This year will be important for Japan’s economic growth as the country continues to struggle to control its debt problem. In the coming months, observers should watch several key indicators of Japan’s economic performance. Given Japan’s economic troubles, it is important that Prime Minister Shinzo Abe push ahead with his “third arrow” reforms, including continued reform of corporate governance, reduction of tariffs, and a push for increased immigration and female workforce participation.
The Government Budget
On Wednesday, the government of Japan passed a record budget of 96 trillion yen ($800 billion). Beginning in April, one-third of the budget will be allocated toward social security costs (one in four Japanese are over the age of 60), one-fourth to pay off national debts (public debt is more than double gross domestic product (GDP)), and roughly 5 trillion yen each toward defense, public works, and a new stimulus package.
The new budget plans to rely less on issuing new debt to pay for programs such as social security. Although new debt creation is still expected to reach up to 30 trillion yen ($250 billion), tax collections are expected to reach a record high of 55 trillion yen ($470 billion)—a 24 percent increase since Prime Minister Abe took office. Both imports and exports are also expected to rise, although the yen is at its weakest value against the dollar since 2007.
Wage Negotiations
Much of the prime minister’s economic plans rest on companies raising base salaries to match expected price inflation resulting from the Bank of Japan’s large purchasing of government bonds. The Bank of Japan is buying up to 12 trillion yen in government bonds a month. Wage negotiations in March will shed some light on how companies feel about the future of Japan’s economy, although recent trends show little faith. According to the Cabinet Office, a majority of businesses surveyed expect business conditions and economic conditions to remain unchanged over the next several months. However, almost one in four smaller businesses, especially those in manufacturing, anticipates things growing worse through winter.
The Economy
In February, the preliminary figures for quarterly GDP for the fourth quarter of 2014 will be released. Although GDP isn’t necessarily a good indicator for how well an economy is performing, it still gives watchers some idea of the economy’s health. For now, a second consumption tax increase has been delayed until October, after worse-than-expected results from the tax increase in April 2014. Recent surveys show that people feel worse off than a year before and don’t expect the economy to improve in the year ahead.
Continued Need for Reform
Speculation continues over the prime minister’s commitment to structural reform, despite his party securing an even tighter hold in the Lower House following a snap election. Although there will be movement on lowering the corporate tax rate, continuing negotiations on the Trans-Pacific Partnership free trade agreement, and moving certain employees into a merit-based pay system this year, many still see the prime minister as allocating his political clout toward not-so growth-oriented issues, such as a perceived view of growing Japanese nationalism.
Regardless, Prime Minister Abe is ready to declare his economic programs have beat deflation, but he should hold off on declaring victory until he has been made more progress on his third arrow promises.
