Tax Is Always Political

When political leaders change the tax system, the first thing they think is benefit for themselves, not for citizens. As same as the discussion in the United States, Japan’s tax reform for next fiscal year is tax cut first, fiscal reconstruction second. The tax reform is mainly targeted on supporters for LDP. Is this administration returning back to “the lost decades?”

The leading parties, LDP and New Komeito, agreed with each other on the tax reform guideline for FY 2013. Following the tendency of the LDP administration, the guideline will be fully reflected on governmental budget. It focused on economic growth and care for families which would be affected by consumption tax increase next year. Overall concept reflected on the conclusion was soft for industry and hard for low-income families. This is the attitude that LDP administration had done for years.

The short-term prime goal for Abe administration is growth. To encourage capital investment, the government applies new deduction from corporation tax. There will be new tax reduction on the cost for research and development.

On the other hand, the tax relief for families as the compensation for raising consumption tax rate will mainly be for purchaser of houses and cars. LDP denied the request of Komeito, supported by low-income families, for introducing exceptional rate for daily necessaries, such as foods or books. The tax rate will be raised from 5% to 8% on April 2014, and 8% to 10% on October 2015. Although LDP accepted the exceptional rate on the second hike, it is unlikely that the rate for foods would not be reduced to 5% after 8% introduced.

Another focus of the discussion was about the vehicle weight tax. LDP succeeded in redefining the tax to be only used for road construction. This special purpose tax was repealed in DPJ administration, because it would encourage construction of unnecessary roads. Needless to say, road construction industries are basic supporters for LDP. With criticism against reappearance of “bad old LDP,” the guideline avoided an expression of special purpose tax, but it described about the tax income to be “ranked as a resource for maintenance and renewal of roads.”

The government has a target of newly delivered national bond of FY 2013 to be within the amount of tax income. But it already decided a large amount of new national bond in the sufficient budget for FY 2012, which made the total amount of the debt for FY 2012 ¥55 trillion, ¥11 trillion more than the limitation set by DPJ administration. The fiscal balance of Japan, which is one of the worst in the developed countries, should be worth under Abenomics.

Where’s Independence?

Frustrated with long deflation, the government of Japan made its attitude clear toward intervention in monetary policy. Following the joint statement between the Bank of Japan and the government to introduce 2% inflation target, the government determined that it would verify the result of BOJ’s policy every three months. The leadership of monetary policy shifted from BOJ to the Cabinet. Then, where is the independence of the central bank?

BOJ has been reluctant to set 2% target. Under the pressure of politics, the bank announced last year that it would consider 1% as a data for decision of changing current zero-interest policy. It was its concern that once the bank set an inflation target, price might get uncontrollably high. From the political side, its policy was looked like ignoring slump of Japanese economy.

Prime Minister Shinzo Abe has been positive for setting 2% goal. He launched the Consultative Conference for Economy and Finance with mandate of the Governor of BOJ to attend. The conference will be a place where political leaders constantly put pressure on the bank. Although there are a number of countries to set price target, most set it for containing price hike. Setting target for escaping from deflation is rare case. “It is a dramatic effort in human history to get rid of deflation,” emphasized Abe.

In 1980s, bubble economy overheated when the government denied BOJ’s intention of raising interest. 

The amendment of the Bank of Japan Law in 1998 was to assure the bank’s independence from political intervention. Abe also said that BOJ needed to print bills making its rotary press work hard. It is close to a typical pattern that a central bank loses its credibility and the value of money is broken down.

The response of market is half positive and half negative. Some regard BOJ’s policy change as a firm sign of monetary easing. Others consider 2% target as meaningless and see no vision of increasing salary and reducing jobless rate. Skeptical about future vision, the foreign exchange market is hovering around ¥90 against one USD.

This fuzzy attitude is based on the notion that Abe only taking care of Japanese economy through April to June. If the economy marks 2 to 3% growth in this term, he will show “go sign” for raising consumption tax rate. Moreover, Abe puts the highest priority on taking simple majority in the election of the House of Councillors in July. It is more important goal for him than rebuilding Japanese economy. Market knows that well.

