Shotaro Oshima

Chairman

Institute for International Economic Studies

Basic “Abenomics”

October 2013

▲ 0.4

1.12.3

1.51.9 1.8 1.8

▲ 3.7 ▲ 2.0

3.4

0.3

1.2

▲ 7

▲ 6

▲ 5

▲ 4

▲ 3

▲ 2

▲ 1

0

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Consumption Housing

Capital investment Inventory

Public demand External demand

Real GDP

（Y-o-Y、％）

▲ 1.2

▲ 3.5

1.1

4.13.8

Ⅳ Ⅰ Ⅱ

Japanese Economy

Ⅱ

2008 Sep. Lehman Shock

2011 Mar. Great

East Japan

Earthquake

4-6 7-9 10-12

＜Real GDP Growth rate＞

(year) 2012 (Source) Cabinet Office Ⅲ

1-3

(fiscal year)

（Q-o-Q, annualized、％）

4-6

2013

1

Japanese Economy

（year）

Unemployment rate （left）

＜Employment＞

（year）

2011 Mar. Great East

Japan Earthquake

2008 Sep.

Lehman Shock

Active job opening to

applicants ratio（right）

2009 Aug

0.42

2009 Jul

5.5％

2013 Aug

4.1％

2013 Aug

0.95

（Source）Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, Ministry of Health, Labour and Welfare 2

＜Wage＞

（year）

Total cash earnings Aug. Y-o-Y -0.6％

＜Indices of Industrial Production＞

2008 Sep.

Lehman Shock

2011 Mar. Great East

Japan Earthquake

Aug.:seasonally-

adjusted

M-o-M :▲0.1％

（year）

2008 Sep.

Lehman Shock

Aug. M-o-M 3.4％

Sep. forecast：M-o-M 5.2％

2011 Mar. Great East

Japan Earthquake

Oct. forecast：M-o-M 2.5％

＜Private Consumption Integrated Estimates＞

Japanese Current Account

(Source) Ministry of Finance “Balance of Payments”, Cabinet Office (Nominal GDP), IMF “World Economic Outlook Oct. 2013”

(Note2) 2013, 2014: IMF estimates.

(Note1) (P) indicates that the figures are preliminary.

3

Growth Strategy for Promoting Investment（”Third Arrow”）

Flexible Fiscal Policy（”Second Arrow”）

Aggressive Monetary Policy（”First Arrow”）

Three Arrows of “Abenomics”

○・“Joint Statement ”of the Government and the BOJ (Jan. 22nd)

（”Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth”）

・Introduction of the “Price Stability Target”（2% in terms of the Y-o-Y rate of change in the CPI)

○・Introduction of the “Quantitative and Qualitative Monetary Easing” (Apr. 4th)

By adopting a three-pronged strategy consisting of aggressive monetary policy, flexible fiscal policy and

a growth strategy to promote private investment, we aim to overcome prolonged deflation and increase

employment and income. (“Emergency Economic Measures for the Revitalization of the Japanese Economy” (Cabinet Decision Jan. 11th 2013))

○ Emergency Economic Measures for The Revitalization of the Japanese Economy (Cabinet decision on Jan. 11th)

（Government expenditure: 10.3 tril. Total size: 20.2tril.）

→FY2012 Supplementary Budget (Enacted on Feb. 26th)

○ FY2013 Budget (Enacted on May. 15th )

○ FY2013 Tax Reform (Approved on Mar. 29th )

Formulated as “Budget for 15 months”

○ Speech of Policies under the Growth Strategy ( First round：Apr.19th Second round：May.17th Third round：Jun.5th)

○ “Japan Revitalization Strategy”（New growth strategy）(Enacted on Jun.14th)

○ Targets for fiscal consolidation -- aim for the creation of a positive cycle between economic revitalization and fiscal consolidation -- ・ Cutting the ratio of primary deficit to GDP (the national and local governments) in half between FY2010 and FY2015 ・ Achieving a primary surplus by FY2020 ・ A steady decline in the ratio of public debt to GDP thereafter （Basic Policies for Economic and Fiscal Management and Reform (Cabinet Decision, June 14th 2013)) 4

