Japan’s new policy plan assumes wage increases and an end to deflation

TOKYO (Kyodo) – Japan approved a new policy plan Friday that would focus on increasing wages and economic growth potential, with hopes that the country is now on the verge of breaking deflation and heading towards what it calls a “New Scene.” ”

The plan, approved by Prime Minister Fumio Kishida’s cabinet, takes into account the fragile state of the economy and especially private consumption, saying the government should closely watch the impact of a weak yen that increases import costs.

The government stuck to its fiscal rehabilitation targets but did not go further in setting a more ambitious target, despite the prospect of higher debt costs limiting future government spending.

The latest policy document coincides with the Bank of Japan’s gradual shift toward normalizing monetary policy by raising interest rates and limiting purchases of Japanese government bonds.

“The government will ensure that incomes grow faster than inflation. To maintain the momentum from next year, we will use all policy tools to support wage increases,” we read in the document.

This year’s annual executive pay talks produced the best results in three decades. With rising prices of everyday items, households have not yet experienced a real increase in wages. The government has implemented a number of support measures, such as a 40,000 yen ($250) per person income and residence tax cut and reduced energy bills.

One of the pressing issues for a rapidly aging Japan is how to cope with population decline, which is expected to accelerate in the coming decades. Kishida sees the current period until 2030 as the “last chance” to reverse the declining birth rate.

The government has said the economy needs to grow by more than 1 percent after 2030 to manage its finances and continue to provide social security services despite demographic challenges.

While focusing in recent years on providing extraordinary support to help the economy absorb the shocks of the Covid-19 pandemic and cope with rising costs of living, the government has emphasized the need to rein in spending and restore Japan’s fiscal health to the worst among developed countries.

The government maintained its target of achieving a surplus in the primary balance – a key indicator of the health of public finances – in fiscal 2025 and a “sustainable” reduction in public debt, which is more than twice the size of the economy.

Many analysts say Japan will likely miss its 2025 budget target and say the heavily indebted country needs to be more realistic. The government’s position is that the priority should be ensuring economic growth first, rather than restoring good fiscal condition.

To ensure Japan’s long-term growth, the government will promote digitalization and automation, invest in key areas such as green technologies and semiconductors to ensure national security, and push for further labor market reforms, including promoting job switching in search of better pay.

The policy document promised “large-scale, multi-year support” for investments to increase production and research and development in artificial intelligence and chips.

Japan “will consider necessary legislative steps to support the mass production of next-generation semiconductors,” it said.

Takuya Hoshino, chief economist at the Dai-ichi Life Research Institute, said 1 percent real growth seems “ambitious” and difficult to achieve unless Japan seriously increases productivity in the face of declining population.

“Investment is key to ensuring Japan’s growth. The weak yen has led to an increase in incoming tourists, but it should also represent an opportunity for Japan to attract foreign investment. However, this has not materialized yet,” he said.

Japan is seeking to attract 100 trillion yen of foreign investment by 2030, increasing its attractiveness as a key location in the global supply chain of key items and attracting start-ups and foreign workers. The end-2022 target is more than double that.