Japans New Model of Capitalism in an Uncertain World
By Prof Shujiro Urata, Senior Research Advisor to the President of ERIA: The year 2021 began with hope that the successful development of a new vaccine would relieve the world from the COVID-19 pandemic. But while vaccines were rapidly deployed in Europe and the United States, the Japanese government’s slow approval process delayed its rollout.
Under former prime minister Yoshihide Suga, the vaccine rollout was eventually accelerated after administrative and logistical hiccups were resolved, contributing to a decline in the number of infections. A state of emergency continued until 30 September as Suga needed to keep cases low to host the Olympics and to increase his chances of being re-elected as leader of the Liberal Democratic Party (LDP) in the late-September election.
Suga hosted the Olympics in the face of general public opposition. The number of infections skyrocketed during the event, resulting in a rapid decline in Suga’s approval rating and forcing him to cede his leadership of the LDP. Fumio Kishida replaced Suga as prime minister and won the general election in October owing to the support of key conservative party members, weak opposition parties and a sharp decline in COVID-19 cases.
Japan’s economic performance was stagnant throughout 2021. According to IMF projections, Japan registered a 2.4 per cent GDP growth rate for the year — an improvement from -4.6 per cent in 2020 — mainly due to inactive consumption from continued uncertainty surrounding COVID-19. A shortage of semiconductors resulting from the pandemic disrupted production of automobiles and electronics among other products, causing a slowdown in economic activity.
The economic consequences of COVID-19 are characterised by a K-shaped pattern reflecting two divergent trends — upward and downward. An increase in demand was found in the technology sector, especially for products such as office machines, while a decrease in demand was found mainly in service sectors such as tourism. Another K-shape consequence was observed for the rich and the poor. The wealthy saw the value of their financial assets rise, while the poor suffered from declining wages and unemployment, resulting in widening inequality.
Looking forward to 2022, Kishida must achieve economic recovery and sustainable growth in an increasingly uncertain environment caused by the new Omicron variant of the virus, climate change and US–China rivalry, among other factors. In response to COVID-19, Kishida is ready to take necessary measures — including accelerating the rollout of vaccine booster shots, speeding up the approval of oral treatments and providing government support for people and companies negatively impacted by the pandemic.
Kishida has advocated a ‘new model of capitalism’ to promote economic growth and equitable distribution simultaneously. The model’s two components are to be achieved by generating a virtuous cycle of economic growth and increasing wages through the collaboration of public and private sectors.
The model’s first component for economic growth has four sub-components, innovation, digital economy, climate change and economic security. The government is to play an active role in each of these. For innovation, the government will support start-up companies and develop human resources in science and technologies. For digital economy, it will build digital infrastructure to provide various services throughout the country. For climate change, it will undertake investment and regulatory reform in the clean energy sector to achieve carbon neutrality by 2050.
Kishida is particularly keen on economic security. He realises the increasing risks of supply issues for strategically important materials and technologies due to heightened geopolitical tensions and possible natural and health disasters, including new infectious diseases. Following similar actions taken by the United States and other major countries, Kishida created the position of minister in charge of economic security in his new cabinet. He is also expected to pass the ‘Act for Promoting Economic Security’, which contains provisions to strengthen supply chains and build critical infrastructure.
A major element of the model’s second component, which focusses on achieving equitable distribution, is increasing wages. For this reason, fiscal measures including tax breaks to companies, increasing wages and direct subsidies to selected groups of workers such as nurses are being considered. The impacts of these measures are likely to be small. A variety of government support for child-rearing — such as expanding capacity for nurseries and childcare centres and the provision of a housing allowance to families with children — are also included. Yet more drastic reform in the labour market must be undertaken to increase overall wages.
The possible economic consequences of Kishida’s new form of capitalism demand closer scrutinisation. This is particularly the case for economic security, as national security is often considered without factoring in economic consequences or costs. Kishida’s new model of capitalism will require large government expenditure, increasing Japan’s already substantial fiscal debt. Kishida needs to provide a blueprint for achieving fiscal sustainability, otherwise citizens will fail to increase spending, against his expectations.
Full implementation of Kishida’s policy hinges on many variables, including an LDP victory in the upper house election in July 2022. To win, Kishida must handle the pandemic successfully. While the IMF projects 3.2 per cent growth for the Japanese economy in 2022, this growth rate may be significantly lower if COVID-19 is not controlled. Only time will tell the success of Japan’s new capitalism.
This opinion piece was written by ERIA's Senior Research Advisor to the President of ERIA, Prof Shujiro Urata, and has been published in East Asia Forum. Click here to subscribe to the monthly newsletter.