By Prime Minister Kishida Fumio
1. Now is the time to upgrade capitalism
I am often asked to clarify what I aim to achieve with the “new capitalism” I am advocating.
In this article, I would like to respond to such inquiries by laying out the grand design of my proposal.
We live in a capitalist society. Capitalism has evolved over the years as human beings have continually tweaked the delicate balance between the efficient allocation of resources through the market, on the one hand, and the resolution of external diseconomies – for example, pollution issues – caused by market failures. Capitalism has been the driving force behind global economic growth for many, many years.
Initiatives in the mid-20th century to move toward a welfare state and the resulting spread of neoliberalism are all part of the process of finetuning capitalism and bringing it to its next stage of evolution.
Neoliberalism is the idea that things will resolve themselves if left to the market and competition. This has been the mainstream view worldwide since the 1980s, and it has served as the engine of global economic growth. With the spread of neoliberalism and the globalization of capitalism, however, the harmful effects of this economic system have become more visible.
Overdependence on the market has widened disparities and increased poverty, and climate change has worsened as an excessive burden has been placed on the natural environment.
In Western countries in particular, inequalities and poverty have grown as there are fewer jobs for the middle class.
The labor share, which indicates the ratio of employee compensation and total wage payments to gross national income, is on a downward trend in the United States and other industrialized countries. Japan’s labor share has been almost flat at 50.5% in 2000 and 50.1% in 2019, while the labor share in the U.S. has decreased from 56.4% (2000) to 52.8% (2019) and that of Germany has decreased from 53.4% (2000) to 52.3% (2019).
Looking at world income growth by income group, the richest 1% captured 27% of global income growth from 1980 to 2016. The income of the middle class in developed countries has been held down as emerging economies grow.
In addition, environmental issues, such as climate change, have worsened due to the burden placed on the natural environment. Natural disasters have wreaked damage in many places. The huge mudslide in Atami City [Shizuoka] last July – still fresh in my memory – is one example.
The limitations of a corporate management that emphasizes short-term efficiency are becoming apparent. During the COVID-19 pandemic, Japan was at risk of being unable to domestically produce and supply enough face masks to its people. During a pandemic, face masks are indispensable to protect citizens’ lives. In addition, the production of cars and game consoles has been delayed due to a shortage of semiconductors. The pursuit of efficiency has resulted in the loss of resilience in supply chains and infrastructure during crises.
Building on the achievements of Abenomics, I am advocating a new capitalism where the benefits brought about by capitalism are maximized by embedding in this economic system a mechanism to correct the external diseconomies caused by market failures. This mechanism will be created by harnessing both growth and distribution strategies and not leaving everything up to the market and competition.
While capitalism has been facing challenges, the economic system known as state capitalism, which is found mainly in authoritarian nations, is gaining momentum worldwide. As democracy is in crisis due to domestic divisions triggered by poverty and widening disparity, authoritarian regimes are gaining strength through state capitalism. We must respond to these challenges by upgrading capitalism itself.
2. Upgrade capitalism by emphasizing “people”
I aim to create in Japan a capitalism that can overcome the global challenges of division and disparity. Past developments in capitalism, such as the welfare state and neoliberalism, originated in Europe and the U.S. I seek to have Japan lead the world in the next stage of the evolution of capitalism, and I am convinced this is possible.
Japan has a proud culture and tradition that value collaboration and ties among people. Take the example of Shibusawa Eiichi [(1840 – 1931), a financier and industrialist who has often been called the “Father of Japanese Capitalism”]. In his Theory and Arithmetic, Shibusawa said that companies fundamentally need to be moral even though their purpose is to pursue profits. He also insisted that companies must be responsible for the prosperity of the nation and humankind overall. Shibusawa proposed these ideas as early as 1916.
In earlier days, well before the Meiji Restoration of 1868, Japanese created the management philosophy of “Sampo Yoshi: Good for the seller, good for the buyer, good for the world.” This creed was developed by Omi merchants, tradespeople who were based in Omi domain (today’s Shiga Prefecture) and traveled to other areas of Japan for business. Their philosophy was that good business should satisfy the seller and the buyer and also contribute to society overall.
In fact, these Japanese corporate management traditions anticipated the European and American movements seeking a new form of capitalism. These old traditions hold that a company is a multi-stakeholder entity and, as such, should consider the interests of all stakeholders, including shareholders, employees, customers, business partners, and local communities.
Is there anything wrong with exclusively pursuing shareholder interests today? In the old capitalism in place from the time of the Industrial Revolution, factories and other physical assets were the main source of value created by businesses. Therefore, corporate governance was a matter of shareholders’ monitoring corporate management by leveraging their power as the ones who provide funds and therefore own the factories.
