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PM Abe releases his New Growth Strategy. No major changes from the initiatives widely anticipated. Overall reactions from private sector and markets positive. Abe notes that implementation will be crucial.
We have previously reported on the New Growth Strategy, which has been the focus of intense debate across government for several months. Abe’s Cabinet formally approved the Strategy along with its policy framework for longer-term economic and fiscal management on 24 June.
The detail of the package was in line with expectations. It is, as expected, a revised version of last year’s Growth Strategy, focusing on what had been left untouched: labour, agriculture and medical sector reforms and corporate tax cuts.
Abe said at a press conference that ‘it is the mission of Abenomics to dynamically pursue the current economic virtuous cycle and ensure that more Japanese citizens feel the economic recovery. Everything depended on implementation of this Growth Strategy’.
Reactions have been cautiously positive. Many corporate heads have supported the Strategy in principle, echoing comments by a president of Japan’s major trading company: “we should welcome Government actions to tackle agriculture, medical and labour sectors which used to be regarded as ‘untouchable’”. But many note that details on implementation have been postponed. Decisions on additional tax revenues to compensate for corporate tax cuts and detailing how to implement labour market reforms, for example, have been left for later.
Most economic commentators also welcome the corporate tax cuts, as this should help enhance corporate Japan’s competitiveness in global markets. However, some commentators question the measure’s effectiveness, as almost 70% of corporations do not pay taxes under current system – another reason to broaden the tax base. Others express concern that the tax cut could end up just leading to additional building up of cash piles without being invested.
As Abe identifies, everything depends on implementation of the Strategy. Markets do not seem as disappointed as they were last June. However, this could mean that the Government has successfully managed market expectations or that these have been lowered.
Japan’s growth potential is now estimated to be 0.5%-1.0%. The Government is targeting 2% sustainable growth. So serious reforms are needed. The present Growth Strategy is a step in the right direction, particularly if the overall pace of reform continues to accelerate under Abe’s tenure.
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