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Beware of Japan’s “New Capitalism”

Fresh off an electoral victory, Japan’s new prime minister, Fumio Kishida, is already offering a glimpse of what his economic policy program will look like in practice. Unfortunately, early signs suggest that while his aims are sound, his policies are not.

TOKYO – Japanese Prime Minister Fumio Kishida survived the general election on October 31, which came just weeks after his arrival in office as the new leader of the nation. Losing only 15 seats, the Liberal Democratic Party (LDP) performed better than expected and will maintain a comfortable majority in the House of Representatives, with 261 of 465 seats.

The relative loser was the largest opposition party, the Constitutional Democratic Party, which lost 13 seats, leaving it with 96. It performed worse than predicted, despite having coordinated its selection of candidates with other opposition parties.

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

Kishida appears to have benefited from a fortuitous decline in the COVID-19 infection rate. His immediate predecessor, Yoshihide Suga, was not so lucky. In late August, Japan’s seven-day average of new cases skyrocketed to their the highest level since the start of the pandemic, exceeding 25,000 in the week of August 23. By early September, Suga had announced his resignation.

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

But Kishida also managed to head off the Constitutional Democrats by adopting a more left-wing economic platform. During the campaign, he promised to place special emphasis on income redistribution, and to supplant the prevailing neoliberal approach with what he calls “new capitalism.” These promises defanged the Constitutional Democrats’ claim that past LDP policies under Prime Ministers Shinzo Abe and Suga had widened the income gap.

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The Restoration Party, however, was able to fill some of the void on the center-right by criticizing Kishida’s emphasis on redistribution, arguing that what the country really needs are structural reforms to boost the growth rate.

Now that Kishida and the LDP have prevailed, the big remaining question is what “new capitalism” will mean in practice. The early signals do not bode well. Kishida’s first concrete policy decision was to disburse ¥100,000 ($878) to each person aged 18 or under. And though this program contains a means-testing provision (on household income), the ceiling is so high that 90% of all Japanese minors qualify.

Then, in response to the predictable criticism that cash disbursements will merely increase household saving rather than consumption, Kishida declared that half of the benefit would come in the form of shopping coupons. But this change hardly guarantees that household consumption will increase, because the coupons can simply substitute for cash that will then be saved.

Ultimately, while Kishida’s goal of helping working parents is laudable, his chosen method is misguided. Worse, another initiative under consideration would subsidize (by tax rebate) firms that raise wages under certain conditions. Such incentives may tilt wages and employment upward, but they are hardly the most efficient way to achieve that goal.

A more sensible approach would be to focus on increasing worker mobility within the labor market. That starts with abolishing the deferred payment structure (increasing severance pay with tenure) and seniority wages (with tenure), together with financial assistance for retraining mid-career workers. Moreover, the best way to raise productivity and wages in the long term is to devote more of the high-school curriculum to STEM (science, technology, engineering, and math) subjects, and to abolish the system of determining college majors at the time of an entrance exam.

Another idea that Kishida’s government has floated is to subsidize oil wholesalers when the retail gasoline price hits a certain threshold (around ¥170 per liter). But this sounds like the kind of fuel subsidy that most economists abhor. One usually encounters such policies in emerging and developing economies, where they are meant 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 plain old socialism. That will not serve Japan well. The economy needs structural reforms to support its development, not subsidies that will merely distort markets.