Photo/Illutration New LDP President Shigeru Ishiba meets with reporters at the party headquarters in Tokyo’s Chiyoda Ward on Sept. 27. (Takeshi Iwashita)

A new government headed by newly elected Liberal Democratic Party President Shigeru Ishiba will be inaugurated on Oct. 1.

Regarding economic policies that directly affect people's lives, Ishiba has expressed maintaining continuity with most of the agenda pursued by the administration of his predecessor, Fumio Kishida.

The most critical policy challenge for the Japanese economy at this moment is boosting household income.

The key question that will test the new administration’s economic policy stance and ability to achieve policy goals will be whether it can deliver further wage increases and higher distribution of economic returns to workers.

Since former Prime Minister Shinzo Abe returned to power in late 2012, the Japanese economy has seen a marked improvement in corporate earnings performance and expansion of payouts to shareholders, supported by factors such as a weaker yen.

On the other hand, Japanese companies have generally remained cautious about offering wage increases and ramping up capital investment, with pay growth remaining anemic for a quarter-century.

From the perspective of individual companies, there is a degree of rationality in prioritizing the strengthening of financial health and cutting costs to accumulate profits.

However, if companies’ moves to suppress wage hikes crimp consumer spending and then lead to reduced investment, thereby creating a vicious cycle, this reasoning should be called a “fallacy of composition.”

As a prescription for this situation, Kishida, upon becoming prime minister three years ago, advocated policy programs to push up household earnings, adopting such slogans as “No distribution, no new growth” and a “Reiwa Era income doubling plan.”

Kishida's proposals basically represented steps in the right direction, but the “income doubling” soon shifted to an “asset income doubling,” and the proposed revision of financial income taxation to address tax unfairness was mostly shelved due to concerns over its negative impact on stock prices.

In terms of wages, there is no denying that the policy of calling for appropriate price pass-through by companies has provided some impetus for wage increases.

However, given the level of corporate profits and the long-term stagnation of wages, there is still a long way to go.

The new Ishiba administration also has to tackle the same challenge of encouraging companies to raise wages higher to break the vicious cycle.

In addition to efforts to ensure economic stability, proactive policies are needed to leverage situations such as labor shortages for investment in human resources and digitalization.

Steady progress should also be secured in efforts to improve pay and work conditions for non-regular workers and raise the minimum wages.

In a news conference last week, Ishiba stressed the importance of boosting consumer spending, saying, “If personal consumption does not grow, the economy will not pick up.”

During his campaign for the LDP leadership race, he also mentioned the potential for stronger financial income taxation for the wealthy and for raising corporate taxes.

Ishiba should confront the issues the Kishida administration failed to address effectively and urgently map out concrete plans to tackle them.

He needs to provide effective political leadership to build an economic structure that is beneficial not only for corporations and shareholders but for households and the entire population.

On the other hand, Ishiba should also commit himself to avoiding the previous administration’s misguided policies.

The Kishida administration intensified government intervention in specific areas under the guise of growth strategies and economic security, providing massive state subsidies for the semiconductor sector, for example.

The government should re-evaluate the role distribution between the public and private sectors, questioning if there is an overconfidence in its ability to promote specific industries that may be causing a distortion in the allocation of productive resources.

--The Asahi Shimbun, Oct. 1

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