Modern enterprises are in the midst of a digital transformation (DX), a green transformation (GX), and other major shifts. For companies to be creative in these turbulent times of change, “people” will be of relatively more importance than “things” like factories. In other words, “people” will be the source of value.
If management does not value human capital, it will be difficult to maximize corporate value or to give back to shareholders in the long term. Therefore, I have designated “people,” or human capital, as the focal point of my new capitalism. The first key phrase of my new capitalism is “from goods to people.”
3. Investment in people is of primary importance
Traditional Japanese-style management was also called humanism, and people-centered management was Japan’s strength. Based on this management style, Japan built its global competitiveness, which has been called “Japan as Number One.” Unfortunately, this system has been breaking down in recent years. With a desire to learn from the past, I would first like to discuss reforms in this area.
Japan’s corporate spending on human resources (Off-JT [off-the-job] human resources development) is now only 0.10% of GDP, lagging behind the U.S. (2.08%), France (1.78%), and Germany (1.20%). Not only is Japan spending less than other countries, but the figure has been on a decreasing trend in recent years. This will result in Japan’s human capital being unable to acquire sufficient basic knowledge for the digital age.
Japan needs to drastically increase investment in human capital so as to break down constraints on Japanese corporate growth and, in terms of wealth distribution, ensure a stable income for today’s children, that is, the next generation of workers. As a start, the government is creating a new policy package worth 400 billion yen over three years. Support for skills development, reemployment, and advancement by changing companies will be provided to about 1 million people, including nonregular employees. To refine the initiative, we are considering ideas submitted by the public, including employees, managers, and education service providers.
Employees have already sent in various comments: “I would like to see companies subsidize wages for time employees take off from work to acquire skills,” “I would like support so that I can gain skills in several areas in a short period of time.” From managers, we have received comments like “I would like to see companies given subsidies when for their employees they set up courses at universities and technical schools.”
Wage increases are not “costs” but “investments” in the future and are an important component of investing in human capital.
In recent spring wage negotiations, the percentage of increase declined from 2.18% in 2019 to 2.00% in 2020 and further to 1.86% in 2021 (Ministry of Health, Labour and Welfare statistics). I would like to see this declining trend reversed at once so wage increases suited to the new era of capitalism can be achieved.
Companies that regard their workers as a cost and seek to hold down labor costs to secure a small amount of profit are not in step with the vision of the new capitalism. Solving social issues through innovation created by excellent human resources and achieving profits commensurate with investment in people are the key to realizing the virtuous cycle of growth and distribution envisioned by the new capitalism.
Investment in human resources may be a cost for a single year but, from the perspective of long-term investment, properly investing in human resources and paying proper wages will create sustainable value for the company. Thus, it is clearly an investment and a growth strategy [to spend on people].
Some say that my new capitalism is only about the distribution of wealth. I would like to point out here that investing in people based on a distribution strategy is also a growth strategy. In the era of the new capitalism, labor costs will no longer be viewed as expenses. Rather they will come to be seen as investment in human resources, in other words, as investment in assets.
Finally, it is imperative that company shareholders understand the idea that people are assets. This needs to be communicated better. Nonfinancial information that does not appear in financial indicators needs to be made visible to shareholders.
Value is rooted in “people.” Therefore, making human resources visible in the corporate accounting system will promote the creation of human capital. I will call on the Financial System Council to discuss having companies fully disclose nonfinancial information in their securities reports under the Financial Instruments and Exchange Act, in addition to an already-requested review of quarterly disclosures. I will not stop at establishing this legal framework. I will also ask experts to research methods of assessing the value of human capital, including cases where companies disclose it at their own discretion, and to create guidelines by this summer for companies to use as reference.
4. Increase added value through new “public-private collaboration”
After World War II, Japanese companies developed innovative new products and services by harnessing their outstanding technological capabilities and creativity. They then offered them to the global community. The QR code developed by Japan’s Denso is indispensable in today’s digital age. The Sony Walkman was the forerunner of Apple’s products. The Toyota Prius was the world’s first mass-produced hybrid vehicle. Automated ticket gates at train stations were developed by Omron. Honda created a pioneering car navigation system. Nissin Foods gave us instant ramen in a cup. Emoji were developed by NTT Docomo. All of these revolutionary products were developed by Japanese companies and captured global markets.
