Will Japan’s economic policies turn more populist after the Lower House election?

At the Lower House election on October 31st, Japanese will decide on key issues for Japan, including economic policies. After years under Abenomics, the question is whether a change will take place and, if so, how big the change.

The ruling party, the Liberal Democratic Party (LDP) has advocated to establish a “new Japanese style capitalism.” In addition to a supplementary budget to firefight COVID-19, Prime Minister (PM) Kishida is aiming at promoting investment on R&D, technology, and clean energy to raise economic growth. Kishida is also proposing to reduce inequality by providing companies tax incentives to raise wages. To facilitate the virtuous cycle between growth and distribution policies, he is keen to let the Bank of Japan (BoJ) work further on achieving the long-standing -although still missed - 2% inflation target.

The interesting issue is that Kishida’s push for redistribution might be a way to avoid losing votes to the main opposition party, the Constitutional Democratic Party (CDP), which has largely focused on distribution policies to reduce inequality. For example, in addition to a JPY 30 trillion stimulus package (about 5.5% of GDP), the CDP plans to introduce an interim income tax exemption for about 87% of taxpayers. Furthermore, they plan to temporarily lower the consumption tax rate to 5% from 10% and to give cash handout to low-income earners.

These developments suggest that populism is increasing in Japan. Both the LDP as well as the opposition, seem to be promoting policies to reduce inequality but without securing new fiscal revenue to afford it. On the contrary, the reality is fiscal policy, as it stands, already reduces income inequality quite substantially (Chart 1). Furthermore, neither the LDP nor the opposition seem to be focusing on making the pie bigger by introducing growth-enhancing structural reforms (Chart 2).

With populist winds blowing in Japan, PM Kishida is expected to twist Abenomics to appeal to a broader audience. On the second arrow (fiscal sustainability), Kishida suggested to put off fiscal reform by delaying the target to achieve a primary surplus in FY25. Instead, Kishida intends to offer more corporate tax incentives so as to finance companies’ wage increases. On the third arrow (structural reforms), there does not seem to be any discussion, at least prior to the election. The only arrow from Abenomics which seems high on Kishida’s agenda is the first, namely lax monetary policy. One important implication is that Governor Kuroda’s term could be extended when his term ends in April 2023 although Kishida could also appoint a new governor for the Bank of Japan with a similar inclination for maintaining very lax monetary conditions.

All in all, Japan’s elections are a good mirror of how much populism in driving the economic policy agenda. Of course, the jury is still out in terms of the election results first but, most importantly, what policies will really be introduced.