Transforming Japan

Transforming Japan

Prime Minister Fumio Kishida is touting a 'New Form of Capitalism' to create a more sustainable and inclusive economy in a country at growing risk of stagnation.

Japan has started to pursue a "new form of capitalism" as the flagship agenda of Prime Minister Fumio Kishida amid the challenges posed by the lingering pandemic and new shocks delivered by the Russian invasion of Ukraine.

With a focus on redistributing wealth and sharing growth more evenly among all participants in society, Mr Kishida has said he aims to build a more sustainable and inclusive economy.

Many observers say such an approach resembles traditional redistributive economics as it contains a strong emphasis on wage growth and tax policy. In other words, this "new capitalism" is actually not new at all, but an old model from the much celebrated "golden age of capitalism" in the 1960s -- a time when wages and productivity rose hand in hand.

Those years were particularly golden in Japan. Not only did gross domestic (GDP) growth average double digits, but workers' incomes also doubled between 1960 and 1967 thanks to a successful income doubling plan by the Liberal Democratic Party (LDP) government.

Workers are certainly hoping that Mr Kishida can deliver, as Japanese wages have been virtually stagnant since the collapse of Japan's bubble economy more than three decades ago. Whatever wealth disillusioned Japanese workers manage to accumulate is generally not spent on goods and services, but rather saved in anticipation of even more difficult times.

However, many critics are still wondering if Japan has the right mechanisms and core policies in place to drive the new premier's lofty ambitions. Economic and financial experts are also questioning how this new form of capitalism, if it takes riot, will affect the global economy and whether it can transform a country with a shrinking workforce, while lifting productivity and people's standard of living.

Robert Feldman, an adviser to Morgan Stanley MUFG Securities in Tokyo, has questions about the ability of the Kishida administration to translate the philosophy of new capitalism into relevant policies on trade, investment and digital transformation.

"I keep hearing questions like, 'Isn't it just all slogans without substance?' or 'Isn't this just a smokescreen for a redistribution policy, which is going to be an excuse for more regulation and protectionism?'" he said at a recent webinar as part of the Asia Undercurrent series hosted by Nikkei Asia.

However, Mr Feldman is willing to give Prime Minister Kishida a chance to prove himself. Many critics, he believes, are missing Mr Kishida's key point that capitalism plus democracy is a better system than authoritarianism plus state capitalism. Market mechanisms, he says, can contribute to wealth, but have widened inequality and the gap between the rich and the poor.

His government has pledged to continue its effort to reduce wage discrepancies between men and women and to ensure that people on irregular employment terms enjoy similar benefits to those on full-time contracts.

"More attraction to foreign investment will be good for the domestic economy," says Aiko Lane, executive director of the US-Japan Business Council. SUPPLIED


In the process, Mr Kishida hopes that wages will rise and people will feel more satisfied with their democratic system of government. Under this policy platform, the premier has placed a strong emphasis on what he calls "human capital", Mr Feldman noted.

Japan was once known for its culture of life-long employment, but that changed with the introduction of neoliberal labour reforms in the 1990s. Currently, almost 40% of the country's workforce is engaged in irregular work.

Irregular workers suffer from higher job insecurity, less desirable working hours, and far lower wages than their regular co-workers, despite often doing similar tasks. While female participation in Japan's workforce has topped 70%, about half of female workers are employed in irregular jobs versus only 22% of male workers. That explains why women earn on average 43% less than men.

The average monthly pay for female full-time workers in Japan came to ¥251,800 (US$2,190) in 2020, compared with ¥338,800 for their male counterparts.

The New Capitalism has pledged to ensure stronger job protection and "equal pay for equal work between regular and non-regular employees". This pay equity principle is actually stipulated in Japan's labour law, but since no government ministry is mandated with enforcing it, violations abound. Stricter government enforcement would improve the situation faced by millions of unfairly treated irregular workers.

The major challenge is that in Japan's protracted situation of low growth, it is more profitable for companies to hoard money than invest it in the real economy or increase wages.

During a meeting early this year with business leaders, Mr Kishida made a strong case for improving workers' pay. Wage increases, he said, mean future investments. "It's critically important for future economic growth. I'd like to see you take an aggressive stance and cooperate," he told them.

The prime minister also stated that Japan needs to set in motion a "virtuous cycle of growth and distribution" at a time when recovery from the pandemic comes with opportunities for a new era.

The business gathering was organised by the Japan Business Federation -- the country's most powerful business lobby, also known as Keidanren -- as well as the Japan Association of Corporate Executives and the Japan Chamber of Commerce and Industry.

Keidanren chairman Masakazu Tokura said he agreed with Mr Kishida on the need for companies to raise pay proactively if they have remained profitable despite the impacts of Covid-19.

"It's the responsibility of companies to distribute (income) to workers," Mr Tokura said. Keidanren, however, does not plan to encourage its member companies to consider wage increases across the board.

While some financial analysts and institutions complain that Mr Kishida's approach discourages healthy competition, Ken Shibusawa, CEO of Shibusawa and Company and a member of the premier's political advisory committee, accepts that the government needs to to a better job of sending a clear policy message to the public. However, he still insists that the the goals of new capitalism are achievable.

"To me, it's capitalism that cares. We need to establish ways to measure progress as well as to consider financial returns and one important factor is human capital," he told the Nikkei forum.

