Japan Institute for National Fundamentals

　　　　　The essential goal of Prime Minister Shinzo Abe's Abenomics economic policy has been a structural reform to increase Japan's growth potential in response to rapid economic and social environment changes emerging from the economic globalization and Japan's aging population and falling birthrate. Nevertheless, the Abe administration has focused discussions on how to achieve a 2% inflation rate through monetary easing. In order to realize sustainable economic growth without depending on monetary or fiscal policy, the administration should fundamentally reform the social security system as early as possible to eliminate fears about the future.

Debt-ridden social security behind deflationary sentiment
　　　　　General account budget requests for fiscal 2016 starting next April have hit a record high of 102.4 trillion yen, topping 100 trillion yen for the second straight year. Debt service and social security spending requests also posted their respective record highs. This is because subsidies from the general account to cover a gap between continuously growing social security spending amid the aging of population and social security premium and tax revenues that are proportionate to slumping wages have been expanding year by year.
　　　　　The fiscal 2015 budget sets aside 31.5 trillion for social security against only 17.1 trillion yen in consumption tax revenue, indicating that the tax revenue falls far short of being a main financial source for social security. While it is impossible to specify social security expenditure's portion covered by debt, deficit-financing government bond issues (debt for future generations) apparently cover a considerable portion of social security expenditure disbursed from the general account. This means the unsound, precarious social security system is the greatest factor behind deflationary sentiment.

Realize fair social security reform and continuous wage hike
　　　　　While the government's annual report on the Japanese economic and public finance for fiscal 2015 has declared a breakaway from deflation, structural deflationary sentiment has grown over some 20 years due primarily to increasing social security contributions and cannot be overcome easily with short-term demand-stimulating measures alone.
　　　　　Recent measures to increase social security costs for citizens include (1) an increase in nursing care patients' payments to 20% of service fees from 10%, (2) a pension benefit cut through the elimination of special levels, (3) gradually raising the eligibility age for employee pension benefits related to earnings, and (4) an annual hike in national and employee pension premiums paid by working population. These measures to effectively raise social insurance premiums have imposed invisible pressures on household balance sheets since 2007. The recognition that the tendency is not a temporary problem but a permanent one accompanying the aging of population has been generated over a long time. Much time will be required to eliminate the deep-rooted recognition. Therefore, the Abe administration should take advantage of a growth strategy based on continuous wage growth and structural reform to eliminate deflationary sentiment as early as possible.
　　　　　But the administration has chosen a growth path based on rosy projections, attempting to delay solutions to the problem. Even in the face of robust earnings, business managers still have deflationary sentiment and remain negative about capital investment and wage hikes, leading labor's share of profits to continue dwindling. A survey covering 35 major countries indicates that cash and deposits account for 16% of gross assets at companies in Japan, far higher than 4.4% in the United States, 6.2% in the United Kingdom, 5.6% in Germany and 8.5% in France ("Discussions on Internal Corporate Reserves," Research and Information No. 836, National Diet Library). Companies should not retain excessive cash and deposits but use the excess for appropriate investment and wage hikes corresponding to labor productivity growth. Excessive social security spending should be cut with the spending efficiency increased to help reduce regressive social insurance premiums. These efforts will promote the growth of economy and improve quality of life.

Yujiro Oiwa is a JINF Planning Committee Member and Professor at Tokyo International University.