Japan’s free education plan requires fiscal balancing act

Education is a process that needs both long-term commitment and investment. So, the government’s move toward making preschool education free in Japan must sound attractive to many.

Prime Minister Shinzo Abe views stepped-up investment in the Japanese people as key to unlocking the country’s future economic potential. But there is a catch, with debt twice the size of its gross domestic product, an aging Japan needs to find ways to fund the proposed scheme amid ballooning social security costs.

Economists believe shifting the country’s focus from elderly people to children is the right course of action, but some critics say politicians tend to cater to the needs of the elderly who will vote for political parties that promise to maintain social welfare.

It is also hoped that improving support to parents will turn the tide of Japan’s declining birthrate and shrinking population.

“It’s often concern about the future financial burden (of children) that discourages those in their 20s and 30s from having them. So the government contributing to educational expenses would be a good step forward,” said Takuya Hoshino, an economist at the Dai-ichi Life Research Institute.

“That said, what is important is how the money is spent. Is it going to help boost the country’s economic growth over the longer-run?” Hoshino added.

The government approved policy guidelines on Friday, stating that a decision should be made by year-end on how to secure a source of sufficient funding to realize free preschool education.

It came after government officials and lawmakers stressed the need for Japan to address the country’s shrinking population, and the dampening effect the demographic change has on economic activity.

Recent health ministry data show in 2016 the number of babies born in Japan fell below 1 million for the first time.

The country’s fertility rate — the average number of children a woman will bear in her lifetime — stood at 1.44 in 2016 while Japan is said to need a 2.07 rate to maintain its population level.

In the face of a tight labor market, the government is encouraging more women into work, while the goal to bring the number of children on nursery waiting lists to zero, as pledged by Abe, has been delayed.

“We have a national crisis,” said Shinjiro Koizumi, one of the lawmakers from the ruling Liberal Democratic Party that has proposed the creation of a “child insurance” system.

“We have a system that supports the lives of elderly people as a society but what we have yet to build is one that supports children and child-rearing,” he said earlier this month.

Under the proposed scheme, employees and companies pay insurance fees along with their pension premiums, but critics say the plan is unfair as those without children are forced to contribute.

At an insurance rate of 0.1 percent, for instance, Japan could reduce the financial burden on parents for preschool education. The rate would need to be set at 0.5 percent to cover the cost of the education entirely “in principle,” according to calculations by the lawmakers.

Economists believe another option being floated — securing funds through a higher consumption tax rate — may be unrealistic after Japan postponed a planned hike to 10 percent to October 2019.

The latest policy blueprint does not refer to the consumption tax increase, which prompted speculation about another delay.

The issuance of “education bonds,” another option, could complicate Japan’s efforts to improve its tattered finances, with Finance Ministry officials holding reservations about the increased financial burden such a scheme would put on future generations.

Debate is expected to intensify in the coming months about the envisaged program, as the need for increased support for education will inevitably be weighed against the harsh reality of Japan’s cash-strapped financial position.

Japan has pledged to turn its deficit in the primary balance to a surplus by fiscal 2020, while it now aims to lower another barometer to gauge fiscal health — the debt to GDP ratio.

The ratio improves when the economy grows and interest rates are low. Japan’s economy is in the longest run of expansion since 2006, while the Bank of Japan aims to keep long-term interest rates near zero.

“The BOJ would have no choice but to maintain its accommodative policy,” said Toru Suehiro, senior market economist at Mizuho Securities Co., adding that the use of the ratio would make it easier for the government to increase spending.

“After years in office, Abe has a revision to the Constitution in his sights. My impression is that the government is pursuing policies such as free preschool education that can resonate (with voters),” Suehiro added.

Education is one of the topics that the LDP has decided to focus on in its debate about the first-ever constitutional amendment, as Abe envisions making higher education free.

The policy blueprint states that Japan’s nine-year free compulsory education system — from elementary to junior high school — has become a “major driving force” of its postwar economic growth. “We need to make various (forms of) education truly open to all citizens” as society has changed, it said.


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