“The joint statement considers BOJ’s independence,” told the governor, Masaaki Shirakawa. However, if the bank was seen only as a printing machine for a political goal, credibility of JPY will be eclipsed.

Sanction Unilateralism

The United Nations Security Council unanimously approved the resolution condemning North Korea of its launch of missile last month and adopting sharper economic sanctions. Having abduction issue with North Korea, the government of Japan welcomed this action of UN to be pressure for returning abductees. Japan, however, needs to mind that unilateral sanction will not work well as actual pressure to North Korea.

Abe administration seemed to have been waiting the resolution. Prime Minister Shinzo Abe delivered a comment saying “We welcome the resolution adopted, on which our idea had been largely reflected.” Chief Cabinet Secretary Yoshihide Suga indicated a possibility that Japan might unilaterally set economic sanction toward North Korea.

Abe is well known as a hard-liner to North Korea. As Vice-Chief Secretary of Koizumi Cabinet, he insisted on solving abduction issue, and joined the delegation to Pyongyang when Kim Jong-il admitted the existence of abductees in North Korea. It is fair to say that Abe became the Prime Minister because of his name value in abduction issue. As PM, Abe decided Japan’s unilateral sanction before UN adopted a resolution of denouncing North Korea’s nuclear test in 2006.

Japan’s sanction has not been working so effectively. It refused North Korean ships in ports, prohibited all importing goods and blocked all persons who had citizenship of North Korea. But North Korean economy was basically dependent on China, not Japan. As long as China supports North Korean regime, Japanese sanction does not mean much. Moreover, there are a number of enterprises in Japan, which have close relationship with North Korea. Gambling business, having growing popularity, is known to have underground ties. Money flowing from those businesses also supports North Korean economy.

New UN resolution includes freezing foreign assets of North Korean bank, which deals with weapons trade. It is still unknown to what extent the resolution works. As far as it is unlikely for Japan to shut down all money to North Korea, pursuing a deal with China is a faster way to put pressure on it. But, Abe is also known as a hard-liner toward China. He does not have an effective measure for leading China to harder sanctions.

After all, it is possible that Japan’s unilateral sanction is symbolic action, without any meaningful effect on its target. Considering a possibility of China, being skeptical against Japan, to take softer attitude to North Korea, unilateral sanction is not the best way for Japan to put penalty on the unilateral country like North Korea.

“Let the Tube Man Die”

Inflated and standing tall in the sky, “tube man” is often seen in front of a car shop for advertisement. But tube man in Japan is something different. Deputy Prime Minister and Minister of Finance, Taro Aso, on Monday told his will to die without expensive terminal care funded by governmental budget. He called a patient in terminal care “tube man,” and said “I don’t need that care.” Although his comment might be disappointing for patient’s family, media accustomed to his light tongue reported his words with small headline.

The statement was made in a governmental meeting for social security reform. “It is too much being lived, even when wanting to die. Supposing it to be done by the governmental money makes my every wake-up in the morning bad. There will no solution without permitting to die soon,” told Aso. “Tube man” was his expression about patients with tubes through nose, mouth or somewhere else on their body for terminal care.

Aso immediately invited criticism from opposite parties. “There are ones who struggle for survival. A politician needs to comment carefully respecting each person’s will and sentiment,” told Secretary General of DPJ, Goshi Hosono. Aso explained his comment as his personal view to life. Naming of “Tube man,” however, must be recognized as ridicule to the patients and their families. Considering he is Minister of Finance, his words might be thought as reflecting of intention of Ministry of Finance, which is struggling with cutting budget including for expensive medical care.

As a Prime Minister, Aso had made a number of false comments. “Why do I need to pay for someone doing nothing?” he told about medical care in 2008. Later soon, “I apologize if I my words harmed feeling of patients on bed,” he said. Most of his false comments stem from his family background. His family is typical one of the establishments in Japan. He is a son of the president of a large cement maker and his grandfather is former Prime Minister, Shigeru Yoshida. Having no experience of want of money, he is said to be innocent about ordinary people’s life.

