The Kishida Administration's Quiet Economic and Security Overhaul

Several weeks ago, I returned to Tokyo from Washington for the first time in five years. What struck me the most was not the food or the trains but the opinions towards Prime Minister Fumio Kishida.

Praise Abroad, Criticism at Home

In Washington, the prime minister is heralded as a key security partner. He speaks strongly in support of Ukraine and advances the Biden administration’s latticed mini-lateral diplomacy. In Tokyo, he is mired in record-low approval ratings due to his party’s scandals and his perceived indecisiveness.

It might be understandable for the public to think this way. However, I was surprised to hear numerous seasoned political and media observers in Japan dismissing the prime minister as well. Kishida’s most notable security accomplishments have been raising the defense budget to 2% of GDP and developing counterstrike capabilities. Yet, these were written off as legacy policies from former Prime Minister Shinzo Abe, not Kishida’s own work.

This assessment is flawed as it ignores the Kishida government’s distinct policy choices. Where this is most evident is in three recent economic policies the government has implemented. All three will strengthen Japan’s long-term security.

METI's Strategic Initiative

The first is the Ministry of Economy, Trade, and Industry's (METI) action plan, which takes a comprehensive approach to economic security. It builds on the government’s 2022 Economic Security Promotion Act, which prioritized resilient supply chains and safeguarding key technologies.

METI’s new action plan aims to bring several complementary entities together. One is in technology, where METI emphasizes promoting critical tech development and protecting Japanese tech sectors. It also underscores the importance of avoiding excessive foreign dependence on mature technologies, which could lead to economic coercion.

Another interconnection that METI is acting on will take place under its new proposed Trade and Economic Security Bureau. This recognizes how often trade, export controls and economic security must be considered in concert, particularly in critical semiconductor technologies.

METI’s reorganization will reassure Japanese firms, as the bureau will provide greater internal coherence on economic security policies. 

In addition, the new organization also facilitates negotiations with American allies on developing shared approaches and standards on export controls and subsidies. These issues, which have been a source of great consternation for Japanese businesses, are expected to be addressed in the Kishida-Biden talks in Washington.

Finally, METI seeks to foster complementary linkages between government, businesses, and policy think tanks to anticipate supply chain vulnerabilities. 

These efforts build on the existing consultation relationships between the Japanese government and industry, integrating economic security simulations conducted by think tanks to reveal and address likely supply chain chokepoints. 

Over time, METI aims to share such information with counterparts in the United States to strengthen and broaden supply chains for like-minded countries. 

Enhancing Japan's Economic and Military Security

The second is a bill introduced in February to establish a security clearance system for sensitive governmental economic security information. 

Japan already has a state security law covering classified information pertaining to defense, diplomacy, espionage, and terrorism. But as the scope of “security” continues to expand, the new bill will also address the safeguarding of economic information.

This development is significant for Japan’s economic and military security in two related ways. As the Japan-UK-Italy GCAP fighter project shows, defense procurements are increasingly complicated affairs requiring skillsets and financial support from numerous foreign partners. 

Japan's new economic security clearance bill would facilitate collaboration between Japan and its allies and partners. That includes collaboration like GCAP and other advanced technologies such as those falling under AUKUS Pillar II, like quantum computing, hypersonic missiles, and artificial intelligence.

An economic security clearance system would also play a significant role in placing Japan’s defense industry — and by extension, Japan’s defense budget — on a solid and consistent footing. Japanese defense contractors frequently decline to expand capacity, citing the lack of consistent projects. This creates an internally reinforcing downward spiral. 

Ensuring safeguards for economic security information makes it possible for Japanese firms to service US Navy ships in Japanese shipyards, and down the line, joint production of weapons systems. Consistent procurement and growing capacity are the best guarantees to ensure Japan’s defense budget will meet its security needs.

Boosting Japan's Savings for Economic Growth

The third crucial development is Japan's Nippon Individual Savings Account (NISA) reform. This reform, aimed at encouraging personal investors, also has the most potential to strengthen Japan in the long term. 

Japan has a well-documented high savings rate. However, much of it is concentrated as cash deposits, at a far higher proportion than in the US and Europe. 

Various Japanese governments have sought to convert this latent potential into investments benefiting the economy. However, the persistence of cash in Japanese commercial culture, as well as 20+ years of deflation, disincentivized ordinary Japanese from moving their money from savings accounts into brokerages.

Now, the new NISA reform that came into force in January could reverse that trend. Originally introduced in 2014, NISA gave individuals the chance to make tax-free investments within annual limits. Yet the program's appeal suffered from low annual investment limits and, more importantly, a limited tax-exemption period. 

The revised system addresses these problems by increasing annual investment limits. They are now 2-3 times higher than they were previously, and the tax exemption period is now unlimited. These make NISA a credible long-term investment vehicle. 

As of March 2023, individuals in their 20s and 30s held less than 30% of NISA accounts. Along with the Bank of Japan's decision to end monetary easing and raise interest rates, the booming Nikkei stock index has set record highs. Additionally, Japan has the sharpest wage hikes for workers in 33 years. In this environment, the new NISA provides needed financial support for start-ups and established firms alike. 

With ordinary Japanese confronting rising prices and mortgages, there will be a greater demand for high-return investments. This shift should also spur innovation and grow the capacity to address Japan's new security and economic realities.

Conclusion

Even with a successful US state visit this week, Kishida will continue to face numerous challenges in office, including internal party tensions and a critical domestic audience. His actions have undeniably built on Abe’s work. Nevertheless, Kishida has also taken important economic steps of his own that will advance Japan’s security in lasting ways. 

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Author: William Chou
Dr William Chou is Japan Chair Fellow at the Hudson Institute.