Japan OKs over $113 billion economic package to ease inflation shock
TOKYO (Kyodo) -- The government approved Thursday an economic package of over 17 trillion yen ($113 billion) to help households hit by inflation with one-off tax cuts and chart a growth path for the economy beyond the cost-of-living crisis.
The total size will likely reach around 37.4 trillion yen when private-sector spending on projects related to the package is included, in the latest push by Prime Minister Fumio Kishida to get more money into people's pockets at a time when real wages are falling.
The key features of the measures are a tax cut of 40,000 yen per person and 70,000 yen in payouts to low-income households who are exempt from paying income and residential taxes and would otherwise be left out.
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.
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Designed to ensure a "complete break with deflation," the new measures are expected to curb consumer prices by around 1 percent as fuel costs will be cut by government subsidies that will be extended to next April. The economy, meanwhile, will get a 1.2 percent boost as measured by inflation-adjusted gross domestic product.
"Pay hikes are not outpacing inflation. This is the biggest challenge facing us," Kishida said at a press conference after his Cabinet finalized the package.
"If we miss out on the opportunity, it will become more difficult to exit deflation. We will boost the disposable incomes of households and consumption, and create a virtuous cycle," he said.
Ideas:
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.
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A supplementary budget will be formed to fund part of the package, which is expected to be around 13.1 trillion yen. The government plans to get parliamentary approval for the budget by the end of November.
Kishida wants to return a portion of increased tax revenues in recent years to the public at a time of faltering public support for his Cabinet as inflation continues to squeeze household budgets.
Opposition party lawmakers and critics, however, question the use of tax cuts as inflation-relief measures, partly because it will take time to legislate them.
Ideas:
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.
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Around 3.5 trillion yen will be used for the 40,000 yen tax reduction -- 30,000 yen for income tax and 10,000 yen for residential tax. The payouts for low-income households are expected to cost around 1.1 trillion yen.
The Liberal Democratic Party and its junior coalition partner Komeito will work out details toward the year-end, with the planned tax reduction expected to kick in in June.
After ramping up spending to cope with the COVID-19 pandemic and rising prices caused by Russia's war in Ukraine, debt-ridden Japan faces the challenge of reducing outlays to pre-crisis levels.
Ideas:
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 challenges to actually cut spending back to the pre-crisis level.
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The new package is primarily intended to mitigate the pain felt by households, but it also aims to boost the nation's potential growth rate, which is estimated to be around 1 percent.
The government plans to utilize a spate of tax incentives, regulatory reforms and other means on top of fiscal spending. Small- and mid-size firms, in particular, will be incentivized to raise wages and invest in labor-saving technologies.
Another key pillar is to increase investment in critical areas for national security and future growth, including semiconductors and generative AI.
Ideas:
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.
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The government will focus on space and oceans as "the new frontiers" of growth. A new fund will be set up at the Japan Aerospace Exploration Agency to promote research and development at private-sector firms and universities, with 1 trillion yen as its initial target of assistance.
The world's third-largest economy has expanded for the third straight quarter to June, with private consumption and capital spending relatively resilient. But economists expect the growth momentum to lose steam as consumers are increasingly feeling the pinch of inflation.
Ideas:
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.
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"I will take the lead and urge companies to go ahead with bigger pay hikes than this year for the 'shunto' negotiations" in early 2024, Kishida said.
The annual wage talks this year between labor unions and management yielded the best outcome in about three decades with an average 3.58 percent increase. But real wage growth remains negative due to being outpaced by inflation.
Ideas:
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!
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