In Abe cabinet, the Minister of Environment, Nobuteru Ishihara, expressed patients of gastrostomy as “looking like aliens” a couple of months ago. He also is another son of establishment, former governor of Tokyo, Shintaro Ishihara.

For PM Abe, who also is a son of established family, Aso and Ishihara are indispensable “tomodachi.” But the fundamental basis of an administration would be soon eroded by minister’s misstatements, because people see essential characteristics of an administration through their comments. A Deputy Prime Minister who doesn’t understand what ordinary voters think may become Achilles’ heel for Abe administration.

Information Matters

The hostage crisis in Algeria ironically reminded us of Japan as a peaceful country. In spite of consecutive crises in Middle East and North Africa for decades, the government of Japan has not established information network in the region. This crisis also revealed a loophole for protecting Japanese citizens in foreign country. Announcing fighting terrorism not only increased enemy, but necessity of readiness for dealing with unexpected crisis.

Japan has generally been distant from conflicts in the region. We have no history of imperialism toward the Arab world. With those traditions, Japan could have build good relations up with the nations there. But the hostage crisis revealed that we have no friend to inform us of what actually was going on.

“Having fewer foreign service personnel than America and Europe, Japan is weak in getting information from the Arab world,” told Nobuo Ishihara, former deputy cabinet chief secretary at the time of Gulf War in 1991, in an interview of Tokyo Shimbun. “The government has not taken good advantage of the lessons we learned over twenty years ago,” he insisted.

Communication with the government of Algeria was not sufficient. Not only obtained information of hostage rescue operation in advance, the government of Japan has been blind about how many Japanese had rescued, injured or killed. With shortage of reports from In Amenas, where assaulted natural gas plant exists, families of hostages are extremely frustrated.

The terrorists attack has reportedly been planned before the France’s intervention to disorder in Mali, neighbor of Algeria, early this month. It is fair to say that Japan had not well prepared for terrorist attack derived from the conflict in Mali, while not sure whether the victims could have avoided the terrorists’ assault, if any warning was brought to them. But even a small hint leaked from terrorist network may help. What is lacking for Japan is building networks by trading information with foreigners. Is it too much to say that Japanese business had to pay high cost as a compensation for its heavy dependence on America security?

In terms of urging the Algerian government to release appropriate information, it seems to have been necessary for Japanese government to send officers in higher class than Parliamentary Vice-Minister of Foreign Affairs, Minoru Kiuchi, in Algiers now. Independent infrastructure for communication, such as telephone through satellite, may needed for emergency.

The discussion inside Japan is as out of point as usual. Expansionists of Japanese force raised an argument of reviewing Japan Self-Defense Force Act, which set a condition of its rescue operation to be limited to where transportation is secured. To exercise what the government has been wanting by grabbing an opportunity, even a human tragedy, is the Japanese way. What they need to do is not providing Japanese troops to foreign country, but appropriate information to Japanese citizens overseas.

Having Different Dreams

The government of Japan recognizes that US took one step toward Japan side on the issue over Senkaku Islands. In the meeting with US Secretary of State, Hillary Rodham Clinton, the Minister of Foreign Affairs, Fumio Kishida, confirmed American standpoint that support Japan’s administration on the islands. Both nations agreed with their cooperation in Asia-Pacific region. But they may be seeing two dreams on one bed.

“[W]e acknowledge they (Senkaku Islands) are under the administration of Japan and we oppose any unilateral actions that would seek to undermine Japanese administration,” told Clinton after the meeting with Kishida. Kishida told that he regard the comment as highly valuable. Newspapers in Japan reported Clinton’s comment to be the first mentioning of US government on other countries’ action over Senkaku Islands.

