just 15 seats, the Liberal Democratic Party (LDP) has done better than expected and will retain a comfortable majority in the House of Representatives, with 261 seats out of 465.

The relative loser was the largest opposition party, the Constitutional Democratic Party, which lost 13 seats, leaving it 96 seats. He performed worse than expected, although he coordinated his selection of candidates with other opposition parties.

A big winner was the Restoration Party (Nippon Ishin no Kai), which won 30 seats and now holds 41, making it the third party in the House, after the LDP and the Constitutional Democrats. It attracted voters critical of the PLD’s handling of the COVID-19 crisis but reluctant to support the Constitutional Democrats, due to their cooperation with the Communist Party during the election campaign.

Kishida appears to have benefited from a fortuitous drop in the rate of COVID-19 infection. His immediate predecessor, Yoshihide Suga, was not so lucky. In late August, the seven-day average of new cases in Japan soared to its highest level since the start of the pandemic, surpassing 25,000 in the week of August 23. At the beginning of September, Suga announced his resignation.

Since then, however, new infections have fallen rapidly, with the seven-day average falling below 270 on election day. Experts have yet to agree on all the factors behind this dramatic turnaround, but an increase in the vaccination rate from 40% to 70% in the same two-month period has surely helped. Whatever the full explanation, Kishida was lucky.

But Kishida also managed to push back the Constitutional Democrats by embracing a more left-wing economic platform. During the campaign, he pledged to put special emphasis on income redistribution and replace the dominant neoliberal approach with what he calls “new capitalism”. These promises contradicted the Constitutional Democrats’ claim that previous LDP policies under Prime Ministers Shinzo Abe and Suga had widened the income gap.

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The Restoration Party, however, has managed to fill part of the center-right vacuum by criticizing Kishida’s emphasis on redistribution, arguing that what the country really needs are structural reforms to boost the economy. rate of growth.

Now that Kishida and the LDP have prevailed, the big question that remains is what the “new capitalism” will mean in practice. The first signals do not bode well. Kishida’s first concrete political decision was to pay 100,000 ($ 878) to every person aged 18 and under. And although there is a means test (on household income) in this program, the cap is so high that 90% of all Japanese minors qualify.

Then, responding to predictable criticism that cash disbursements will only increase household savings rather than consumption, Kishida said half of the profits would come in the form of vouchers. But this change does little to guarantee that household consumption will increase, as coupons can simply substitute for cash which will then be saved.

Ultimately, while Kishida’s goal of helping working parents is laudable, the method he chose is wrong. Worse, another initiative under study would subsidize (through tax breaks) companies that increase wages under certain conditions. Such incentives can boost wages and employment, but they are hardly the most effective way to achieve this goal.

A more sensible approach would be to focus on increasing the mobility of workers within the labor market. It starts with the abolition of the deferred payment structure (increase in severance pay with seniority) and seniority wages (with seniority), as well as financial assistance for the retraining of workers in the middle of their career. . Additionally, the best way to increase productivity and wages in the long run is to devote more of the high school curriculum to STEM (science, technology, engineering, and math) subjects and abolish the determination system. college majors at the time. an entrance exam.

Another idea launched by the government of Kishida is to subsidize oil wholesalers when the retail price of gasoline reaches a certain threshold (around 170 per liter). But it sounds like the kind of fuel subsidy most economists hate. Such policies are typically found in emerging and developing economies, where they are supposed to buy the political support of low-income families. Once introduced, the program, with all its inefficiencies, will be politically perilous to reverse. A better alternative is the standard textbook approach of providing direct targeted support to low-income families and essential businesses.

Early indicators suggest that Kishida’s new capitalism is in fact just old socialism. It will not serve Japan well. The economy needs structural reforms to support its development, not subsidies that will only distort markets.