Abe’s risky economic reforms

 

[By Jiao Haiyang/China.org.cn]

Q: Abe’s hike of the consumption tax rate is controversial, because it may hurt consumption. What is your view?

A: I think his decision to raise the consumption tax is not whimsical. At this juncture, Japan is left with no other choice. With its 1,100 trillion yen of debts, and growing expenditures, Japan is actually spending more than it can afford. Since its sources of revenues are limited, Japan can only rely on tax increases. And taxing consumption has the most immediate effect.

Abe’s decision is necessitated by economic circumstances, but it is a well-calculated move. He did it in steps, rather than raise the tax rate from 5 percent to 10 percent in a single breath. Starting in April, he first raised the rate from 3 percent to 5 percent, and then to 8 percent. Public opinion is closely monitored to see if there is room for further hike and how to institute it, incrementally or otherwise.

Meanwhile, he implemented policies to cushion the impact of tax hikes, for instance, bestowing larger fiscal transfers and subsidies on poor households.

He is also mulling cutting corporate taxes to counteract the negative fallout of heavier consumption tax. All his moves are linked. Together they form a system, aimed at achieving an inflation rate of over 2 percent and speeding up economic recovery. However, Abe will encounter practical problems.

Another challenge lies in how he can harness the ruling troika of politicians, bureaucracy and businesses in Japan and tame vested interests. His policies are relevant only when they are supported by associations like Keidanren.

Q: Abenomics’ impact on China?

A: A hallmark of Abe’s economic overhaul is the restructuring of Japan’s economy, with an emphasis on enhancing its productivity and competitive advantage, as well as on phasing out obsolete industrial capacity.

As such, Japanese firms will surely relocate part of their outmoded productions and assembly lines to areas outside of Japan. China is a potential destination.

For our part, we need to examine if these productions are beneficial for China’s own industrial upgrading, and help resettle them in needy locales.

On the other hand, an undeniable feature of Abenomics is its “de-Chinese” focus, in particular, its desire to wean Japan off its dependence on China as a part of its global industrial chain. Several industries even seek to be disconnected from the operations in China.

This tendency has a real impact on Sino-Japanese economic partnerships and the impact is becoming broader in scale and scope.

Q: How should people regard the changing balance of economic power between China and Japan?

A: I think the problem lies more with Japan than with China. Japan must first reposition itself correctly. It must come to terms with the changing economic picture.

After China’s GDP overtook Japan’s in 2010 to become the second-largest economy, many Japanese, astounded, could not accept the fact. All of a sudden, their sense of superiority that Japan was always the better economy in the post-war world evaporated. Add to that the pain of the lost 20 years, pessimism is all the rage in Japan, and it was given an outlet in 2010, the pivotal year that China surpassed Japan. Bitter feelings have since lingered.

As China consolidates its lead over Japan, Japan is struggling to keep up. In 2013, China’s GDP is 9.3 trillion yuan, almost twice as large as Japan’s 5 trillion yuan. The Japanese government needs desperately to allay its citizens’ frustration and anger at being bested economically by China.

If it refuses to see things as they are, Japan will end up losing badly. Abe is now exploiting popular fears of China and magnifying them. In other words, he is provoking the Japanese, expecting harder work from them to spur the economy, a move that is not without consequences.

Should his reform fail, the unpalatable results will be myriad.