In the coming weeks, Japanese politics will progress from its current obsession with personalities toward a renewed focus on policies. Sure, it was fun to watch the post-Abe succession race with all its speculation about possible character traits and leadership styles of the different candidates, but, as soon as the new prime minister is confirmed and presents his Cabinet, the national debate will shift from the “who” to the “what.”
Personally, I expect a strong thrust of new, innovative and even radical policy initiatives designed to create a stronger basis for future prosperity for Japan. Why? The good news is that the pressure for immediate, tangible and impactful policy action is tremendous. The new prime minister will have to call a general election by mid-October next year — that is, he’s got barely one year to prove his worth. Given that the post-Abe leadership race was only an internal affair among party insiders, there are poised to be more skeptics than fans among the general public. The people will not only ask, “What have you done for me lately?”, but, more importantly, they’ll ask, “What have you done to deserve being the prime minister of my country, Japan?”
The other good news is that, on top of all the hardships, tragedies and struggles, the COVID-19 crisis has actually created opportunities for policy action that would have been unthinkable during a normal economic cycle.
Specifically, by now even the most vested interest and most resilient-to-change actors in the economy — Japan’s Fortune 500 companies — have realized that “business as usual” is not an option. In my 30-plus years of interaction with Japanese corporate and business leaders, I have never seen as much openness for new ideas and as much commitment to change internal processes and routines. When you see stalwarts of Japan’s industrial pride such as Hitachi and Toyota (to name just the big two) shift toward telecommuting for three days a week and the introduction of a pay-for-performance model, you know that — finally — Japanese management appears prepared to take risks and lead the next step in the evolution of corporate culture.
This is exactly the kind of fundamental change at the core of the economy — private enterprise — that Abenomics struggled to deliver. Where in the past, corporate leaders natural reflexes were marked by a de facto reactionary stubbornness and resistance against fundamental change in internal procedures and corporate rule, now the existential threat posed by COVID-19 has become a powerful catalyst for change.
All said, the first post-Abe prime minister now faces corporate leaders in a sweet spot of unprecedented openness for potentially radical and creative evolution. I am certain the new prime minister is a skilled Machiavellian who will seize this unique opportunity for fundamental structural change.
So what should be done? Good policy cushions a cyclical downturn; great policy accelerates structural change. In my personal view, great positive forces can be unleashed in Japan by focusing on the following structural imperatives:
From excess competition to “regional’ and ‘national’ champions: Japan’s economic structure is incredibly fragmented, with industry after industry marked by an excessive number of players. Facts: The top four companies in all the various industries and subsector tabulated by METI, on average, account for barely 11 percent of industry-wide revenue. In the United States, comparable analysis suggests approximately 35 percent of each market is controlled by the top four players. There is no question that Japan’s excessive competition is a root-cause for economy-wide symptoms such as structural disinflation, low corporate profitability, low labor mobility and low inward direct investment, among other things.
Now the (likely) surge in bankruptcies forced by COVID-19 offers a unique opportunity for industrial re-organization and streamlining. Great policy would offer tax incentives for the stronger companies to buy the weak and encourage so-called “roll-ups” by offering exemption from excessive regulation for those entrepreneurs prepared to merge with and integrate struggling competitors. Great policy will build regional or national champions (and break with the entrenched practice of supporting “zombie” enterprises).
From under-employment to full-employment: At the end of last year, the labor shortage and structural drop in population was supposedly the single biggest problem Japan faced. Since then, approximately 1.5 million have lost their job, and another 2.4 million have been furloughed, many with little prospect of ever returning to their old jobs. All said, because of COVID-19, Japan has around 2.5 million to 3 million people now ready and eager to re-engage in economic life. Great policy will seize this opportunity and offer incentives to corporate managers and entrepreneurs who hire and re-train people. Particular focus falls on nursing and care-giving, where aggressive and fast-track training programs, paid for by the government, can easily solve the significant shortage of manpower. Great policy here must also create a national campaign to make nursing cool and make care-giving an aspirational profession. Everyone agrees that nursing and care-giving are a structural growth industry. There is no better time than now to make worries about the 150,000 or 200,000 structural caregiver shortage a thing of the past.
Create a national digital agency in charge of Japan’s digital upgrade: If nothing else, COVID-19 has turbo-charged awareness that Japanese business culture and processes are outdated relative to the opportunities created by latest digital and data technologies. The need for an urgent upgrade and re-skilling is, finally, widely recognized among both private and public sector leaders. For the new prime minister, this creates exciting policy opportunities on many fronts. Support for re-training and digital up-skilling would be an obviously good policy. But the real opportunities go deeper: The creation of a new agency charged with crafting and consolidating Japan’s digital and cyber initiatives would not just be a strong symbol of a new national focus; it would also force all other ministries and agencies to step-up their digital skills and processes. Here, Japan can follow Taiwan, which has shown how truly transformational and inspiring the establishment of a digital ministry can be.
Of course, this is by no means a complete list of what the next prime minister and his team may want to focus on. However, the key focus must fall on identifying deep-running fundamental forces that, if properly guided by new policies and rules, turn current problems into a new basis for future prosperity.
In my view, the current combination of excess competition, underemployment and recognized need for a digital revolution, actually puts the new prime minister in a fantastic position: He’s got plenty of freed-up national resources to play with, and he’s got a mission to accomplish. He can try and “buy” victory in the next election by simply offering more support to keep zombie companies and outdated economic practices alive, or he can earn victory by promoting a genuine path toward better companies, higher skilled workers, and a streamlined and more productive government. Personally, I’m very excited about the coming post-Abe policy regime.
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.