Japan is poised to emerge stronger and more competitive from the COVID-19 crisis. Where Abenomics failed, the “coronanomics” depression has the potential to be a catalyst for genuine structural and behavioral reform.
Positive signs are emerging already. Corporate managers famously resistant to change are all of a sudden forced to embrace smartphone and information technology as passionately as Japanese teenage girls have been for decades. And, with an urgency not seen since the Meiji modernization drive, Japan’s captains of industry, commerce and finance are serious about the digitalization of bottom-up decision-making.
If I am right and the novel coronavirus kills entrenched resistance to long-overdue reform in corporate decision-making processes and workflow management, it will do more to boost future productivity than anything Prime Minister Shinzo Abe’s “third arrow” of structural reform could have hoped for. Corporate culture is always the key driver — or obstacle — to productivity at the microeconomic level of individual firms.
The bad news is that even the most productive and innovative enterprise will fail if macroeconomic conditions continue to deteriorate. No matter how radical and innovative, there is no workflow reform or process optimization that will save, say, Japan Airlines or All Nippon Airways if air travel doesn’t begin to recover. Without growth in GDP in general, and corporate investment and household consumption in particular, the jobs of our reformed digital salarymen and salarywomen will sooner or later fall victim to the depression. Where will growth come from?
The good news is that Abenomics is not dead. When the virus-related economic policies were unveiled in early April, Abe’s team did more than simply follow the script agreed upon by the other major policy leaders around the world.
Yes, a record-size economic package worth about 20 percent of GDP was presented, which is more or less in line with the public support measures promised by both the U.S. and German leadership teams. But Abe also went out of his way to stress Japan is embarking on a two-stage approach to overcome the crisis — first cushion the downfall, then accelerate the recovery. He even committed to the explicit goal of wanting to ensure a V-shaped recovery for Japan.
Call me naive, but this is exactly the kind of strategic pragmatism that is to be admired about Japanese economic policymaking: Don’t panic, don’t grandstand, listen to experts, stay unified and work hard to combine immediate necessities with strategic objectives. Whether you like or don’t like the current administration, its style of policymaking certainly is a welcome contrast to the narcissistic, self-obsessed and divisive game show that appears to pass for national policymaking on the other side of the Pacific.
More importantly, you don’t have to be an economist to realize that a two-stage approach is indeed what is needed not just to counter this crisis but to actually build a better future. First, the socialization of risk and public guarantee of a minimum level of purchasing power, i.e., stabilization; second, the privatization of risk and incentives for private investments that will create new purchasing power and added value, i.e., an industrial policy and growth strategy.
The pandemic has forced unprecedented uncertainties into all aspects of the global and local economies, and the risks are enormous and returns unpredictable. To restart a virtuous cycle, the more the government does to create certainty and predictability around specific growth opportunities, the faster private investors, entrepreneurs and corporate leaders will overcome their fears and begin to invest in building a new future. The sooner we know what the “new normal” is supposed to or could look like, the faster we’ll get there.
Importantly, and contrary to the predominant pessimistic view, there is absolutely no reason why the “new normal” will not be better, more productive and more sustainable than what we had before. All we need is a bit of inspired policy leadership, politicians and technocrats who form a united front in committing to concrete goals, and then an empowerment of private enterprise to get on with the business of trying to achieve these goals.
No, this is not a planned economy but a national policy drive to inspire a better and more prosperous future. And this “national vision” is exactly what Abe’s team is working toward with the two-stage policy response presented in early April.
Inevitably, all eyes are still focused on the effectiveness of the first stage, the one designed to prop up demand and control the damage to corporations and employment. But in my view it will be the yet-to-be-presented second stage of the package that will determine the historic legacy of Abe’s administration. I trust that the chances are good it will be bold enough to inspire a new Japan investment up-cycle.
Why? Just as the coronavirus crisis is forcing previously unthinkable changes in corporate culture, it has also opened up opportunities to reform previously untouchable parts of Japan’s administrative state. Yes, a privatization and deregulation drive has become possible. Specifically, we may get substantial new investment opportunities from the following “stage two” policies:
- An accelerated push toward true e-government, with Japan aiming to become the first liberal democracy running an entirely paperless administration for all aspects of public affairs and interaction with the state’s customers — the Japanese people and their corporations. The goal: Make Japan’s administrative state the envy of the world in terms of quality, efficiency and user friendliness.
- A fundamental shifting of public health care priorities away from the de facto primary focus on cost-cutting toward a new focus on capacity expansion and growth incentives. If nothing else, the pandemic has exposed an embarrassing shortage of health care capacity, both in terms of facilities and caregivers. The goal must be to surpass Germany and become the undisputed global leader in terms of capacity, quality of service and flexibility to respond at scale to a crisis.
- Launch a new regional re-development plan where, in public-private partnerships, all prefectures are to construct new medical supercenters that include state-of-the-art geriatric and hospice care centers and research and development facilities, as well as omotenashi medical tourism wards. To attract and retain caregivers, doctors, technicians and other staff, the national government should subsidize wages at, say, 15 to 20 percent higher than typically offered in Tokyo. Also, these new regional medical supercenters should be accessible by a newly constructed autonomous mobility vehicle network designed and operated by a consortium of the major Japanese carmakers.
- Instruct the education ministry to exercise its tremendous power and make mandatory the teaching of at least two computer languages in middle school, followed by mandatory courses in artificial intelligence and machine learning throughout high school. Harvard, MIT, Stanford, etc., will be more than happy to offer their online course catalog should lack of local teacher talent be a problem. From 2022, all university entrance exams must have at least one section on AI or machine learning.
- Speed up the consolidation of Japanese industries by offering tax incentives for M&A and other forms of consolidation.
Of course, some of these policy ideas may seem like science fiction, but so was our digital salaryman just a couple of months ago and yet here he is. Abe has set a high bar for himself. Let’s see what he’ll deliver.
The two-stage policy approach is the right one and even incremental progress on any of the issues proposed will mean progress toward a new and better “normal.” I am convinced the forces unleashed by the COVID-19 crisis will make Japan stronger, more competitive, and more prosperous.
Jesper Koll is the senior adviser to Wisdomtree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.
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