Japanese Prime Minister Shinzo Abe’s cuts to local-government subsidies are like trying to “wring water from an old rag that’s been squeezed dry,” says Kazuya Yoshida, a 27-year veteran of Shijonawate City’s municipal staff.
Abe pared payments to local authorities by 392 billion yen ($3.9 billion), or 2.3 percent, deepening decade-long cutbacks for city and prefectural budgets hurt by falling populations and dwindling revenues. While Abe has deployed fiscal stimulus at the national level to revive Japan’s economy, a drop in wages for provincial civil servants risks prolonging deflation.
“Where on earth can we find benefits from Abenomics?” said Yoshida, 50, who manages disaster prevention in Shijonawate, an Osaka suburb. “We’re increasingly worried about our household budget. The Abe administration doesn’t understand what’s actually going on” in local economies, he said.
With Abe pushing companies to raise pay levels, his regional budget cuts are diluting policy makers’ campaign to rekindle inflation. Four fifths of Japan’s 3.43 million state employees work for local municipalities, with their wages influencing private employers’ compensation decisions, according to Yoshito Kan, 53, executive secretary of the Osaka Confederation of Trade Unions.
“Local government wage setting is very important in terms of the impact on the private sector,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who previously worked at the Bank of Japan. “Reducing local government wages is of course inconsistent with the end-to-deflation story.”