On the background of Clinton’s comment, there is a positive action of Japan to introduce US in Asia-Pacific region. PM Abe prepared a policy speech at a reception in Jakarta, Indonesia, on Friday, in which he would have emphasize the importance of Japan-US alliance for peace and security in Asia-Pacific. Although the speech was canceled for Abe’s sudden return back to Tokyo to conduct Algerian hostage crisis, it is obvious that Abe, in his tour to Thailand, Vietnam and Indonesia, had persuaded the leaders of Southeast Asian nations to welcome US commitment to this region. Clinton possibly appreciated to Japan’s effort in her comment.

Both Japan and United States, however, don’t have clear vision to achieve their goal through the alliance. Japan wants to get firm support on Senkaku issue. But US set two conditions on it. One is that the matter of sovereignty needs to be solved by both country, and US will take neither side between Japan and China. Another is that the dispute should be solved by peaceful measures. After former Noda government bought the islands, Japan could not find any clue for dialogue with Chinese government. Continuous territorial violations around Senkaku Islands by Chinese ships annoy the government of Japan. US exercised no actual help for Japan so far.

US wants Japan’s support for strengthening its tie to Asia. China’s disruptive attitude against US is hazardous for US “rebalancing” strategy in the world. Although Japan generally welcomes US coming into Asia in governmental level, the government will be fettered by internal backlash. Abe administration decided not to get a conclusion on joining the negotiation over Trans-Pacific Partnership (TPP) before the election of the House of Councillors this summer. If it decides it, LDP will fall into a confusion between pros and cons. Okinawa is another problem. Abe seeks to submit environmental assessment in Henoko area, where Futenma Air Base would be relocated, next month before the summit talk with Obama. But broad protest of the people in Okinawa is expected.

Clinton and Kishida agreed with having summit talk by both leaders in the third week of February. But it is still not clear that both Abe and Obama can get positive outcome there.

Unbelievable Market Enthusiasm

Thirsty for an evidence of revitalization in economy, markets seem to be too excited every day. The enthusiasm is based on expectation to the positive attitude of PM Shinzo Abe for economic recovery. Actual concept of “Abenomics,” however, is the mixture of targeted inflation and public construction projects with additional national bonds. There came some skepticism up among economists.

Abe’s closest economic adviser, Koichi Hamada, a professor of Yale University, showed his view that “there will be no concern about JPY 90 to 100 against 1 dollar, even though 110 should be worried,” at the press conference in Tokyo. Responding to it, JPY fell to 90 against 1 USD, the lowest in last two years and seven months, in Tokyo Foreign Exchange Market on Friday. Nikkei 225 rallied to ¥10,900, the highest in last two years and nine months, expecting good deal for exporters.

Some economists feel current market excessive. “Stock market is surprised with current hike and foreign exchange went to an unbelievable level, while bond market is relatively cool,” described a dealer of a bank in Japan. JPY is marking isolated down in international market, which invites criticisms from competitors against Japan and even International Monetary Fund.

Credibility of Abenomics is still not assured. PM Abe insists on that the Bank of Japan needs to unequivocally announce 2% inflation target. But we don’t know how the inflated amount of money works. His policy expects ¥200 trillion for public construction next ten years. But it is concerned that the money for construction will not be fully digested within every fiscal year. It also is said that the effectiveness of focusing on building infrastructure is known to be limited from the experience after bubble economy ended early 1990s, and excessive support from the government discourages motivation of industries for innovation or exploring new market.

Assessments by think tanks on the governmental Emergency Economic Measures, delivered on January 11^th are not fully positive. The report of Mizuho Research Institute on January 16^th expects that the measures may raise real GDP in FY 2013 by 0.6%, while 1.1% should be expected as a whole. The main reason of slowness in FY 2013 was lack of supply reserve in public investment sectors. “Steady execution of growth policy and review of strategy for fiscal steering are needed for mid-term boost of growth power and incentive for getting rid of deflation,” the report concludes.

What we see in current market enthusiasm and economic policy of Abe administration is only a short-term optimism. If Abenomics does not contribute for raising job rates and individual income level, the expectation of markets may show steep down.