Abenomics rolls on in Japan’s post-election budget

Despite the budget stimulus and the implementation of QE, global investors have doubts that Shinzo Abe will undertake the politically fraught third arrow of Abenomics.

Following last month’s snap election victory by Prime Minister Shinzo Abe’s ruling Liberal Democratic Party, Japan’s Cabinet has just approved a national budget of ¥96.34 trillion, the largest ever.

Attempting to encourage a tenuous economic recovery, the budget deficit has declined by ¥4 trillion to ¥13.4 trillion, a hopeful sign the LDP government is moving towards its eventual goal of a surplus by 2020-21. However, the Cabinet Office still concedes the deficit by then will still at least likely be an estimated ¥11 trillion.

The budget aims to continue the stimulus strategy of Abenomics, with a particular emphasis on revitalising stagnant regional areas, which was a key component of the LDP’s election platform. Around 15 per cent of the budget, ¥15.5 trillion, is going towards local government grants, promoting measures such as shopping vouchers for local businesses, fuel subsidies for the fishing industry, subsidies for rice farmers, and low-cost loans for regional small businesses.

The Abe government hopes to support improved education and employment services in regional areas, to encourage young people and families to remain and halt the decline of an ever-aging population, worsened by rural-urban drift. However, the southernmost island of Okinawa has had its funding reduced, as its provincial government continues to resist the presence and relocation of US military bases.

Over 30 per cent of the budget is to be spent on social security, at a record ¥31.5 trillion. Aged pensions and payments to low-income households, including child-rearing support allowances will increase, as well as medical care funding. Rental assistance and nursing care subsidies will be trimmed. Over ¥700 billion will be devoted to expanding sorely-needed day care as part of a ¥900bn package promoted as ‘women’s empowerment’, which also includes more employment and training services and expanded university student loans.

The budget also sees the largest-ever allocation to rising defence spending of ¥4.98 trillion -- a 2 per cent increase. Continuing Abe’s highly active diplomacy to promote Japan’s trade and international image, ¥685.4bn is going to the Foreign Ministry, a 2.9 per cent increase; and ¥423.8bn to Overseas Development Assistance, a 0.2 per cent increase.

Abe has pledged to back completion of the Trans-Pacific Partnership multilateral trade talks, and conclude an FTA with the EU, complementing the Japan-Australia Economic Partnership Agreement that has now just come into effect. As well as seeking to improve prickly diplomatic ties with neighbouring Korea, Abe also hopes for better relations with China, Japan’s largest trading partner. Showing some progress towards this ambition, security talks between Japan and China to establish a ‘hotline’ to defuse potential clashes in the East China Sea have finally commenced.

Funding for the budget has been aided by savings extracted from efficiency measures in the bureaucracy. Extra tax revenue was also received in the current fiscal year due to higher corporate profits, as well as from last year’s consumption tax hike, from 5 per cent to 8 per cent However, this increase crushed consumption and tipped the economy into recession.

Around 40 per cent of the budget will still be funded by borrowing. This ongoing indebtedness will see outstanding government bonds estimated to cost ¥807.1 trillion by the end of fiscal 2015. There are nevertheless hopes that Japan’s public debt-to-GDP ratio, the highest in the developed world, may now be reaching its peak at 245 per cent.

Corporate profits have been assisted by the depreciating yen, particularly the large vehicle and electronics export industries, as well as the tourism, agriculture, forestry and fishery sectors. However, higher import prices due to the weaker yen have harmed operating costs for smaller businesses. More expensive imports have also discouraged consumer demand, worsened further by real wages continuing to decline.

The recent slump in global fuel prices is hoped though to offset this somewhat. The Abe government is pushing for higher wages, but this is being resisted by the main corporate lobby group, the keidanren, which only wants to concede higher bonuses not raised salaries, which would provide greater security and entrench the confidence of wage earners.

This is despite Japanese firms sitting on record high cash holdings of ¥233 trillion, while households are now reducing their savings to a negative rate of 1.3 per cent. This is the first postwar negative savings rate recorded in Japan, breaking a tradition of high household saving, which peaked at 23.1 per cent in 1975. To encourage business to lift wages, a corporate tax rate cut of 2.51 per  cent to 32.11 per cent -- with possible further reductions in future -- has been proposed by the LDP as part of a potential tax reform package.

The Bank of Japan claims a 1 per cent base wage increase is the minimum required to secure growth. Unemployment nevertheless remains steady at 3.5 per cent. Japan’s economy is back in positive growth of 0.7 per cent in the last quarter, with an annualised inflation rate also at 0.7 per cent. In the other major policy tool of Abenomics, the BoJ is continuing its massive quantitative easing program, with an average of ¥80 trillion of bonds being purchased per month. Ten-year bond yields have now reached a record low of 0.3 per cent.

The budget bills are due to be presented to the Diet on January 26, and should pass easily given the comfortable majority enjoyed by the LDP and its coalition partner Komeito. While the budget’s stimulus spending and QE remains the core of Abenomics, doubts continue among international investors over whether Abe will finally undertake the more politically fraught ‘third arrow’ of Abenomics, which includes complex and far-ranging structural reform to various sectors of the economy.

Craig Mark is associate professor of International Studies at the Kwansei Gakuin University.