The Journal The Authority on Global Business in Japan

Now that 2018 is in full swing, let us consider what New Year’s resolutions Japan should make and the main challenges facing the government and businesses in achieving them.

Goldman Sachs forecasts the world’s gross domestic product will grow 4 percent this year, up from 3.7 percent in 2017. For the first time in years, the global economy is entering a new year amid largely favorable winds.

Japan’s GDP posted a seventh consecutive quarter of growth through the July–September period, and many economists predict the growth rate for fiscal 2017, which ends in March, will be close to 2 percent. Workforce shortages caused by an aging and declining population have prompted companies to invest more in labor-saving technologies. Listed companies are expected to post a record combined net profit for fiscal 2017.

DOMESTIC MATTERS
The new year will likely be less stormy on the domestic political front, too. The lower house was dissolved for a snap election only a few months ago, and there will be no upper house election until the summer of 2019. The ruling Liberal Democratic Party is to hold a presidential election this autumn, but Prime Minister Shinzo Abe has no rival who threatens to oust him as party chief.

In a recent speech, Christine Lagarde, managing director of the International Monetary Fund, borrowed the words of late US President John F. Kennedy, saying that “the time to repair the roof is when the sun is shining.” Painful reforms, in other words, should be carried out while the economy is faring well.

This year marks the 150th anniversary of the Meiji Restoration, a historical milestone that put Japan on the track to modernization. The past century and a half is divided into two distinct halves. The first extends from the Meiji Restoration to the Pacific War, while the second encompasses Japan’s postwar reconstruction, its economic bubble, and other developments up to the present day.

What should be the government’s first priority, particularly as the country prepares for a change in Imperial era names after the emperor steps down next year?

The most crucial task is to draw a blueprint of what the country’s social security system and public finance should look like, with a view to coping with the advent of a super-aged society. It is a challenge comparable to constructing a modern state or rebuilding an economy, but we hope the government will face it squarely and formulate an economic policy package this summer.

AGE ISSUES
All of Japan’s baby boomers will be 75 years or older by 2025, after which it will be even more difficult to rein in ballooning social security costs. Over the next two to three decades, as the number of elderly grows, the working-age population is set to decline. Increases in healthy life expectancy mean it is no longer feasible to maintain the current age threshold for social security programs for the elderly.

The number of people aged 65 or older as a percentage of the total workforce is also growing. [Nikkei Asian Review] suggests considering a comprehensive package of measures aimed at raising the pension eligibility age to 70 incrementally, while also making efforts to increase employment opportunities for elderly citizens.

The Abe government is prepared to raise the consumption tax from 8 percent to 10 percent in 2019. The problem is what to do as a follow-up. The government must devise a plan for pushing ahead with further tax hikes at a moderate but continuous pace, while also keeping an eye on whether such increases risk pushing the country back into deflation or triggering a spike in the yen’s value.

The government must also be careful regarding monetary policy, which has become more closely linked with public finances than before. While US and European monetary authorities are moving to wind down their unprecedented monetary easing, Bank of Japan (BOJ) Governor Haruhiko Kuroda has indicated that his first priority is breaking the deflationary mindset in Japan.

But the BOJ must not forget to provide the market with clear signals as to what economic conditions would cause the bank to rethink its monetary policy, and in what order it intends to implement any policy changes.

PRIVATE HELP
The public sector alone cannot invigorate the Japanese economy. There is much that the private sector must do.

Companies should use more of their ample cash reserves for investing in new technologies and rewarding employees.

It has been many years since the days when Japanese companies were churning out epoch-making products and services. In the digital age, companies must utilize both in-house and outside talent to tackle challenges nimbly and without fear of failure.

Creating a highly liquid labor market is a challenge for Japan. Another urgent task is to facilitate the reform of corporate labor and personnel management, and to further promote women’s participation in the workforce.

Many major events are scheduled to take place in Japan in 2019: Emperor Akihito’s abdication and a change in the country’s Imperial era names, local elections across the country, an upper house election, and an annual summit of the Group of 20 leading economies, with Japan holding the rotating chairmanship. Where Japan stands 10 years from now will hinge largely on whether the country can manage to tackle its various challenges ahead of these events.

©2018 Nikkei Inc. Nikkei Asian Review is published by Nikkei Inc. All rights reserved.