Is Japan's LDP Beginning to Get Serious About Reigning In Public Debt?


Last Tuesday, Shinzo Abe’s government approved the Basic Policies for Economic and Fiscal Management and Reform, a policy document that sets interim goals in order to achieve a primary balance surplus by 2020 and begin righting the nation’s debt-laden public finances. The aim is to limit social security spending increases to about 500 billion yen per year until 2018. The modest outline did not go much further, however, failing to suggest any specific reforms or adjustments to reach this goal. Neither did it set a cap for the government’s total outlays.

The document’s vagueness, focus on “flexibility,” and lack of an overall spending cap are all deliberate choices by Prime Minister Abe to allocate limited political capital on other priorities. They also reflects his beliefs about the dangers that austerity measures pose for Japan’s economic recovery, drawing ongoing lessons from Greece’s worsening financial crisis.

As the Nikkei Asian Review reports, Abe is more focused on passing his contentious security bills and Trans-Pacific Partnership (TPP)-related legislation this fall than duking it out over the annual budget. An official close to Abe commented that the Prime Minister does not want to make spending cuts a major issue within his party or in the Diet. Such a fight would take away important time from the security and TPP debate. Avoiding an overall spending cap will make achieving a consensus on the budget much smoother.

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This new policy direction will also help head off any major budget-related fights ahead of the ruling Liberal Democratic Party (LDP)’s intraparty leadership election this September, and the Upper House elections scheduled for summer 2016.

In addition to these political calculations, there is also an economic-ideological calculus. Abe believes that Japan’s fiscal correction can best be achieved through a focus on higher tax revenues spurred on by robust economic growth – not fiscal discipline.

The ongoing financial crisis in Greece appears to be influencing Abe’s thinking: convinced that his Abenomics will work, Abe sees spending cuts as a “path to a Greece-style debt crisis.” He fears that austerity measures would shutter Japan’s economy, which is just barely sputtering to life. Therefore, he does not want to impose a spending cap or increase consumption taxes above 10 percent.

On the flip side, Abe’s critics and fiscal hawks fear that the government’s projections for Japan’s economic growth, which assume productivity level increases last seen in the 1980s and ‘90s, is too optimistic.

Investors are also concerned by Abe’s declining interest in economic policy – even though he had started out on the right foot. Almost a year after he took office (for the second time), he became the first sitting Japanese prime minister to ring the closing bell at the New York Stock Exchange in late September 2013 – signaling to international markets the seriousness of his emphasis on Japan’s economic recovery. When Abe first retook office, it appeared that he was ready to learn from the mistakes of his previous term. He promoted Abenomics as the centerpiece of his premiership, and framed the Lower House snap election last December as a referendum on his economic policies.

Yet investors are growing concerned that constitutional revision and security issues are Abe’s new focus. Mizuho Securities said in a June 17 note to investors that Abe stayed at the government’s regulatory reform council for only 14 minutes.

As much as Abe has accomplished in the economic realm so far, Japan still has a long way to go. It is too soon to be letting such an important issue slip off the radar. As much as internationally conscious observers can appreciate Abe’s efforts in the security realm, the question remains: how long will it take Abe to re-learn the lesson that the most important issue to domestic voters is their own livelihoods?

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