By Richard Katz*
For six long months, the Kishida administration, aided by outside advisers from universities and start-ups, has struggled to translate Prime Minister Fumio Kishida’s mantra of a “new form of capitalism” into concrete policies. The final product rather hollow than the Cabinet approved June 7, 2022 must have disappointed many participants.
On the fundamental principle – that healthy growth and fairer income distribution were necessary for each other – Kishida surrendered to criticism from the ruling Liberal Democratic Party (LDP) and financial markets who wrongly accused him of promoting socialism. In fact, fostering redistribution to reduce inequality and improve consumer demand is a long-standing ingredient of the standard macroeconomic recipe.
Some critics argue that rather than distributional measures, Kishida would achieve better wage growth through reforms that would improve labor productivity. If this is necessary, it is no longer enough to increase wages. Wages in recent decades have stopped increasing commensurate with productivity growth in many countries. This wage gap is worse in Japan than in other rich countries.
The result is a Japanese policy document full of rhetoric about achieving a “virtuous cycle of growth and distribution” — with few substantive measures to achieve it. It is also weak on how to achieve its growth goals, such as the stated goal of a tenfold increase in start-ups.
Kishida’s surrender began right after his inauguration in October 2021. During the “Kishida shock”, stock prices fell in response to his call for higher capital gains and dividend taxes so that multi-millionaires no longer pay lower tax rates than upper-middle-class citizens. Kishida quickly retreated.
The back-pedalling continued when Kishida decided he could not afford to offend Keidanren, the big business federation, on the eve of July’s upper house election. As the leader of a weak LDP faction, he also did not wish to annoy the stronger, more conservative factions led by former Prime Minister Shinzo Abe and former Finance Minister Taro Aso.
This left Kishida with nothing more than a rehash of failed measures already laid out by his predecessors. On wages, Kishida repeated Abe’s futile calls for companies to raise wages by 3% a year. He also repeated the 12-year goal of reaching a minimum wage of 1,000 yen ($7.40) per hour (at today’s exchange rate) but gave no deadline for reaching that level. (it is currently 930 yen [US$6.89]). He has proposed increasing the level of temporary tax breaks given to companies that raise wages by a certain increment, although this measure has had little impact in the past.
When some officials and outside experts involved in the deliberations protested the lack of specific solutions, they were told “to wait until after the upper house elections”. Kantei (the prime minister’s office) feared that going into detail would expose the discord between ministries and interest groups, which would harm the LDP in the elections. He promised those frustrated with the process that by the end of 2022 he would present a detailed “five-year plan”, but few have confidence in the end result.
The main driver of income distribution is the gap between businesses and households. Companies hoard “retained earnings” – profits that they don’t pump back into the economy through wage increases, investment, or taxes. Board members received documents showing that, from 2000 to 2020, retained earnings mushroomed as worker compensation and investment fell.
The government has compounded the problem by repeatedly raising taxes on consumers while dramatically reducing the corporate tax rate from 52% of profits in 1998 to 30% today. This has eroded corporate tax revenue by a few percent of GDP. Canceling the corporate tax cuts and using the resulting revenue gains to reduce the consumption tax would leave total tax revenue unchanged. No one at Council meetings even mentioned this option.
Japanese law has long mandated equal pay for equal work between regular and non-regular workers and between men and women. Yet, no government agency is responsible for investigating violations and punishing offenders. Worse still, the courts have effectively gutted parts of the law, taking a pro-employer view of what constitutes “reasonable” discrimination and ruling that seniority rules apply to non-regulars. The law must both be enforced and enforced.
Raising the minimum wage has surprisingly powerful ripple effects. It not only raises the income of those who are below the minimum, but also those who earn 15-20% above it. Given that the average salary of part-time workers is only US$8.20 and they make up almost a third of all employees, the impact on living standards and consumer demand would be dramatic.
Among 21 OECD countries, Japan ranks 18th with a 2020 minimum wage equal to just 45% of the national median wage. In a typical high-income country, it is 52%, while 50% marks the poverty line. These days, a 52% target in Japan would translate to around 1,155 yen (US$8.5).
It is not difficult to find practical solutions. The challenge lies in overcome political resistance to Kishida’s plan.
*About the author: Richard Katz is a Senior Fellow at the Carnegie Council for Ethics in International Affairs.