Abenomics Leaves Japan’s Hinterland Behind as Budget Cuts Bite

Abenomics Leaves Japan’s Hinterland Behind as Budget Cuts Bite

Japanese Prime Minister Shinzo Abe’s cuts to local-government subsidies are like trying to “wring water from an old rag that’s been squeezed dry,” says Kazuya Yoshida, a 27-year veteran of Shijonawate City’s municipal staff.

Abe pared payments to local authorities by 392 billion yen ($3.9 billion), or 2.3 percent, deepening decade-long cutbacks for city and prefectural budgets hurt by falling populations and dwindling revenues. While Abe has deployed fiscal stimulus at the national level to revive Japan’s economy, a drop in wages for provincial civil servants risks prolonging deflation.“Where on earth can we find benefits from Abenomics?” said Yoshida, 50, who manages disaster prevention in Shijonawate, an Osaka suburb. “We’re increasingly worried about our household budget. The Abe administration doesn’t understand what’s actually going on” in local economies, he said.

With Abe pushing companies to raise pay levels, his regional budget cuts are diluting policy makers’ campaign to rekindle inflation. Four fifths of Japan’s 3.43 million state employees work for local municipalities, with their wages influencing private employers’ compensation decisions, according to Yoshito Kan, 53, executive secretary of the Osaka Confederation of Trade Unions.

“Local government wage setting is very important in terms of the impact on the private sector,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who previously worked at the Bank of Japan. “Reducing local government wages is of course inconsistent with the end-to-deflation story.”

Bearing Brunt

Those in regional cities have already taken the brunt of cuts as at least six recessions in the past 20 years eroded revenue. The average monthly wage for an official in Shijonawate has fallen 20 percent in the past decade, to 299,500 yen, according to the city. That compares with a 4.9 percent drop to 460,587 yen for Tokyo government workers.

“Wage cuts for local officials risk widening economic gaps among regions and nailing already weak areas further to the wall,” said Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo.

Angst among local authorities hasn’t fed through to political consequences for the ruling Liberal Democratic Party, which is poised to expand its hold on the national legislature in a July 21 election. Abe’s LDP, along with coalition ally New Komeito, will probably win a majority in the upper house of parliament, according to a July 4-5 Yomiuri newspaper poll, helping ease passage of legislation.

Next Budget

Abe’s administration hasn’t said whether it plans further cuts to local government subsidies in the next annual budget, due in December.

The three-pronged policy prescription of Abenomics includes fiscal stimulus, along with monetary expansion and structural reforms. A 10.3 trillion spending package enacted in February spanned reconstruction and disaster prevention in the aftermath of the 2011 earthquake and tsunami to measures designed to encourage private investment.

“For local economies, avoiding government wage cuts would be more help than boosting public work projects,” said Motohiro Adachi, an economics professor at Wakayama University in western Japan, who wrote a book on the decline of Japan’s regional retail industry after visiting some 300 provincial shopping districts. “It’s not a wise policy to cut wages now, because consumption is a leading force for Japan’s economic growth.”

Living Costs

The pain from constraints on pay will escalate should Bank of Japan Governor Haruhiko Kuroda’s monetary stimulus — which has driven down the yen 20 percent in the past eight months — spark broader cost-of-living increases. With the bulk of the nation’s nuclear plants shuttered, the weakening yen already sent utility costs up the most in almost five years in May. Excluding fresh food and energy, consumer prices fell 0.4 percent from a year earlier, the statistics bureau said.

Optimism that Abenomics will work contributed to upgraded forecasts for the third-largest economy, and boosted the Topix index (TPX) of shares 64 percent over eight months. Industrial output rose 2 percent in May, while retail sales gained 1.5 percent. Fifty-five percent of respondents in a Nikkei newspaper survey published last month approved of Abe’s economic policies.

Faster growth would help support tax revenues as Abe contends with the world’s biggest public debt burden. Last month the prime minister pledged to halve the primary fiscal deficit, which excludes debt servicing costs, to 3.2 percent of gross domestic product by fiscal 2015, from 6.9 percent this year.

Postwar Record

Japan reduced the pay of central government workers by an average 7.8 percent last year, the biggest reduction since World War II, partly to help finance reconstruction after the 2011 earthquake. Even so, trimming public-sector wages further may have less of a direct impact on the national economy than in other developed nations because Japan’s state payroll makes up a smaller proportion of the working population.

The government hires about 6.7 percent of the nation’s workforce, compared with 14.6 percent in the U.S., 9.6 percent in Germany and 17.4 percent in the U.K., according to data from the Organization for Economic Cooperation and Development.

That’s little consolation for Yoshida, whose wife also works for Shijonawate city to help support their two children. He’s concerned that a further decline in wages would threaten to erode savings used to pay the school fees.

“We can hardly keep up as it is,” he said.

Some colleagues are even borrowing to pay school fees or reducing life-insurance payments as higher electricity bills and mortgage payments drain their budgets, said Yoshida, who is also chairman of the Shijonawate officials’ labor union.

‘Breaching’ Autonomy

Among the 47 prefectures, 36 said they are considering wage cuts, a central government survey published on June 13 showed. The Abe administration is “breaching the fiscal autonomy of local governments,” the national association of city mayors, said in a statement on June 5. “It’s extremely regrettable that the central government is ignoring all administrative cost-cutting efforts we municipalities have made up to now.”

“There may be some who hail Abenomics, but most people outside big urban areas don’t have many stock investments and are excluded from the benefits,” said Hitoshi Hazawa, who has worked for Akita Prefecture in northern Japan for 30 years and now chairs the local union of government officials. “Many restaurants here are already empty because people are eating out less, and wage cuts will only cut consumption further.”

Akita, 450 kilometers (280 miles) north of Tokyo and famous for its rice farming and sake, will lose more than a third of its population by 2040, the fastest contraction in Japan, according to government data.

“It will take a while before benefits reach regional economies,” Finance Minister Taro Aso said on July 9 after visiting Oita in southern Japan and Iwate in the north during the election campaign. While there are signs of improvement in Tokyo, “you would be wrong if you assume same things are taking place in regions.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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