Introduction of the “Quantitative and Qualitative Monetary Easing”

April 4, 2013

Bank of Japan

5

Introduction of the “Quantitative and Qualitative Monetary Easing”

6

(Source) Bank of Japan

Introduction of the “Quantitative and Qualitative Monetary Easing”

7

Based on “Japan‘s Economy and Monetary Policy: Toward Overcoming Deflation” Speech at a Meeting Held by the Naigai Josei Chousa Kai (Research Institute of Japan) in Tokyo Haruhiko Kuroda Governor of the Bank of Japan（July 29, 2013）

Expansion in the Monetary Base and JGB Holdings

USD/JPY & Nikkei since 2007

8

Interest rate in the United States and USD/JPY rate

9

(Source) Federal Reserve Bank of St. Louis

In FY 2013 Budget,

Toward the Revitalization of the Japanese Economy, based on “Emergency Economic Measures for

The Revitalization of the Japanese Economy”, formulating “Budget for 15 months” along with FY 2012

supplementary budget.

As well as FY2012 supplementary budget, giving priority to three areas; “Reconstruction and disaster

prevention measures”“Wealth creation through growth”,“Security of life and regional activation”.

"Budget for 15 months" coupled with FY 2012 supplementary budget

① In order to respond to urgent issues such as the disaster prevention measures and measures for aging

social infrastructure, enhancing the public works on the projects to protect citizen’s life and livelihood.

In order to address the changes in the security environment and to build effective and efficient

defense,

enhancing national defense budget for security of life.

② Review / Rationalization of Public assistance System and Personnel cost of local public servants etc.

Giving priority to the projects （example）

① In FY 2013 budget, tax revenues exceed government bonds issues, getting away from the three years

lasting extraordinary situation where tax revenues were less than government bonds issues. ② Improving primary balance steadily

（In general account, FY2012 initial budget -24.9 trillion yen * ⇒ FY2013 initial budget -23.2 trillion yen )

Important first step to fiscal consolidation targets

Highlights of the Budget for FY2013

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Prioritized Budget （Wealth creation through growth）

１．Growth potential strengthening through stimulating private investment ○ Assistance to R & D for energy saving-recycling project

○ Promotion of innovation in medical-related area including the Research for using iPS cell

２．Assistance to SMEs and small-scale business operators ○Assistance to the new challenges of R&D and technology expansion, etc. which

contribute to developments of Manufacturing Technology of SMEs and small-scale

business operators

○Management assistance including business revitalization and facilitation of funding for

SMEs and small-scale business operators

３．Assistance to Japanese companies’ overseas operations, etc.

○ Along with broadening the market of Japanese products starting from visual contents such

as Anime, enhancing the enticement of tourist to Japan, etc. (Cool Japan), promoting the

exports of the infrastructure utilizing superior technology and service of Japan

11

Social Security Expenditure and Budget

(1)Social Security Expenditure by Category (2)FY2013 Budget(General Account)

(Source) National Institute of Population and Social Security Research, and Ministry of Finance

12

General Government Fiscal Balance and Gross Debt Obligations

(1)General government fiscal balance (2) General government gross debt obligations

(Source) Ministry of Finance, original data from “Economic Outlook”(OECD Dec.2012)

(Note) 2013: OECD estimates.

13

○ The Government aims to halve the primary deficit of the national and local governments to GDP ratio by FY2015 from the ratio in FY2010 and to achieve a primary surplus by FY2020, thereafter the Government will seek to steadily reduce the public debt to GDP ratio.

Basic framework for Fiscal Consolidation: Medium-term Fiscal Plan (Approved by the Cabinet on August 8, 2013)

II. Fiscal consolidation targets

1. Basic initiatives

○ It is necessary to reduce the primary deficit of the National Government’s General Account, which accounts for a large part of the primary deficit of the national and local governments.

○ The Government aims to improve the primary balance of the General Account at least by approximately 4 trillion yen in FY2014 and FY2015 respectively, and brings down the General Account’s primary deficit to around 19 trillion yen in FY2014 and to around 15 trillion yen in FY2015, thereby seeking to achieve the target to halve the primary deficit of the national and local governments.