In recent years, however, only 9.9% of Japanese companies in the manufacturing industry have introduced new products and services, while a mere 4.9% of Japanese companies in the services industry have done so. Japan lags Germany (18.8% in manufacturing, 9.0% in services) and the U.S. (12.7% in manufacturing, 7.6% in services) (OECD statistics, 2012–14). As a result, the markup rate, or the percentage by which sales prices exceed manufacturing costs, is 80% for the U.S. and 70% for the UK, and it is on the rise for both countries. Japan’s markup rate, however, is stagnant at 30%.
Japan must create a corporate and industrial structure that can create high value-added products and services, secure high sales prices, and obtain high markup rates. The public and private sectors should work together to create this structure while fulfilling their respective roles. Things should not simply be left to the market and competition. Creation of such a structure is the goal of my growth strategy, which undergirds the new capitalism. The second key phrase in my new capitalism, after “from things to people,” is “public-private collaboration.”
Just talking about distribution does not create anything to distribute. I am responsible not only for the distribution of wealth to the current working generation, but also to their children, that is, to the next generation of workers. I aim to enhance both growth, which is what is distributed, as well as distribution, which forms the foundation of that growth. This is what I mean by a virtuous cycle of growth and distribution. Both the government and the private sector will play a role in creating high added value. They will make bold investments in fields such as science and technology, economic security, digital technology, and climate change, as well as enhance their investment in people, as I discussed earlier.
As the multi-stakeholder approach takes root, the Japan Fair Trade Commission (JFTC) and others will change the emphasis of their competition policies. To date, regulations on mergers have been focused on market share (these are known as horizontal regulations). Horizontal regulations will become relatively less important as markets expand across domestic and international borders.
In the new capitalism, business partners will be just as much value-creating partners as employees, and the appropriateness of companies’ relationships with their business partners will be given more weight (this is known as vertical regulations). Is a fair amount of the costs being passed on to subcontractors? Is a company using its superior position to force business partners to accept inappropriate conditions? Such unequal relationships may arise between digital platform companies and their partners, or between large companies and startups or freelancers. These issues will be examined, and Japan will enhance the JFTC so that it is in step with the new capitalism.
The COVID-19 pandemic is also having a huge impact on freelancers. To create an environment where freelancers can engage in their work with a sense of security, we will submit to the Diet a law to protect freelancers, including stipulating that contracts between business operators and freelancers must clearly outline the contractual terms and prohibited acts.
5. Startups will save Japan
I expect startups to increase added value for Japanese products and services.
It is crucial that in Japan there takes root an ecosystem that continues to generate new companies that produce innovative products and services with high added value. One study concluded that innovation tends to occur at newly established companies. The young generation establishing startups through trial and error will surely contribute to increasing the added value of Japanese products.
I thoroughly support the young generation. Among the companies I introduced earlier that have developed innovative new products and services that reached markets around the world, Sony, Honda Motor, and Nissin Food Products were founded during the decade of Japan’s recovery from the devastation of World War II, which ended in 1945. In addition, 119 companies that were founded during that decade constitute the largest group among all the currently listed companies in Japan.
In other words, companies that were founded after that postwar decade have not become major corporations. In the U.S., 124 companies that were established during the period from 1995 to 2004 form the largest group among all listed companies. This indicates that new companies, such as Amazon and the former Facebook, are growing.
Through public-private collaboration let’s usher in a second era of business creation in Japan that follows the one that took place in the immediate years after the war. First, the listing system needs to be made user friendly for startups. Regarding initial public offerings (IPOs) in Japan, some point out that a share price that was determined in the market on the first day of listing (initial share price) is significantly higher than the price at which entrepreneurs sell their shares (the opening price) and for this reason entrepreneurs can raise only a small amount of funds and do not have enough funds for startups.
Under the Special Purpose Acquisition Company (SPAC) listing framework, which has been introduced in other countries, startups and investors agree on an initial share price upon acquisition; so startups can be listed at a mutually agreed price. Therefore, the framework is regarded as meaningful for solving the problems associated with the present listing system in Japan. On the other hand, some people say investors should be protected under the framework.
To solve these problems, we will have a group of financial experts come up with a recommendation through a detailed study that considers the situations in other countries from the perspective of startups.
On the other hand, it is also important to improve the environment for existing companies making efforts to reorganize their operations. More and more business owners feel that the COVID-19 pandemic, which has been raging for two years, has left them wallowing in a growing sea of debt. The results of a survey conducted by a private research firm found that 16.7% of large firms and 35.7% of smaller firms “feel they have excessive debt.” To promote corporate efforts to restructure operations for a new growth stage, we will develop legislation to allow the implementation of debt-relief measures for a company if main lenders or the main bank decide, even without the agreement of all lenders, that new investment in the company is possible if it is relieved of its debt.
