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one. Needless to say, unless social security is
reformed, the burden on the working population will
become unbearable. The lack of confidence in the
sustainability of social security is causing the working
population to curb spending, which, in turn, weighs
on Japan’s economic growth. Thus, comprehensive
social security/tax reform is important both for
restoring the nation’s fiscal health and for removing
constraints on economic growth.
Consumption tax hike is not enough
While raising the consumption tax is certainly an
indispensable element of social security/tax system
reform, the social security system itself must also be
reformed to accord with a shrinking population. For
instance, hiking the consumption tax to just under
20% could turn the primary balance from its current
deficit of roughly 6% of GDP to a surplus of almost
2%, which would stop the debt-to-GDP ratio from
expanding for a while. But because the current social
security system is predicated on continued
population growth, budget deficits will reoccur in due
course owing to escalating social security costs.
Thus, the current level of social security benefits
must be reduced.
What is more, social security costs are escalating not
just because of the demographics of ageing and a
falling birth rate, but high costs are also programmed
into the system because regulations limit the
suppliers of social welfare services such as medical
and elderly care.
Unless the social security industry can be made
more efficient from a supply-side perspective through
competition, there is a risk that money spent to cover
social security costs will just be wasted. It is also vital
that recipients of social security benefits shoulder
more of the burden, as excessive demand is being
fostered because upfront expenses are held down by
government subsidies.
Dealing with the issue of double burdens
The way social security is designed must also be
thoroughly overhauled. Given the reality of a
shrinking population, the pension system and the
nursing/healthcare system must be converted from
the current pay-as-you-go format to fully financed
systems. To limit the inevitable problem of paying
double burdens when moving to a fully funded
system, a package must be formulated to ease the
pain by spreading the burden widely across all
generations and over an extended period (say 50
years). Although the current pension system might
not seem to be heavily in debt owing to its pay-asyou-go
format, the government should quickly deal
with its “net liabilities” by creating a special account
along the lines of that set up to liquidate massive
60
50
40
30
20
10
Chart 3: Trade's Relative Weight in Nominal
GDP (%, 2009)
0
Export
Import
12.512.2
13.9
11.2
30.0
27.7
40.8
35.9
26.7
22.3
49.9
46.0
Japan US UK Germany PRC Korea
Source: The World Bank, BNP Paribas
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
Chart 4: Working Age Population
(age 15-64, % y/y)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: MIC, BNP Paribas
debts held by JNR (Japanese National Railways)
when it was privatised in the late 1980s.
Opening up Japan could raise growth
If comprehensive social security/tax reform removes
impediments to economic growth, the “opening of
Japan” can be deemed a policy for raising growth.
Since domestic demand cannot be counted on to
expand owing to population decline, the issue is how
to tap into external demand.
On this score, Japan needs to go beyond just making
products, as the world’s premier supplier of high-end
durables, capital goods and IT/digital products.
Japan needs to win the hearts of overseas
customers through its renowned customer service
(i.e. meticulous and cordial interaction with
customers, emphasis on satisfying customer needs),
which can be applied to both services and
manufacturing.
Furthermore, by joining the TPP, the distinction
between domestic and external demand will fade
with the free flow of money, goods and labour across
Ryutaro Kono 13 January 2011
Market Mover
16
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