"Of course, we need to recognise the importance of shareholders but we also need to care about the environment and about people, so that we can focus on new, sustainable growth."

According to Mr Kishida, rebuilding sustainable capitalism is a matter of urgency because "stable democracies are in jeopardy". The ultimate goal, he says, is to protect democracy against autocracy.

"I keep hearing questions like 'Isn't it just all slogans without substance?'," says Robert Feldman, an adviser to Morgan Stanley MUFG Securities in Tokyo. SUPPLIED


In the past, the alliance between the United States and Japan was focused on doing things together. Nowadays, the emphasis is on how the two nations can influence the Indo-Pacific region and the world. Japan has really become a true leader in this regard, said Aiko Lane, executive director at the US-Japan Business Council of the US Chamber of Commerce.

Discussing his views on Japan's role in the world shortly after he took office last October, Mr Kishida said he would tale "a realistic approach to Japan's foreign policy while aspiring to the ideal".

Some of Mr Kishida's New Capitalism policies, such as a push toward greater economic security and a transition to greener energy, will be an inspiration to other countries, said Ms Lane. However, she adds the caution that Japan's global status is changing.

Japan is currently the third largest economy in the world but by some estimates, it will fall to eighth place behind the US, China, India, Indonesia, Brazil, Russia and Mexico by 2050. To remain strong in terms of economic and democratic power, it is strategically important for the Kishida administration to keep a balance of outward and inward direct investment.

Of all the Group of Seven (G7) nations, Japan ranked third in terms of cross-border investment with estimated value of $1.8 trillion. However, inward direct investment is another story. The ratio of outward to inward foreign direct investment (FDI) is 8:1.

"More attraction to foreign investment will be good for domestic economy," she said.

The Japan External Trade Organization (Jetro) argues that Japan's ageing society, and the resulting steady decline in population, has negatively affected the country's attractiveness to foreign investors. "Even though Japan is experiencing ageing, FDI to Japan is increasing," said Atsushi Taketani, president of Jetro Bangkok and chief representative for Asean.

He points out that net FDI to Japan in 2020 rose 61% from the previous year to ¥7.1 trillion. This was the highest figure since 2014, and far more than ¥4.5 trillion in 2016.

"This figure does not show any negative influence from the ageing society," he told Asia Focus. "Most of the FDI to Japan is related to the non-manufacturing sector. Many companies invest in Japan aiming at a large market. Healthcare is one promising field.

"Ageing has so many diverse consequences, but it could bring positive factors for investment, such as expanding the healthcare market," he added.

Ms Lane said that stimulating innovation and the domestic economy must be the top priority for Japan. A highly educated workforce should be supported to advance science and technology.

Despite being perceived as high-tech and a leader in computer technology and robotics, digital and cashless payment in Japan is far less advanced compared to neighbouring countries like China, South Korea or many in Southeast Asia.

The financial ecosystem should also be adjusted to utilise the full spectrum of sustainable investment. This would be in line with the current trend of environmental, social and corporate governance (ESG) investing, leading to increasing wages and productivity.

While higher wages for workers could mean lower profits for existing industries and capitalists, investors need to be convinced that they would benefit from embracing progressive strategies, and that their short-term, upfront investment will pay off in the long term.

"To me, it's capitalism that cares. We need to establish ways to measure progress as well as consider financial returns, and one important factor is human capital" Ken Shibusawa CEO of Shibusawa and Co and an adviser to the prime minister SUPPLIED


Noah Sneider, Tokyo bureau chief for The Economist, sees many parallels between Mr Kishida's approach and US President Joe Biden's "Build Back Better" programme and the "Next Generation EU" concept in Europe. The aim is to equip citizens with the skills needed for a changing employment environment, particularly an emphasis on vocational training for work in the field of digital technology.

"Certainly, there's an opportunity for Mr Kishida to take the lead in economic thinking," said Mr Sneider. "However, the question I am asking is whether this is the right recipe to unlock the untapped potential in the Japanese economy."

While the government has pledged to continue its effort to reduce the wage gap between male and female workers and to ensure that people on irregular employment terms enjoy similar benefits to those on full-time contracts, there is little so far in the prime minister's proposals that can credibly be called new.

Many analysts still believe the Kishida government has so far been reluctant to put the required pressure on capitalists to undertake real reforms, or that it is prepared to change the underlying structure of society.

Even before Covid-19 upended the economy, the employment for life concept was on the wane in Japan. The pandemic has hastened this shift, changing many people's attitudes toward work and leading to more interest in startups and entrepreneurship. But for a country that embraces so many cutting-edge technologies, Japan is behind the curve when it comes to creating a supportive environment for entrepreneurs.

Labour productivity is also slowing and on the decline, compared to South Korea. By 2030, it is estimated 16 million jobs in Japan will be lost to the new technology. And as ageing shrinks the labour force, Japan will need to do more with fewer people. Digital transformation is urgently needed.

Mr Sneider believes much more could be done to boost productivity and reform the labour market. The success of new capitalism depends on people's readiness to accept changes to the business as well as trade and financial systems and infrastructure in the country.

Superpower nations are closely watching Mr Kishida's progress, to see if he can take action to confront the forces of capital and neoliberalism to meet his goals, while strengthening Japan's power in the region and beyond, he said.

"The question I am asking is whether this is the right recipe to unlock the untapped potential in the Japanese economy," says Noah Sneider, Tokyo Bureau Chief for The Economist. SUPPLIED

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