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July 8, 2020

JAPAN: Abe government begins planning for the post-Covid-19 world

BY Tobias Harris

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  • The Abe government has unveiled drafts for key documents that will guide its efforts to adapt to the “new normal.”
  • The main ideas – digital transformation, innovation, and greater labor and social flexibility – are not new; the government is hoping the crisis will accelerate changes that had been stalled.
  • These deliberations will likely continue beyond the end of Prime Minister Shinzo Abe’s tenure.

At an 8 July meeting of the Council on Economic and Fiscal Policy (CEFP), the government’s main advisory body unveiled a preliminary draft of the Abe administration’s 2020 basic policy on economic and fiscal policy, the blueprint for the FY 2021 budgetary process. The basic policy, together with the growth strategy drafted by the administration’s Future Investment Council and a separate report (“Future to Choose 2.0”) on Japan’s demographic challenges, are at the heart of the Abe administration’s efforts to think through how Japan should adapt to what it calls the “with Corona” and “post-Corona” worlds.

Given present uncertainty, these documents are better at describing the challenges posed by the “Corona shock” and posing questions about how Japan should adapt than providing detailed policy proposals. Nevertheless, in many cases, the Abe administration is using the Covid-19 crisis to advance ideas that had been articulated earlier in the administration. The Abe government’s deliberations on the post-Covid-19 world, therefore, should be viewed as the first round in a debate that will continue through the campaign to succeed Abe as leader of the Liberal Democratic Party (LDP) and into the next cabinet.

Future to Choose 2.0 interim report

The Future to Choose 2.0 committee first convened in early March and quickly had to shift gears to respond to the Covid-19 shock. The committee’s focus is still on the intersection of demographic, family, labor, and technology issues, but the scale of disruption has led the group to take a more ambitious approach. In the interim report, the committee wants to move quickly to establish a “new normal,” implementing reforms in a short time that could otherwise take a decade or longer to realize. The realization of a long-awaited “digital transformation” (DX) is central, since incorporating information technology more thoroughly into Japanese life – through telecommuting, telemedicine, and “digital government” for example – is essential to achieving the social flexibility that the Abe government has stressed both to combat demographic decline and encourage new, higher-value-added sources of growth. To this end, the report calls for a “Digital New Deal” to make necessary investments in digital infrastructure, research & development, and human capital.

The report also calls for a more flexible social safety net to extend protections to freelancers and other individuals not covered by the existing safety net. The goal is not simply to protect younger workers, however: the government wants to invest in education and training for students and younger workers to encourage greater risk-taking that results in new companies. It also wants to encourage a shift away from seniority pay, which would in turn enable more mid-career inter-firm mobility. Again, these goals have been staples of the Abe government’s industrial policies since 2013. It remains to be seen whether the Covid-19 shock will be a sufficiently powerful impetus to deliver changes that have thus far proved elusive.

Growth Strategy Action Plan

The Abe government’s growth strategy identifies similar goals as the Future to Choose 2.0 report – a more flexible, entrepreneur-friendly labor system and digital transformation – but is more focused on industry-specific policies. For example, a major priority for the growth strategy is the financial sector, particularly the development of a digital payments system and the promotion of cashless transactions. The ultimate goal, however, is innovation. At the heart of the plan are reforms to promote “open innovation,” which would encourage not only start-up formation but also cooperation between start-ups and established firms, in order to strengthen Japan’s edge in advanced technologies, including robotics, mobility, clean energy, “Beyond 5G” or 6G, and space.

Basic policy on economic and fiscal policy management and reform

Both documents will feed into the basic policy, which will in turn shape the FY 2021 budget. The key theme of the basic policy is the “new normal”; the program will draw from longer-term vision documents to support policies that can promote Japan’s ability to adapt to the new era. Accordingly, the “Digital New Deal” is the highest priority, including a crash program for digitizing government after years of delays, incentives for telecommuting, and investments in nationwide 5G infrastructure. Other initiatives would boost online education, including for adult learners; and encourage the use of information technology to support local economies, and reduce Tokyo’s economic and social dominance.

The basic policy also outlines the Abe administration’s views of the post-Covid-19 international order, highlighting a greater role for government; threats to the international trading system due to disrupted flows of people, goods, and capital, the rise of economic nationalism, and US-China friction; and the hollowing out of international cooperation on infectious diseases, macroeconomic policy, and climate change. To meet these challenges, the Abe government not only advocates that Japan should be a leader in expanding existing trade agreements like the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP) and pursuing World Trade Organization (WTO) reform, but also envisions Japan’s becoming a global leader in the process of adapting to a “new normal.” The paper also builds on spending included in this year’s first supplemental budget to encourage more resilient supply chains, mentioning that Japan will seek to create economic security rules to promote the exchange of goods with “countries with shared values.”

Next steps

The Abe cabinet is aiming to approve final drafts of the basic policy and growth strategy as soon as 17 July, at which point they will serve as guides for cabinet ministries as they prepare their budgetary requests for next year. These documents will also shape the deliberations of a new government advisory group that will consider a vision for Japan’s place in the post-Covid-19 world beginning in late July.

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