Commentary / Japan

The power of Generation Reiwa

by Jesper Koll

I want to be reborn as a 23-year-old Japanese. In fact, the current generation of Japanese high school and university graduates can look forward to achieving something that, unfortunately, looks increasingly unlikely for their peers in the United States, Germany, France, Britain, South Korea or other advanced industrial economies: Yes, Japan will become the envy of the world because it is the one country where the up-and-coming next generation is poised to be better off economically than their parents. Here’s to the Reiwa Generation!

The reason for my optimism is simple. It is Japan’s demographic destiny combined with the basic forces of economics — demand and supply. As the supply of labor goes down, the price of labor, i.e., wages and income, will go up, and contrary to the simple-minded arguments of the demographic doomsday brigade, rising wages and better incomes actually do trigger a positive supply response. People who previously had given up on looking for work all of a sudden become attracted by better pay and better quality employment contracts. They start working again, and so do people who, quite rationally, had decided that they were better off living off their parents or grandparents rather than working for what they deemed sub par compensation or under unacceptable conditions. The magic of free markets actually does work in Japan.

Just look at the numbers: In the past two years, February 2017 to February 2019 (which at the time of this writing was the latest monthly data set available), Japan’s total employment rose by 2.29 million people — from 64.27 million to 66.56 million. At the same time, Japan’s total population declined by approximately 840,000. So yes, the number of Japanese has been dropping by almost 1,200 per day; but at the same time, the number of Japanese gainfully employed has actually been rising by almost 3,100 per day.

Make no mistake — Japan creates new jobs and employment about 2.5 times faster than its population is decreasing. The fact that most economists and commentators focus on death rather than employment tells you more about the dismal state of modern-day public discourse than it does about the true state of Japan’s economy. Jobs equals income equals purchasing power equals GDP equals economic life; while death is, well, exactly that. Japan’s total scorecard: death, 1; economic life, 2.5.

Importantly, Japan’s demographic doomsday brigade forgets that an economy is so much more than just population arithmetic. How many people will go look for work, will want to be employed, or will become entrepreneurs and create new jobs for fellow citizens in new, more exciting companies, depends on many other factors than just simplistic “number of people aged 15 to 65” (which is the standard definition of the potential labor force). Pay, as in compensation per hour or per day, is one factor determining how willing somebody will be to forego a life of leisure; in rich countries like Japan, an even more important one is quality of job — possibilities of career advancement, work-life balance, stimulating team members, corporate culture, management flexibility, etc.

Here, there is no question that in today’s Japan the balance of power is shifting away from employers to employees — and throughout Reiwa, the “war for talent” is poised to get more and more intense in Japan. While the current parent generation was lucky to get a job at all during the decades of post-bubble misery, the new generation of high school and university graduates can pick and choose. Even top-notch listed companies are having to step up their game to attract and retain the best and brightest. In my view, the intensifying war for talent will do more to fundamentally change Japanese corporate culture than any other force. If the Heisei Era was marked by a lost generation and corporate cost-cutting, Reiwa will see the rise of a new golden generation where corporate Japan will focus on investing in human capital.

A most important first sign of this positive structural dynamics is the fundamental improvement in the quality of jobs created: More and more of the new jobs created are now actually on a full-time/regular employee basis. This is a reversal from a deeply entrenched trend that started with the labor reforms of 1995-1996, which allowed nonregular employment across all industries.

Since 1996, the only net job creation was irregular employment, which surged from barely 20 percent of all employment to almost 40 percent. Now, however, over the past two years the growing scarcity of labor and intensifying “war for talent” has forced a positive inflection: Full-time regular job creation rose by 890,000 over the past two years (February 2017 to February 2019) for the first two-year consecutive positive growth in almost two decades. To be sure, irregular jobs still rose almost twice as much, 1.52 million; but the downward trend in full-time regular employment growth has been broken and, in my view, it will only be a couple of years before full-timers outpace part-timers.

Here we witness the beginning of the fundamental pivot that turns Japan’s demographic destiny into a positive force for both the economy and society. The inevitable rise in the quality of jobs — full time, not part time, not irregular or uncertain “geek economy” jobs — creates the beginnings of a virtuous cycle: better job security, higher incomes by becoming part of the corporate bonus pool (which most of the irregular workers don’t get), and access to credit and mortgages (again, basically not available to part-timers).

On top of these straightforward economic benefits, the socio-psychological impact is very significant. An employed person is a valued part of a corporate culture, actively engaged in a functioning and goal-oriented socio-economic community. Japan’s demographic destiny means Japan’s young generation is wanted, is valued, and the older generation will have no choice but to fight for their services. You see why I do want to be reborn as a 23-year-old Japanese.

To be sure, the demographic doomsday brigade — “Jesper, how dare you be bullish on Japan, a country where in 300 years only 25 people will be left” — will have none of this. Sooner or later the country will run out of labor, and then what? One little fact to remember: The labor participation rate, i.e., the percentage of people aged 15 to 65 currently employed or actively looking for work, stands at around 78 percent in Japan. This compares to about 73 percent in the United States, but just about 84 percent in Switzerland (OECD data). I see absolutely no reason why the Japanese will not work as hard as the Swiss — which means there are more than 3 million Japanese available to enter or re-enter economic life.

Yes, human capital may be scarce, but make no mistake, there are plenty of Japanese ready to come out and work. All it takes is a true next generation of corporate leaders who actually invest in their people; corporate leaders who stop complaining about a supposed demographic trap and instead start creating the right incentives and forward-looking employment conditions that attract and motivate Japan’s ample pool of human capital. The Reiwa generation of university and high school graduates will enjoy a natural tailwind propelling them toward job and income growth and economic prosperity that their parents never knew.

For corporate Japan a similar rise in prosperity and competitiveness is also possible, but it does require a fundamental rethink of how human capital is employed, motivated and valued. Since the labor reform of 1995-1996, Japanese corporate leaders focused on cost-cutting, cost-saving and cutting corners with the cheapest, most unskilled workers possible. They were disinvesting in human capital. Switching back toward true investment in human capital will not be easy, not just because labor is scarce but also because working together with increasingly intelligent machines is poised to require a radically new skill set for both employees and managers.

Combining scarce labor with new technology is poised to force a radical rethink of all aspects of workflow, internal processes and rules — fundamental reform of Japanese corporate culture. Management was never meant to be easy, but don’t let these challenges for corporate leaders distract you from the new emerging mega-trend: Japan is headed into a new golden age for its young generation. Ah, to be a 23-year-old Japanese.

Based in Tokyo, Jesper Koll is WisdomTree’s head of Japan. Researching and investing in Japan since 1986, he is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog .

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