PM Kishida expanding safety net from economic stability to national security

Since becoming the Prime Minister (PM) of Japan last October, Kishida has faced constant waves of challenges. After re-introducing the quasi-state of emergency to contain Omicron infection, the Ukraine crisis not only challenged Japan’s national security issues but also hurt the economy through sharply rising global commodity prices. To make the situation worse, the Bank of Japan (BoJ) has contributed to amplify the surge in import prices as the Yen has weakened by 11% year-to-date as a result of the BoJ holding up to its Yield Curve Control, thereby, protecting the 0.25% ceiling on 10-year JGB yields.

To counterbalance the negative risks from the Omicron pandemic and the surge in commodity prices, PM Kishida promptly launched policies to stabilize the economy with a JPY 55.7 tr (10.4% of GDP) fiscal stimulus package. In addition, the government is currently organizing a package including fuel subsides and financial support to low-income households, which amounts to JPY 2.7 tr (0.5% of GDP).?

Beyond firefighting renewed Pandemic related shocks and the Ukraine’s war, Kishida also had an agenda, during his election campaign, centered on “New Capitalism”, which has evolved from distribution policy to developing an inclusive economy. More specifically Kishida’s Cabinet has been working on enhanced the social safety net while promoting growth-enhancing investment. One related measure is the expansion of vocational training and supporting childcare and education. To stimulate growth, the PM plans to increase R&D and support digitalization and clean energy. On the negative, Kishida has remained silent on structural reforms to reverse the negative trend on Japan’s stubbornly low productivity and potential growth.

Without higher potential growth, Kishida’s vision to double income from households’ asset holdings, which was recently revealed during his official visit to the United Kingdom on May 5th, could have unintended consequences. Because households have largely financed the government, the JGB market is highly sensitive to households’ asset allocation. Hence, the PM’s plan could trigger a surge in capital outflow from JGBs to overseas assets in search of higher yields.

The Ukraine crisis has opened a new chapter on Japan’s national security issues. With Japanese increasingly wary of China’s potential military operation in Taiwan, national security is now a key priority for Kishida, who has just confirmed, during President Biden’s official visit to Japan, doubling defense expenditure to 2% of GDP within five years. Moreover, Kishida agreed during Biden’s visit that Japan would play a larger role to assure peace and prosperity in the Indo-Pacific region with a stronger partnership with Australia and India. Japan will also participate in the Indo-Pacific Economic Framework for Prosperity (IPEF), as proposed by Biden, with a large focus on ensuring supply chain resilience among other important issues.

All in all, with a stagnating potential economic growth and an overstretched fiscal situation, all the more so when adding defense expenditure, Kishida’s push for a leading role in the Indo-Pacific strategy seems doubtful.

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