Having started my career as a portfolio strategist immediately after the peak of Japan’s asset bubble in 1990, I encountered the same question from investors around the world: How was Japan ever going to grow again?

After all, the economy was overburdened by bad debts in the banking system, an ever-expanding fiscal deficit, toxic deflation and daunting demographics. Frankly it was challenging to come up with any positive solutions during much of the 1990s, but then in 1999 I realized that part of the solution was right in front of me.

I had given birth to my first child three years prior, and while I returned to work after my four months of maternity leave, I noticed that many of my Japanese female peers who had also become mothers had not. For some, it was simply their personal choice to stay at home, but for many, I learned that despite their desire to return to work, numerous obstacles prevented them from doing so. That’s when I decided to explore the nature of these hurdles — related to government policies, business practices and societal norms — and estimate the potential impact that higher female labor participation could have on Japan’s economy — hence the birth of womenomics.

Two decades have passed since we at Goldman Sachs published our first report on womenomics in 1999, but has anything really changed on Japan’s gender diversity front? After all, based on the World Economic Forum’s latest Global Gender Gap Index, Japan ranked just 110 out of 149 countries, and the revelation of systematic lowering of female applicants’ exam scores by medical schools in 2018 suggests that the diversity agenda is moving backward, rather than forward.

However, there has been progress.

Thanks to widespread labor shortages and Prime Minister Shinzo Abe’s declaration that “Abenomics is womenomics,” Japan’s female labor participation rate — previously among the lowest in the OECD — has soared to a record 71 percent, surpassing both the United States and Europe. Japan now boasts one of the most generous parental leave benefits globally, companies are required to disclose gender diversity statistics, and labor reforms mandate legal limits on overtime hours and equal pay for equal work.

Despite such progress, Japan continues to face a demographic tsunami in which one out of three citizens is elderly, and by mid-century its workforce will shrink by 40 percent from 75 million to 45 million. Japan remains one of the few countries where the number of registered pets (dogs and cats only) outnumbers children under the age of 15. Indeed, the International Monetary Fund recently warned that in the absence of meaningful structural reforms, demographic headwinds could cause Japan’s real GDP to decline by over 25 percent in the next 40 years.

Averting such a scenario requires a three-pronged approach involving government, corporations and society. Government policies should be aimed at: 1) creating more flexible labor contracts to eliminate the rigid duality of full-time versus part-time workers (the latter now accounts for 40 percent of all employees and 70 percent of all part-timers are female); 2) requiring gender pay gap disclosures, since at 25 percent Japan’s gap is the largest in the Group of Seven; 3) rectifying tax disincentives that discourage married women from working full time; 4) introducing parliamentary gender quotas (at 14 percent, Japan’s female representation in the Diet is lower than Saudi Arabia and Libya); 5) promoting female entrepreneurship; and 6) loosening immigration rules to allow more foreign caregivers for children and seniors, especially since Japanese fathers typically spend less than 1.5 hours per day on childcare and household chores — half that of fathers in the United Kingdom and the U.S.

Companies should sensitize their managers to gender differences through unconscious bias training, create more flexible work environments, shift from seniority to performance-based evaluations, and engage “male diversity champions.” Society needs to dispel myths such as “the more women work, the lower the birthrate” (empirical evidence shows the opposite is true), shift gender role stereotypes in the media and encourage more girls and women to pursue STEM education and careers (Japanese women hold more university degrees than men, but Japan’s ratio of female researchers and scientists is the lowest in the OECD).

While the wish list is long, the rewards are potentially massive. Closing the gender employment gap could lift Japan’s GDP by 10 percent, and in a “blue sky scenario” that also assumes the ratio of female versus male working hours rises to the OECD average, the GDP boost could expand further to 15 percent. For businesses, Japanese listed firms with the highest female manager ratios boast the highest average sales growth and return on equity. In other words, diversity does make a difference to the bottom line of economies and companies.

How Japan chooses to manage its demographic headwinds over the next several years will serve as an important template (or not) for how other countries should cope with their own aging societies. The good news is that two tailwinds should help advance the womenomics agenda over the next 20 years: the rapid expansion of ESG (Environment, Social, Governance) investing and the shifting attitudes of younger-generation Japanese males.

Since 2011, Japan has seen a 23 percent compound annual growth rate, in the number of domestic asset owners to the United Nation’s Principles of Responsible Investing, and the world’s largest pension fund — the Government Pension Investment Fund — has begun allocating funds to companies that demonstrate progressive diversity practices. Notably, proxy adviser Glass-Lewis revised its 2019 Japan voting guidelines so that it will begin issuing recommendations against members of a board that do not have any incumbent or proposed female members.

Thirty years ago, more single Japanese men preferred their future spouses to be full-time housewives than working outside the home, but this has since reversed, with the majority now preferring that their spouses work. This suggests that attitudes of millennials and younger generations are already headed in a positive direction, and the desire for a better work-life balance is no longer just for women, but for all of Japanese society.

Kathy Matsui is vice chair of Goldman Sachs Japan, co-head of Macro Research in Asia and chief Japan equity strategist. She also helps oversee Launch With GS, Goldman Sachs’ $500 million commitment to narrow the gender investing gap. Her latest report on womenomics is available in English at bit.ly/Womenomics5 .

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