Research and analysis

Japan: release of new growth strategy

Updated 17 July 2014

0.1 Summary

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.

0.2 Detail

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.

0.3 Comment

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.

0.4 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.