Structural challenges

Japanese Prime Minister Shinzo Abe formally unveiled an ambitious set of economic reforms on Tuesday, June 24, in his latest bid to reinvigorate the nation's economy and put it back on a growth trajectory. This is the third element of Abe's three-pronged strategy, named "Abenomics," to boost Asia's second largest economy through a combination of monetary, fiscal and structural policies.

The plan, which is aimed at restoring the nation's global competitiveness, foresees changes in areas such as labor, investment and agriculture, among others. In a DW interview, Naoyuki Yoshino, Dean of the Asian Development Bank Institute (ADBI), says that Japan's economic problems can be solved by tackling the crucial issue of an ageing population.

DW: What are the main aspects of Abe's current round of reform agenda?

I think that more than 20 years of Japanese recession derived from an ageing population, which is one of the biggest problems facing the nation. Japan has the highest life expectancy in the world, but the retirement age is just 65. It is very difficult to support all these retired people. Therefore, PM Abe wants to raise old people's labor participation.

The government also proposes to increase the proportion of women in the workforce by making it easier for them to manage both private and professional lives. The plan foresees government expanding inexpensive child care facilities across the country. Furthermore, Japan intends to expand the use of robots in production, in order to reduce the impact of ageing population on the economy.

As part of the new plan, the government said it would cut the corporate tax rate to below 30 percent over several years from next year. Would this encourage more investment and boost growth?

There are two views about the reduction of the corporate tax rate. One view is that even if the corporate tax is reduced, firms will not invest as the measure will not lead to a jump in demand for goods and services, thereby having no impact on the companies' profitability. In fact, domestic demand in Japan is lower than in the past.

But another view is that the decrease in tax rates could incentivize foreign companies - which have been very reluctant to come to Japan - to invest in the country, thus augmenting competition in the Japanese market. So, if that happens, then that could contribute to an expansion of output. However, there can be a real boost to demand and GDP growth only when more old people and women start working.

What impact will this tax cut have on government revenues and in turn on the nation's massive debt, which is more than twice its annual gross domestic product?

In the past, governments were only talking about increased public spending, particularly on social welfare and pension benefits. But I strongly suggested PM Abe this time around that he has to maintain a balance between government spending and tax revenues.

For instance, Japan's government expenditure is on par with several European countries, which have very good provisions for social welfare and pension systems. However, the consumption tax rate in Japan is far lower than the prevailing rate in Europe thus causing significantly more budget imbalance.

If Japanese people prefer to have a good social welfare system, then our tax rates have to go up. But if they do not want to pay higher taxes, then we will have to be content with lower social welfare and pension systems. Therefore, the Abe government has to explain to the people that spending and tax revenue are a combination and should not be seen in isolation.

How does the government plan to reform certain protected sectors of the economy such as agriculture?

Japan has associations of agricultural farmers who exercise very strong political power. Although many young farmers want to do it their own way, old farmers are still relying on these groups.

Adjusting the agricultural sector takes time and the government should take a gradual approach, rather than hastily entering into free trade agreements. Farmers have to adapt to cope with the new environment and the government should support them in the process.

Do you see Japan opening its doors to immigrants to replace the ageing population?

I don't think immigration can solve a structural problem like ageing population. Furthermore, we have a lot of young women who can work and we are not short of labor force. Japan also tried to open its doors to Indonesian nurses some three years ago, but it ended in failure as they found the Japanese language very difficult to learn and could not communicate properly with the people here.

Many previous governments in Japan have sought to introduce such reforms but failed due to strong vested interests. What is the difference this time around?

In the past, many governments relied solely on monetary policy - which is called quantitative easing - and on low interest rate policy, although Japan's problems were structural. PM Abe this time around is tackling those structural problems, which could ultimately revive the nation's global competitiveness.

Naoyuki Yoshino is Dean of the Asian Development Bank Institute (ADBI), Senior Advisor at the Japan Financial Services Agency's (FSA) Financial Research Center (FSA Institute), and Professor Emeritus of Keio University, Tokyo, Japan.