By Noriyuki Suzuki,
Japan approved a new policy blueprint on Friday that sought to focus on boosting wages and the economy's growth potential, with the hope that the country is now on the cusp of breaking with deflation and moving toward what it dubbed a "new stage."
The plan, endorsed by the Cabinet of Prime Minister Fumio Kishida, acknowledges the fragile state of the economy and especially private consumption, saying that the government should keep close tabs on the impact of a weak yen, which inflates import costs.
The government stuck to its fiscal rehabilitation goals but did not go further in setting a more ambitious target, despite the prospect of more debt-related costs limiting future government spending.
The latest policy document coincides with the Bank of Japan's gradual shift toward normalizing its monetary policy by raising interest rates and reducing its buying of Japanese government bonds.
"The government will ensure faster income growth than inflation. In order to maintain the momentum from next year onwards, we will deploy all policy tools to support wage hikes," the document said.
This year's annual labor-management wages talks produced the best outcome in three decades. With rising prices of everyday goods, households have yet to feel real wage growth. The government has implemented a slew of support measures, such as a 40,000-yen ($250)-per-person income and residence tax cut and reduced energy bills.
One pressing issue for rapidly aging Japan is how to cope with population decline, which is expected to accelerate in the coming decades. Kishida views the current period up until 2030 as the "last chance" to reverse the trend of declining births.
The government said the economy needs to grow by over 1 percent beyond 2030 to manage its finances and continue providing social security services, despite its demographic challenges.
Having focused in recent years on providing emergency support to help the economy absorb the shocks of the COVID-19 pandemic and manage the rising cost of living, the government underscored the need to rein in spending and restore Japan's fiscal health, the worst among developed nations.
The government maintained its goal of turning a surplus in its primary balance, a key indicator of fiscal health, in fiscal 2025 and "steadily" reducing the nation's debt, which is more than double the size of the economy.
Many analysts say Japan will likely miss the fiscal 2025 goal and argue that the heavily indebted nation needs to be more realistic. The government takes the view that priority should first go to ensuring economic growth, rather than restoring fiscal health.
For Japan's longer-term growth, the government will promote digitalization and automation, invest in key areas like green technology and semiconductors to ensure national security, and push for further labor reforms, including the promotion of job-hopping in search of better pay.
The policy document promised "multiyear, large-scale" support for investment to boost output as well as research and development in the fields of artificial intelligence and chips.
Japan will "consider necessary legislative steps to support the mass production of next-generation semiconductors," it said.
Takuya Hoshino, chief economist at the Dai-ichi Life Research Institute., said 1 percent real growth looks "ambitious," and difficult to achieve unless Japan seriously boosts productivity as the population falls.
"Investment holds the key to ensuring Japan's growth. A weak yen has led to a surge in inbound tourists but it should also serve as an opportunity for Japan to attract foreign investment. For now, though, this has not materialized," he said.
Japan has been seeking to attract 100 trillion yen worth of investment from overseas by 2030, by boosting its appeal as a key location in the global supply chain of critical items and a draw for startups and foreign workers. The goal is more than double the figure at the end of 2022.
