When Prime Minister Shinzō Abe finally unveiled his plans to make Japan more competitive in June, the proposals underwhelmed. While he promised to lower Japan’s corporate tax rate, currently the highest in the developed world, to below 30 percent, Abe shied away from comprehensive agriculture and labor reforms that could revitalize the island nation’s economy. The latter, especially, are sorely needed.
Japan’s rigid labor laws, which make it nearly impossible to lay off workers, have led many companies to limit hiring to part-time or temporary employees who are typically paid a third less. 17 percent of Japanese men aged 25 to 34 now hold such jobs. For women of all ages, the rate is a staggering 57 percent. 70 percent of Japanese women also still quit their job when they have children.
For both genders, regular jobs have fallen 3.1 percent in recent years. The average wage per worker in real terms has dropped 9 percent since 1997 and 2 percent since Abe took office just two years ago.
Productivity is lagging as a result. Firms are reluctant to invest in workers who are on temporary contracts while those with secure jobs need not compete. Japan’s GDP per hour worked is now a quarter below the average for rich countries.
Abe has done little to reverse these trends. Some of his policies are actually making things worse.
Japan’s expansionary monetary policy, promoted by Abe as one of the three “arrows” of his economic reform program, has helped the yen lose as much as a quarter of its value, boosting exports. But it has made imports much more expensive at a time when the closure of Japan’s nuclear power plants, which once provided almost a third of its electricity, necessitates higher imports of oil and natural gas. Manufacturing firms that refuse to cope with electricity shortages and rising prices are looking to outsource more of their production.
The stimulatory effect of the second arrow of Abe’s reform program, higher government spending, has been more than offset by tax rises that are necessary to slow the growth of Japan’s debt, equal to 227 percent of economic output last year. The government has raised the sales tax from 5 to 8 percent. Another hike, to 10 percent, is scheduled for next year. That will naturally depress consumer spending.
The negative economic outlook is exacerbated by worrying demographics. Whereas 70 percent of Japanese men in their thirties are married, only 25 percent of those with irregular jobs are. Many young Japanese are putting off marriage and having children — some indefinitely — yet they remain, by and large, hostile to letting in more immigrants who could compensate for their own low fertility. The population is rapidly aging as a result and will soon start to shrink.
The third arrow of Abe’s program was supposed to contain meaningful reforms that would put Japan on a more sustainable economic trajectory. It didn’t. By refusing to shake up his country’s labor market, the prime minister is hastening Japan’s decline.