Japan's looming benefit cuts an unspoken, unsettling election theme

Japanese Prime Minister Shinzo Abe
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Japanese Prime Minister Shinzo Abe

Hiroko Shinohara frets about one issue Prime Minister Shinzo Abe has noticeably avoided on the campaign trail ahead of Sunday's election: the need to cut Japan's generous social welfare program that supports millions of people.

"I hope my own pension is OK, but I need to work as long as I can and save money, just in case," said Shinohara, 67, as she tended her family's traditional Japanese sweet shop in Tokyo.

"I really worry about people in their 30s and 40s now. Will there be any money left for them when they're old?"

Abe called the election as a referendum on his economic policies, particularly the decision to delay a tax increase designed to curb Japan's runaway public debt, which tops a quadrillion, or 1,000 trillion, yen ($8.3 trillion).

When will Japan private consumption recover?
When will Japan private consumption recover?   

But raising revenues is not the only problem. So is curbing spending that's already growing rapidly and is set to expand further as the number of retirees soars in this fast-graying society, and as the workforce supporting them dwindles.

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Looming benefit cuts are causing people like Shinohara to save rather than spend, complicating Abe's attempt to break the nearly two-decade deflationary mindset.

Government projections indicate that even if Abe had raised the national sales tax to 10 percent from 8 percent next October as initially planned, Japan was not on track to meet its promise to balance the budget in the next 7 years.

With the tax hike delayed by 18 months, there is even greater need for cuts to generous social benefits, further tax increases or, more likely, both.

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"We cannot rely on high growth but must seek both tax hikes and welfare spending cuts to fix public finances," said Kazumasa Oguro, associate professor of economics at Hosei University.

Details only after elections

Abe, who media projections show is on course for a landslide victory in Sunday's ballot despite concerns over his economic policies, promises answers in the coming months, but is not giving out specifics while on the campaign trail.

"We will formulate specific plans by the summer of next year on achieving a primary budget surplus" for the fiscal year to March 2021, Abe's Liberal Democratic Party said in its election platform.

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Japan's public debt this year is more than twice the country's GDP and the heaviest burden among developed nations.

But after an April hike in the sales tax tipped Japan into recession, Abe decided to delay the second hike, saying the priority must be to make the economy strong enough to weather the pain.

Moody's Investors Service cited rising uncertainty over the government's ability to hit its budget goals when it downgraded Japan's sovereign debt rating by one notch to A1 last week.

A quarter of Japan's population is over 65, and that figure is projected to increase to nearly 40 percent by 2050. The number of those aged 18-24 has fallen by nearly a third over the past two decades.

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Social welfare spending, already one third of the 96 trillion yen budget, is rising automatically by about 1 trillion yen a year as Japan's demographic time-bomb ticks.

Finance ministry forecasts early this year showed that even if the sales tax hike had gone ahead, under the most optimistic assumption of 3 percent annual growth and further steps to rein in social security spending, Japan would not reach its goal.

It would run a deficit, excluding debt service and income from debt sales, of 6.6 trillion yen ($55 billion), or 1.1 percent of GDP, in the 2020-21 fiscal year, the ministry calculated.

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In her shop in the Sugamo area of northern Tokyo, Shinohara declined to say how she would vote on Sunday, but made clear she was no fan of Abe's economic recipe. She has not been able to pass on the April tax increase and higher costs to customers.

"Abenomics? I want it to stop," she said.