○ The Government will make its utmost efforts to keep the amount of newly issued National Government bonds below that of the preceding fiscal year for the FY2014 and FY2015 budgets.

○ In terms of local government finances, from the viewpoint of stable management, together with keeping expenses down in line with the efforts of the national government, total general revenues needed for stable fiscal management of local governments in FY2014 and FY2015, including those which receive grants under the Local Allocation Tax Act, should be maintained virtually at the same level as in the FY2013 Fiscal Plan of Local Governments, and not below.

III. Achieving the target for FY2015.

I. Basic Understanding

○ The Government seeks to achieve nominal GDP growth of around 3% and real GDP growth of around 2% on average over the coming decade (from FY2013 to FY2022). The Government creates a virtuous cycle between sustainable economic growth led by private demand and fiscal consolidation.

Provisional Translation

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III. Achieving the target for FY2015.

2. Initiatives on the expenditure and revenue sides

○ Social security: The Government seeks to control the overall level of social security expenditure to the extent possible amid an upward trend mainly due to population aging and advances in medical technologies. The Government will also make its utmost efforts, by resolving the issue of the exceptionally high levels of public pension benefits, the elimination of which is a pre-requisite for invoking the macroeconomic-slide mechanism, as well as ensuring concrete progress in enhancing efficiency in promoting the use of generic medicine.

○ Infrastructure: The Government will apply a “selection and focus” strategy by prioritizing projects with a high return on investment, in combination with non-infrastructure measures.

○ Public finances of local governments: As the economy recovers, there is a need to proceed with normalizing the crisis-response mode following the Lehman Shock.

○ The Government will improve the primary balance of the General Account, just as is the case for efforts to be pursued until FY2015, and turn it into a surplus.

○ On the expenditure side, the Government will gradually reduce the primary expenditure to GDP ratio by controlling the primary expenditure to the extent possible through eliminating wasteful expenditure in each year’s budget, while increasing GDP through economic growth. On the revenue side, the Government will seek to expand tax revenues through economic growth. In the process of making these efforts, the Government will consider securing financial resources for social security spending that has been on the rise mainly due to population aging, through measures both on the expenditure and revenue sides, including any necessary reforms of the systems.

Basic framework for Fiscal Consolidation: Medium-term Fiscal Plan (Approved by the Cabinet on August 8, 2013)

Provisional Translation

IV. Achieving the target for FY2020.

15

0

5

10

15

20

25

30

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

（Trillion Yen）

（FY）

<Characteristics of consumption tax>

- Stable revenue source - not easily affected by changes in economic environment or population structure.

- Neutral for economic activities - the burden not concentrated on particular groups (ex. working generation)

- Large amount of revenue.

Changes in Tax Revenue

Income Tax 13.9

Consumption Tax 10.6 (excl. local consumption tax)

Corporation Tax 8.7

Inheritance Tax 1.5

Consumption tax is

suitable for stable financial

resource for social security,

in which people equally bear

the social security

expenditures.

・First stage = From 1st April, 2014 8％（national:6.3％ local:1.7％）

⇒Prime Minister Shinzo Abe confirmed in Oct.1 that the government will raise the

consumption tax rate from April 2014.

・Second stage= From 1st October, 2015 10％ national:7.8％ local:2.2％）is scheduled.

※ Including local allocation tax, local consumption tax revenue generated from this tax increase is

equivalent to the consumption tax rate of 0.92% from April 1st 2014 and 1.54% from October 1st 2015.

Raising Consumption Tax Rate

16

The Stimulus Package planned to buffer from Consumption Tax increase

17

◆Japanese Government plans \5 trillion economic package

and \1 trillion tax cut to reduce the consumption tax

increase's negative impact.

Details will be shown in early December, when an extra budget for fiscal 2013

to fund the stimulus package will be compiled in an integrated manner with

the initial budget fiscal 2014 at the end of 2013.

