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Inside Japanese politics

Kishida's 'new capitalism' raises economic reform setback fears

New Japanese prime minister considers hiking tax on investment income

From left, Junichiro Koizumi, Japan's prime minister Fumio Kishida, and Shinzo Abe (Nikkei montage/Reuters)

TOKYO -- Japan's newly installed Prime Minister Fumio Kishida is hoping to implement his concept of "new Japanese capitalism" under which he ran his campaign to be leader of the ruling Liberal Democratic Party. While he has vowed to change the neoliberal policies left in place by his predecessors, it is unclear exactly what kind of reform he is aiming for.

He noted that while deregulation and structural reforms since Prime Minister Junichiro Koizumi have led to economic growth, they have also created inequality and social division. Kishida wants to implement a "Reiwa income-doubling plan," referring to the current Reiwa era under Emperor Naruhito and the 1960 income-doubling plan of former Prime Minister Hayato Ikeda.

Kishida said that Abenomics, the economic program implemented by former Prime Minister Shinzo Abe that consists of monetary easing, fiscal stimulus and structural reforms, had strengthened the economy and he pledged to continue in those three areas.

"We will not give up on putting Japan's public finances in order, but we must get the order right," he said during his LDP leadership campaign.

As the country continues to battle COVID-19, Kishida said he would employ active fiscal policy, promising a spending package of several trillion yen by the end of the year. He also promised government subsidies to help small- and medium-sized businesses.

In the first three years of his administration from 2012, Abe emphasized regulatory reform, believing that profits from major Japanese companies would trickle down to the rest of society. But from the middle of his premiership, his administration shifted to a "virtuous cycle" of growth and distribution.

Under this policy, he called for companies to increase pay by at least 3% to spur economic expansion and to treat regular and non-regular staff equally. He also implemented structural reforms to tackle the declining birthrate and the aging population under his "dynamic engagement of all citizens."

Kishida plans to adopt and speed up the "distribution" element of the revised Abenomics, but the details of such policies have not been unveiled.

After being elected president of the Liberal Democratic Party on Sept. 29, Fumio Kishida, right, presents a bouquet of flowers to his predecessor, Prime Minister Yoshihide Suga.

At the same time, Abe's administration already had growing concerns that Japan could not confront a rising China while relying entirely on the market and economy. A form of "state capitalism," or cooperation between industry and the political leadership, with the application of administrative acumen, would be needed.

Because of that, officials from the Ministry of Economy, Trade and Industry were put in charge of policy management. Kishida, like his predecessor, will push for economic security and a "free and fair distribution of data." He will appoint Takashi Shimada, a former top official at METI, as his executive secretary of political affairs. In these broad policies, there is a strong sense of Kishida acting as Abe's successor.

However, Kishida will abolish the Committee on Growth Strategy, a group that also includes Heizo Takenaka, professor emeritus at Keio University and the leader of the Koizumi reforms. In its place, Kishida will create a Committee for a New Japanese Capitalism, a tentative name, to develop a vision for a post-pandemic economy and society. The Regulatory Reform Promotion Council in the Cabinet Office will also be rebranded as the tentatively named Digital Extraordinary Administrative Research Council.

The future of the advisory council for the National Strategic Special Zones, which reports directly to the prime minister, is also in question. Takenaka and others have promoted the "super city" idea of urban development through bold regulatory reform, but this shift from neoliberalism could be fraught with conflict.

Kishida will face a lower house election on Oct. 31. If he stays in power, he will need to deal with the fiscal 2022 budget in December. The regular Diet session will convene in the first half of 2022, followed by an upper house election in the summer. It will only be after that upper house election that Kishida will be free to work on his own policies.

For now, Kishida's politics can be symbolized by his focus on the distribution of tax. He wants to break the "barrier" of the 100 million yen ($899,000), at which the burden of income and resident taxes peaks.

Taxes on salaries and wages progressively increase to 55%, but gains from stock transfers and dividends are taxed at a flat rate of 20%. Kishida believes this low tax on investment income benefits the wealthy and increases inequality.

Kishida, instead, wants to create a "virtuous cycle in which raising the incomes of a wide range of people stimulates consumption and acts as a catalyst for the next stage of growth." Another new committee, tentatively named Public Price Evaluation Review Committee, will be set up to accelerate wage hikes for workers like caregivers and child care staff, which are determined by the government. Kishida has also called for a "revival of the Reiwa middle class" with more support in education and housing costs for families with children.

During the election campaign for the LDP presidency, Kishida strongly opposed the proposal by his opponent Taro Kono to fully fund basic pensions through consumption tax. Instead, he proposed the concept of "social insurance for all workers."

This would allow anyone who works for a company, whether they are in full-time or part-time employment, to join the company's employee pension plan and health insurance scheme, and is considered a part of a growth strategy to ensure future security. It will also increase the burden of insurance premiums on companies.

Taro Miyamoto, a professor at Chuo University who is an expert on welfare politics, explains in his recent book, "The Politics of Poverty, Elder Care and Child Care," that neoliberal policies in Japan are not driven by a consistent ideology or specific political force. He sees a "more structural, deeply rooted" bias at work.

One challenge is Japan's chronic public finance woes. The country has the largest outstanding long-term debt among leading countries, and its social welfare spending is set to increase as its population ages. The Ministry of Finance is doing its utmost to curb spending.

On the other hand, while Japan's tax rate is the lowest among the major countries, its people feel that they are heavily taxed. They harbor a distrust of politicians and officials and do not see that the taxes they pay will be redistributed as welfare. As a result, policies that increase taxes are difficult to implement.

Kishida has said he would not increase consumption tax for a decade. If the government refuses to give up on consolidating Japan's public finances, there is no escaping the fact that spending will have to be brought in check. It also bears noting that supply-side reforms to increase growth have been left on the wayside in Kishida's policy pledges during the LDP leadership contest.

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