Japan Economic Package: Update Jan. 6, 2024.

 

Japan OKs over $113 billion economic package to ease inflation shock

Article Source: https://mainichi.jp/english/articles/20231102/p2g/00m/0na/038000c

Ideas:

Its rare that a proposed economic package, which first introduced, remains mostly the same when it finally approved. But it seem to tax cut of 40,000 yen per person and the 70,000 yen payouts for low-income households was able to keep the same numbers without losing its intended value.

It sounds very good but can a one-off tax cut really improve the Japanese economy? Of course even the Japanese government has budget constraints and maybe 40,000 tax cut was the limit that the Japanese government could afford at this point.

Of course the main question is how is the Japanese government going to pay for the tax cuts and the payouts, when the Japanese government has one of the highest debt to GDP ratio among advanced nations.

While the tax cut and payout are the first step to maybe "completely break with deflation" its going take much more for the Japanese economy to grow significantly.

The mindset of companies and households need to change from a deflationary mindset to one of improved growth through wage increases and more consumer spending in the Japanese economy, and that is not going to happen in one quarter or even half a year, as it could take much longer to get consumers spending significantly and companies, all companies, to increase wages.

At the same time, price hikes will continue in 2024 until, all companies, finally begin to increase wages. But the challenge is, as companies pass-on their costs to the next in the supply chain, those same companies that just increased wages, now might have to pass-on the wage increases to the next in the supply chain, including the final retail customer.

The Japanese government is already one of the biggest government spenders among advanced economies, and an extra supplementary budget is no surprise here.

And as always, anytime there is faltering public support, government will find ways to try and improve the public support, and in this case returning tax revenues might help with many households, but at the same time might not improve public support.

Also, opposition party lawmakers, like everywhere in the world, will find fault with the current proposals and might come up with their own ideas related to tax cuts and one-time payouts and also mentioning the time need to pass-on extra tax revenue.

The challenge, once all of the tax cuts and payouts are finalized and finally able to go to the Japanese public, the Japanese government needs to makes sure access is easy and doesn't require a lot of un-needed paper work for households or individuals to get what the Japanese government wants to give them.

At the same time, the Japanese government needs to make sure that schemers take advantage of the Japanese government with cheating or other means to cheat the government.

Rarely, once spending increases, do governments reduce outlays, as most of the time spending gets higher and higher. And Japan is no exception, as it will be challenged to actually cut spending back to the pre-crisis level.

It might take more than one tax cut and or more than a one-time payout for household consumer sentiment to improve, and the long-established deflationary mindset has been entrenched in the Japanese economy for over a decade.

The Japanese economy might only grow 1 percent, but that is better than nothing, and its  a start, its a platform for better growth in the future.

And at the same, tax incentives and regulatory reforms are much needed in the Japanese economy along with helping small and mid-size firms with helping them increase wages.

For too long, like many advanced economies, many of the benefits go to large companies and the small and mid-size companies get left out.

More than 70 percent of the Japanese workforce works for small and mid-size companies. The challenge is if the government doesn't find ways to help the small and midsize companies Japan its going to have a two-tiered wage system based on haves and have-nots as many small and mid-size companies can't afford to give wages hikes.

That is the problem now in South Korea, as the variance for  wages and benefits for large  companies and small companies is so large that many university graduates don't want to work at small and midsize companies.

While "the new frontiers" of growth sounds good, will they really improve the daily lives of households and or individuals in the Japanese economy?

Yes, the Japanese economy needs to economic drivers, beyond exports, but what the Japanese economy really needs is improved productivity per capita, as it has one of the lowest per capita labor productivities among advanced economies.

Japan also needs new innovation drivers, but sometime old established traditional companies are slow to change in Japan.

Private consumption or consumer spending might be resilient at this time, but inflation might eat away at consumer sentiment, and households and individuals will get tired and reduce their spending.

Prime Minster Kishida can only do so much, with suggesting and asking companies to increase wages but in the end companies will decide what is right for them and when to increase wages.

Wage increases might have been 3.58 percent, for large companies, but again, 70 percent of the Japanese workforce might not have received a wage increase in April 2023, as most don't work for large companies, but small and mid-size companies.

Inflation is expected to continue in 2024 for companies and might need to increase wages more than the 3.58 percent of 2023. If not real wages, again, will be outpaced by inflation, which means, again, households are going to be stressed even more from inflation.

Have a nice day and be safe!