Welcome to Issues in Japan.
The topic this time is “The Crisis is an Opportunity to Reform for Growth.”
I would like to share the insights and analysis of Ms. Hiroko Ohta, Distinguished Professor, National Graduate Institute for Policy Studies, along with her article carried on Sankei Shimbun website, January 28, 2022.
Why is the recovery so weak?
Japan's economic growth this year will be lower than that of the United States and the euro zone, according to the outlook of international organizations.
Last year's growth rate was quite low, so one would expect it to be higher, but this year's forecast is also low, indicating the weakness of Japan's recovery from the crisis.
Why is the recovery so weak, given the massive fiscal spending that has been undertaken to combat the effects of the Covid-19 pandemic?
We need to think carefully about this point in our economic policy this year.
The first reason may be that the measures to deal with the Covid-19 pandemic have concentrated on the near-term support measures, and the policies leading to post-Covid-19-pandemic growth are too weak.
In times of crisis, the market and industrial structures change drastically.
In response, policies are needed to strengthen the business structure and support the transition to a new industry, but these medium- and long-term perspectives are too lacking.
Second, delays in reforms that began before the Covid-19 pandemic have become a further drag on growth.
The delay in digitalization is the most obvious example.
Movements accelerated by the Covid-19 pandemic, such as digitization, greenization, and changes in work styles, had already become important issues even before that.
Therefore, in order to enhance the resilience of the Japanese economy, a two-sided strategy is needed: to create a new era of growth and at the same time, to tackle all the structural issues that have existed for some time.
The ongoing battle against the Covid-19 pandemic will not be easy to manage, but this year will be a crucial one for future growth.
Prime Minister Fumio Kishida's policy speech and other statements have outlined a new vision for growth, and several meetings have been set up.
Specific measures will be clarified in the future, but in order to actually achieve growth, it is inevitable that we will also have to make drastic efforts to tackle the structural issues that have existed for some time.
Structural Reforms to Make Human Capital Thrive.
For example, it is said that "investment in human capital" will be drastically strengthened in order to create a virtuous cycle of growth and distribution.
In a transition period like the present, the most important thing is to invest in human capital.
However, in order to actually make the most of human resources, it is essential to reform the rigid labor market and increase the mobility of human resources.
Human resources can only be utilized if the system, which is based on the premise that one company is fixed, is reviewed and the system is made to support labor mobility.
In other words, it is necessary to shift to a "proactive labor policy" that emphasizes job training and other forms of support for changing jobs.
Everyone agrees with the expansion of investment in human resources, but there is always strong opposition to labor market reform.
In addition, one of the keywords of the new capitalism is "public-private partnership."
Indeed, there is a growing number of areas in which the public and private sectors are working together, such as research and development of future technologies with high risks and investment in the field of economic security.
However, the more we emphasize cooperation, the more we must remove the factors that help the public sector hinder the growth of the private sector.
The so-called bedrock regulations are a typical example.
In general, there are two types of growth strategies: supportive measures such as subsidies, and removal of obstructive factors through regulatory reform.
In Japan, subsidies and taxation are by far the most common forms of support, while the removal of obstructive factors, against which opposition is strong, has lagged behind.
In terms of obstructive factors, the strong vertically segmented administration of ministries and agencies has been a structural problem for some time.
As for digitization, progress can be expected with the creation of the Digital Agency.
However, in the area of climate change countermeasures, for example, the Ministry of Economy, Trade and Industry and the Ministry of the Environment have issued different policies on carbon pricing, which is a key issue, and the direction of policy is still unclear.
Clearly articulate the growth picture.
It's not just about growth strategies.
Even in improving distribution, the vertical division of ministries and agencies stands as a barrier.
In the Covid-19 pandemic, if the government could track the movement of people's income in real time and provide benefits without application to those who needed assistance, it would have been able to provide more assistance to those suffering from reduced income.
However, the government does not have a mechanism to do so.
In order to have this mechanism in normal times, the vertical division between the Ministry of Finance, which has tax information, and the ministries in charge of benefits would have to be broken down.
In addition, for "distribution to future generations," full-scale reform of the social security system, in which the balance of benefits and burdens differs greatly among generations, is essential.
This year, as the baby boomers begin to enter the latter stage of elderly life, the urgency of reforming the social security system is increasing.
Labor market reforms, reforms of bedrock regulations, and reforms of the social security system have been strongly opposed and politically difficult, which is why they have been left untouched until now.
However, unless we take action on these issues, neither growth nor distribution will be realized.
Now that a sense of crisis has been shared due to the Covid-19 pandemic, it is a good time to make a full-scale effort.
Prime Minister Kishida was once criticized for having a weak reform mindset, but he has clearly denied this himself.
I think he is right.
We cannot be so optimistic about the current Japanese economy that it can grow without a reform mindset.
We need to clearly indicate the new form of growth that we should be aiming for, and broaden the public's perspective to the distant future, so that we can carry out the difficult reforms that lie ahead.
This is what is strongly expected of Prime Minister Kishida as he heads into the post-Covid-19 pandemic.
The avobe are the insights and analysis of Ms. Hiroko Ohta, Distinguished Professor, National Graduate Institute for Policy Studies, along with her article carried on Sankei Shimbun website, January 28, 2022.
That’s all for now. Thank you for your interest.
