Japan's PM says population crisis is an 'emergency', so why is he holding back funding?

Japanese Prime Minister Fumio Kishida has made clear he will not introduce taxes or increase existing ones to address the nation's population crisis.

Kishida announced his decision on Monday at the fourth meeting of the Children's Future Strategy Council that aims to encourage young couples to have more children and, ultimately, reverse the contraction and dramatic ageing of Japan's population.

In January, Kishida said that providing support for families to have children was his government's "most important policy" and that the country was facing its "now or never" moment.

Do you have questions about the biggest topics and trends from around the world? Get the answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

The council has outlined a number of ways to increase the nation's birth rate and a comprehensive report detailing the entire strategy is due to be announced in June, with the cost of the initiatives estimated at 3 trillion yen (US$21.7 billion) a year.

On the question of financing the major portion of the spending package, Kishida has ruled out the possibility of sales tax hikes, leaving debt issuance as one of the leading options of funding, at least for now.

Unfortunately, that cost comes on top of the economy treading water for at least two years as a result of the pandemic and the Ukraine war. It also coincides with the government committing to a sharp increase in defence spending over growing threats to regional security and Japan's sovereignty posed by China, North Korea and Russia.

Earlier this year, the government said it would fund a wide-ranging weapons upgrade for the Self-Defence Forces that would raise the defence budget to 6.82 trillion yen (US$49.2 billion) a year, an increase of 26 per cent on the 2022 budget.

As a result, Kishida is in the unenviable position of having to find the funds to cover two very expensive policy promises that are equally critical to the security of the nation.

With increases in consumption tax and other similar levies ruled out, the government is left with few other options to raise the cash, economists point out. One option is to raise social insurance premiums, in particular those for healthcare, although this would be unpopular with the public as well as companies that are obliged to pay a proportion of their workers' contributions.

The unions are on the same side as the employers on this particular issue and highlight that an obligation to pay more in health and other premiums would eat into long-awaited wage increases. Ironically, the government has been pressuring firms to raise wages to encourage spending as a way out of Japan's economic doldrums.

Another approach would be to transfer funds away from other areas of government spending, such as infrastructure or education, which would be just as controversial.

As a result, there seems little alternative to the government taking on greater debt to fund the increased spending, although one economist who is a member of a panel advising Kishida said that this was the best option, in the circumstances.

"The declining birth rate has been a problem for a long time and now Kishida has declared it an emergency," said the economist, who declined to be named as the council has not yet completed its deliberations.

The government wants to increase household incomes and enable women to get better jobs with more opportunities for promotion and that pay more, as well as providing more help - such as more kindergarten places - to young families raising children. This aligns with Kishida's "New Capitalism" strategy.

The adviser also insists it is better to cover the cost of measures designed to encourage couples to have more children through taking on more debt rather than increasing taxes as this only shrinks workers' pay packets and makes it even harder for ordinary people to see how they are going to be able to cover the costs associated with raising a child.

Japan already has the highest government debt in the world, some US$9.8 trillion that accounts for 263 per cent of GDP, but the economist said the short-term cost would be worth it if it led to more births, expanding the consumer base and taxpaying pool.

There is no doubt the government needs to act quickly as the problem is becoming more acute with every passing year. Just 799,728 babies were born in Japan in 2002, the fewest on record and the first time the total has dipped below 800,000. Japan's National Institute of Population and Social Security Research had forecast in 2017 that annual births would not fall below 800,000 until 2030.

There were 124.49 million Japanese in 2022, a decline of 556,000 from 2021 and down from a peak of 128 million in 2017.

A study in the medical journal The Lancet that was published soon before the coronavirus pandemic had predicted that Japan's total population would contract to 53 million by the end of the century.

Additional reporting from Reuters

This article originally appeared on the South China Morning Post (SCMP).

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.