Welcome to September 2023 policy update.
This Policy Radar covers developments in Japan’s defense budget, new proposed stimulus package, recent response to China’s import ban, and the launch of new special investment zones.
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This month's focus: Kishida reveals new economic package to stimulate economic growth
Prime Minister Kishida Fumio has directed his Cabinet ministers to create a new economic package by the end of October in an effort to counter inflation and bolster the Japanese economy. He emphasized the use of “all possible tools” to mitigate inflation’s impact and promote economic growth through increased pay raises and investments. Kishida, who prioritizes wealth redistribution, announced plans to reduce taxes and social security burdens while also reviewing the allocation of emergency funds to support sustained wage growth.
The economic package will be funded by a supplementary budget and will focus on five main areas: alleviating the inflationary burden on households, encouraging wage growth, increasing investment, addressing demographic challenges due to a declining population, and ensuring the safety of Japanese citizens. Specific measures include subsidies to control rising gasoline prices and utility bills, support for small and midsize companies facing labor shortages, and incentives for investments in strategic sectors like semiconductors. Kishida views this as a crucial phase in shifting from a cost-cutting economy to one characterized by a virtuous cycle of pay increases and corporate investments.
While the exact size of the spending package remains undetermined, the government intends to draft a supplementary budget for fiscal 2023. Speculation persists that Kishida’s timing in announcing the economic package may be related to the possibility of calling a snap election this year, with some members of the ruling Liberal Democratic Party advocating for a package exceeding 15 trillion yen (101 billion USD). To maintain fiscal discipline, Finance Minister Shunichi Suzuki emphasized a thorough examination of each policy item to include only what is truly necessary. Rising import costs, surging inflation rates, and the sustainability of pay raises are all significant factors in Japan’s economic strategy going forward.
Japan’s Defense Ministry to seek a 12% increase in its budget for FY2024
Japan’s Defense Ministry is seeking its largest-ever budget of over 7.7 trillion yen, representing a roughly 12% increase over the previous year, as it looks to strengthen the Self-Defense Forces (SDF). The budget request underscores Japan’s commitment to defense reforms initiated in December, driven by growing security concerns stemming from China, North Korea, and the situation in Ukraine. Prime Minister Fumio Kishida had set a goal for the defense budget to reach 2% of the country’s GDP by 2027, outlined in the National Security Strategy and National Defense Program, with a five-year spending plan totaling approximately ¥43 trillion ($315 billion).
The budget request includes funds for establishing a permanent joint headquarters for the SDF, located in Tokyo’s Ichigaya area, aimed at improving coordination among the branches of the military and enhancing defense cooperation with the U.S. military. The headquarters will play a crucial role in developing strategies and responding to security threats effectively. Additionally, the budget includes funding for the development of domestically made long-range missiles, extending the range of anti-ship missiles, building Aegis-equipped destroyers, and enhancing rapid deployment and civil protection capabilities.
The urgency behind these budget requests reflects Japan’s recognition of the need to bolster its defense capabilities and prepare for contingencies, particularly in light of regional security challenges, including China’s assertiveness near Taiwan and North Korea’s nuclear activities. The allocation of resources to modernize its defense infrastructure and capabilities demonstrates Japan’s commitment to its defense reforms and its aim to contribute to regional security and international alliances.
Langley Insight
If all goes according to plan, Japan is poised to become the third-largest military spender in the world by 2027. However, the challenge of pushing for an increased defense budget is that it would require the Japanese government to find another ¥4 trillion a year to allocate for defense spending by the fiscal year beginning in April 2027. To cover that, the government would have to either shift some money around the existing budget or implement a tax hike. A proposal of a tax hike has been made by Kishida before, but it was met with concern from some members of the ruling coalition, especially within the junior partner Komeito, who were already unenthusiastic about the defense policy designs — and even less so about them coming at the expense of its constituents.
Kishida’s original plan for the economy was to catalyze economic growth while urging companies to increase wages for their employees. However, wages have been stagnant as prices of goods and services have continued to rise, with declining polling numbers reflecting the public’s negative sentiment toward these economic conditions. Therefore, the government will likely resort to the easiest option for preventing any increase in taxes, which is to postpone any new defense spending-related hikes, for the time being. Furthermore, the collapse in the yen is forcing Japan to scale back a historic five-year, ¥43.5 trillion defense buildup plan. Since the plan was unveiled in December, the yen has lost 10% of its value against the dollar, forcing Tokyo to reduce its ambitious defense procurement plan, which was then calculated to cost $320 billion. As a result, the possibility of force cuts and delays to key acquisitions will pose an obstacle to justifying an increase in the defense budget. The timing to implement the defense spending tax hike will be decided based on general economic and wage increase trends. In December 2022, Kishida said a decision on when to start the defense spending tax hike would be made in 2023. But with just two months remaining in the year, that prospect is also becoming increasingly unlikely. However, with fiscal 2024 looking to not provide the environment for such a tax hike, chances are it will not be implemented at the same time as the income tax cut.
