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16.09.2013 г.

Japanese Economy in 2012-2013. The New Economic Policy

Elena Leontieva

Shintaro Abe, taking the post of Prime Minister of Japan in the late 2013, declared a program of renewal of economic policies and offered a number of new guidelines for the nation. The "New Deal" is badly needed because Japan has lost leadership in Pacific Asia after two decades of price deflation and economic stagnation. The period of 1990-2010 (more accurately, 1990-2012) was named "lost decades".

Japan's demographic trends are unfavorable. Population is rapidly ageing, and the potential of economic growth based on domestic investment and consumer demand is low. Private companies invest overseas more than in the domestic market. Resources of Japan, such as high quality of human capital and excellent technological potential, are underused.

The Great East Japan Earthquake of March 11, 2011 required increasing imports of foods, building materials and equipment for restoration and huge amounts of fuels in order to meet critical deficiency of energy resources. As a result, in 2011-2012 Japan got foreign trade deficit for the first time since 1985,

During the two "lost decades", the government never stopped efforts to pull the economy out of stagnation by means of expansion of public works and lower taxation of incomes. Infusions of money from the state budget gave no positive effect and merely increased the public debt. At present, Japan has the largest public debt in the world. Debt issues give 46% of all fiscal revenue. Debt servicing takes 24% of all fiscal expenditures - about as much as the entire sun of social security payments.

Improvement in public finance and fiscal discipline looks an impracticable task.

Japan isn't facing a direct menace of a fiscal collapse or a sovereign default. About 90% of its public debt is held by domestic commercial banks and insurance companies. Financial institutions possess a strong resource base composed of savings made by corporate and household savings. Corporations take more than a half of their saving abroad, but households keep their savings (about a third of Japan's national wealth) at home. This makes a "safety pillow" for the state budget.

Public debt in its present scale devours the resources that could be invested in domestic economy and creates difficulties for the government in fulfillment of its social obligations.

The program presented by Shintaro Abe, named "abenomics", sets goals and gives guidelines for overcoming deflation. It is a pledge to create new fields for domestic capital investment and to return the economy to the course of economic growth.

To cope with deflation, the Bank of Japan has set a target of 2% inflation to be attained in two years, and keeps lending rate near zero. The goal of this monetary policy is to reverse expectations of decline in price level, which are typical of deflation.

The Cabinet of Abe is ready to sacrifice budget discipline for pumping money into the economy. Huge sums of money will be spent on repair of obsolescent public-sector infrastructure (roads, bridges, tunnels etc.). Construction works will create domestic demand - for building materials, equipment and workers. Wages and salaries will create new consumer demand, and then, demand for new capital investment. Interest rates and commodity prices will go up, and deflation will be stopped.

The Abe government has pledged to achieve a primary surplus by fiscal 2020. This cannot be done unless tax proceeds will increase under a new start of economic growth.

The roadmap offered by the Abe Cabinet includes a tax reform, revision of labor laws and alteration of agricultural policy. Consumption tax rate will be raised to 8% in April 2014 and to 10% in October 2015. The labor reform is aimed at elimination of the so-called "system of life-time employment".

Agriculture will become a key industry, able to decrease dependence of Japan's economy from imports and to acquire steady position in foreign markets.

Agriculture actually has a prospect of entering the world market. In order to become a large-scale producer of high-quality foods, Japan will need to develop a new type of agricultural enterprises - to replace small peasant farms with large agricultural operators, such as business corporations.
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