Draft of stimulus package

(trillion yen)

In Extra Budget for fiscal 2013 5

Public Investment (ex. Measures to cope with the aging of infrastructures) 2Additional Budget for the Great East Japan Earthquake Reconstruction Expences 1.3Payment in cash to low-income people 0.3Payment in cash to home buyers 0.3Abolishion of the special corporation tax for reconstruction 0.9

The capital investment tax reduction and tax benefits to employers 1

The capital investment tax reduction 0.7The tax benefits to employers increasing the wage level of workers 0.2

（Source） Interview surveys with the embassies, information available on the websites of the European Union and of the governments, etc.

（Notes） 1. The base rate of consumption tax in Japan is 5%: 1% is local consumption tax and 4% is national consumption tax.

2. In Canada, in addition to goods and service tax（ value-added tax）, taxes such as retail sales tax are imposed by almost all provinces（ e.g. Ontario: 8%）

3. In the United States, retail sales tax is imposed by states, counties and cities（ e.g. New York State and New York City: 8.875% in total）.

4. In the graph above, the blue sections represent the tax rates for foodstuffs. The scope of foodstuffs to which the reduced tax rate is to apply is different from country

to country; the standard rate may apply to some kinds of foodstuffs. Unprocessed agricultural products and some other foodstuffs may be subject to different tax

treatment from those described herein.

5. The EU Directives preclude the application of reduced tax rates of under 5% or 0%.

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Japan’s consumption tax rate is the lowest among major countries. In other countries,

consumption tax (value-added tax) holds an important position as a fundamental tax.

In particular, EU member countries are obliged to set their standard tax rate at 15% or

higher.

International comparison of value-added tax rate

-Tap into expanding global

market-

Establish strategic commercial relations (e.g., TPP, RCEP) Tap into global markets (e.g., infrastructure export, Cool Japan) Promote domestic globalization (FDI in Japan, global talents)

-Turn challenges into new

markets-

Extend “healthy life expectancy”

Balance supply and demand through clean and

efficient energy usage

Communities that make money through local

resources (e.g., agriculture)

Speed up the restructuring of industries

Reform employment system and strengthen

workforce

Bolster scientific and technological innovations

Promote IT use

Strengthen competitiveness of Japan as a

business hub

(e.g., energy restrictions, special zones)

“Japan Revitalization Strategy”-JAPAN is BACK

[First arrow]

Dispel deflation mindset

Aggressive

monetary policy

[Second arrow]

Ignite the damp economy

Flexible fiscal

policy

[Third arrow] Restore the confidence of companies and

people, and change “expectation” into “action”

New growth

strategy

Strategic Market Creation Plan

Plan for the Revitalization of Japanese Industry

Strategy of Global Outreach

Roadmap to growth

3 Policies

(“Replacing old with new”, regulatory and institutional reform,

opening up of government enterprises)

(Maximize the potential of women, the young and the elderly,

and foster internationally competitive talents) (Revive Japan as a “technology-driven nation,”

revitalization through “Made by Japan”)

3 Plans

Vitality ・ Talents / New products ・ New services

19

From “20 years of stagnation” to “A new decade of revival”

Three Arrows

• An economy and society that guarantees

free and fair competition and open

economic environments, equipped with

great attractiveness to the rest of the world;

• GDP growth (average of 10 years)

Nominal GDP growth: around 3％

Real GDP growth: around 2％

• A faster increase in wages than prices in the

medium to long term

A new decade of revival

• Long-lasting economic

stagnation and deflation

• Nominal GDP growth:

▲0.2%

• Real GDP growth: +0.8%

20 years of stagnation

20

Basic policies for Japan Revitalization(Summary)

21 “The Immediate Actions for Japan Revitalization”(Oct.1,2013,Headquarters for Japan’s Economic Revitalization）

6466

62

67 67

56

64

68

20

30

40

50

60

70

80

90

1990 1995 2000 2006 2012 2030

（billion persons）

0

10

20

30

40

50

60

70(%)

○ Labour Force Participation Rate ○ Labour Force Participation Rate by Sex

actual estimated

and Age Group (Japan and Sweden)

Labour force participation rate (right)

Labour force participation rate (right)

Labour force

Labour force

With policy actions

（Source） Cabinet Office, Government of Japan / Ministry of Internal Affairs and Communications / National Institute of Population and

Social Security Research/ Statistics Sweden (SCB)

Labour Force Participation Rate

22