Japan to give extra 20.7 billion yen to its fisheries industry following China’s import ban
Japan has announced a relief package of 20.7 billion yen (141.4 million USD) to support its fishery industry in response to China’s seafood import ban following the release of treated radioactive water from the Fukushima nuclear power plant. Prime Minister Kishida unveiled the support measures, which include boosting domestic consumption, ensuring sustainable seafood production, addressing reputational damage, and exploring new overseas markets. This financial assistance is part of a broader commitment to provide 100.7 billion yen to the fishery industry, with two separate funds already set up. Japan aims to reduce its dependence on specific countries, particularly China, as a seafood export market and urges Beijing to engage in scientific discussions about the environmental impact of the water discharge.
The relief package will be funded by reserve funds and comes after Japan began releasing treated water from the Fukushima Daiichi nuclear power plant into the Pacific Ocean, causing tensions with China and local fisheries. Although Japan claims that the water is safe due to the removal of most radionuclides, China nonetheless imposed a blanket import ban on Japanese fishery products. This move has had a significant economic impact, as Japan’s exports of agricultural and fishery products to China and Hong Kong totaled 278.2 billion yen in 2022, with fishery items contributing significantly to this trade.
Langley Insight
During his speech at the Economic Club of New York, Prime Minister Kishida Fumio announced the creation of special business zones to attract overseas asset management companies to set up operations in Japan. With a focus on strengthening Japan’s asset management sector and tapping into the vast 2.1 quadrillion yen (14.2 trillion USD) in assets held by Japanese households, Kishida aims to overcome the language barrier, which currently poses a significant hurdle in attracting foreign talent. These special business zones will facilitate administrative procedures in English, and the government plans to enhance the business and living environment to cater to the needs of overseas asset managers. Kishida also expressed his commitment to promoting deregulation, allowing asset management firms to outsource their back-office operations. To support newcomers in raising funds, he intends to implement initiatives similar to emerging manager programs in the U.S. and France, creating a forum for U.S. and Japanese asset management institutions to ensure policies align with global investor needs. The government aims to finalize regulatory changes by the end of the year and submit legislation to parliament in 2024.
Efforts are underway in both the public and private sectors in Japan to support fisheries businesses affected by China’s ongoing import ban on all Japanese seafood, initiated earlier this past August. In the almost month since the ban, the fisheries industry is struggling with oversupply and declining value amid the absence of a clear timeline for China to lift the ban. The import ban has particularly affected the scallop sector, with its products, originally intended for shipment to China, now piling up in freezers, incurring additional costs for storage.
To counter the economic fallout, initiatives like the furusato nozei system, where taxpayers contribute to local governments and receive local products, have seen a significant rise in donations for fish and marine products. For instance, the town of Namie in Fukushima Prefecture received 157 donations in August, nearly six times higher compared to the same period the previous year. In a move to provide support, the U.S. Embassy in Japan has also stepped in to assist fisheries businesses by facilitating exports to the United States through processing facilities in Taiwan, Thailand, and Vietnam, aiming to mitigate the impact of the import ban. Currently, the Japanese government plans to continue diplomatic efforts to persuade China to lift the seafood import ban, emphasizing the safety of the water release plan based on international standards and inspections by relevant authorities.
Japan to launch English ready investment zones to boost foreign investment
In a historic move, Kishida became the first Japanese prime minister to address the Economic Club of New York, founded in 1907 and comprising influential business and economic figures. During his speech, he urged investors to evaluate Japan’s economic strength and future plans, encouraging them to invest in the country. Approximately 200 people attended the speech, highlighting the significance of Japan’s efforts to attract international asset management companies and position itself as an attractive destination for global investors.
Langley Insight
Global investment banks have recently begun exploring the theme of whether Japan is truly back as a favorable investment destination. The consensus seems to be that Japan is indeed back as an ideal destination for investment, although global investors may need more convincing to commit for the long term. Kishida is set to make a strong push for investments in Japan, emphasizing the country’s underlying economic strength and future plans. Despite positive signals, there is a need to address heightened skepticism among global funds that have diverted attention away from Japan in recent years.
One notable factor driving renewed interest in Japan is the Tokyo Stock Exchange’s push for companies to improve capital efficiency and Warren Buffett’s significant investments in five of Japan’s largest trading houses. Furthermore, a fundamental shift in the way global funds view China, amid US-China tensions and concerns about unclear economic policies, is working in Japan’s favor. Japanese companies’ increased alignment with shareholder interests and government initiatives to make Tokyo more attractive for foreign asset managers will continue to contribute towards the growing appeal of Japan as an investment destination.