As for existing smaller companies, we will take all possible measures to support their financing and efforts to continue operating amid the pandemic. It is also important to support smaller firms facing structural changes in reorganizing their operations, such as the renovation of big rooms for group tourists into smaller family rooms with a hot spring and of banquet halls into private dining spaces at accommodation facilities, the introduction of delivery sales at restaurants, and the acquisition of equipment necessary for selling products and content online. To that end, we will support a broad range of efforts for expanding subsidies for restructuring.
6. Realize bold investment
In addition to startups, investment is also crucial for increasing added value. When we look at the changes in capital expenditure by private companies (gross fixed capital formation value) during the period from 2000 to 2019, the value increased by 1.45 times in the U.S., 1.42 times in France, and 1.26 times in Germany while it increased only by 1.1 times in Japan. Similarly, the value of investment in research and development in the period from 2008 to 2018 increased by 1.35 times in Germany, 1.33 times in the UK, and 1.31 times in the U.S. while it increased only by 1.06 times in Japan.
A new form of capitalism cannot be realized if it is left solely in the hands of the market. We need to make bold investments through public-private collaboration based on utilizing market functions with the government covering the portion that is insufficient.
The Japanese government has decided to invest overall about 30 trillion yen and, together with the private sector, a total of about 120 trillion yen in R&D over the next five years. Also, the government will create a 10-trillion-yen university fund and begin tapping it within this fiscal year to establish in Japan universities with world-class research capabilities. Furthermore, the government will submit at the upcoming ordinary Diet session a bill to reform universities, including reforming governance and strengthening the ability to secure external funds, which are both required of world-class universities.
At the beginning of this article, I touched on the issue of stable supplies by taking face masks and semiconductors as examples. Economic security is an important area that needs to be addressed amid the global situation where various problems have surfaced in a domain where security and economy intersect. Japan needs to advance efforts to secure strategic technologies and materials and to prevent the theft of technology. In order to strengthen the supply chain to secure stable supplies of strategic materials and to ensure the reliability of key infrastructure, we have decided to submit a relevant bill to the upcoming ordinary Diet session and set up a government fund that will grow to the scale of 500 billion yen and use this fund to support R&D in fields essential for the future of the world, such as artificial intelligence, quantum science and technology, life sciences, space, and oceans.
Also, Japan now has to import 64.2% of its semiconductors and does not have the capacity to manufacture cutting-edge semiconductors. We will create a strong supply chain by supporting the establishment of facilities for producing cutting-edge semiconductors over several fiscal years and swiftly improving necessary systems.
7. Regional areas to play leading role in realizing a vision for a digital garden city nation
I mentioned earlier “from goods to people” and “public-private collaboration” as the key words in realizing a new form of capitalism. Another key word is “regional areas.”
The vision of the digital garden city nation that I advocate is an important pillar of the growth strategy for realizing a new form of capitalism that emphasizes regional areas. We will revitalize regional areas and realize a sustainable economic society while taking advantage of regional characteristics through the use of digital technology.
To realize this vision, we need to improve the digital infrastructure, which leads the age, as a public infrastructure, as we improved roads, ports, and airports. We will use underwater cables to complete a “digital garden city superhighway” surrounding Japan in roughly three years. This will make it possible to use high-speed, large-capacity digital services anywhere in Japan, coast to coast. As for the so-called 6G next-generation communications infrastructure, we will develop a technology that can achieve a 100 times faster communication speed at 1/100th of the power consumption compared with 5G over the next five years or so by applying optical communication technology to networks and computers in anticipation of introducing 6G around 2030.
Also, we are considering supporting regional efforts that utilize digital technology, such as remote education, remote medical care, and information communication technology (ICT) offices, by creating model municipalities that can serve as examples for solving these important issues and by improving their attractiveness. The government on its own responsibility will disseminate the efforts to the rest of the nation.
At the same time, we will work on structural reforms for enhancing the convenience of the public, society, industry, municipalities, and government so that the public can enjoy better services capitalizing on digital technology and get a solid sense of economic growth.
One of the comments I receive about the new form of capitalism is that it lacks a positive attitude toward reform. But I can say that is absolutely not true. Far from lacking a positive attitude, I will promote digital reform, regulatory reform, and administrative reform in an integrated manner. Specifically, we will promote the review of regulations and systems to enter the digital age, the realization of a small but big government (a government that can effectively provide enough services by capitalizing on a digital infrastructure) by utilizing the power of digital technology, and the reform of the supply-demand structure for digital workers, whose number is insufficient in both the public and private sectors.
To achieve these goals, we drew up digitalization principles at the end of last year. We will continue collectively reviewing 40,000 laws and government and ministerial ordinances and compile a plan to review regulations this spring to create an economic social structure appropriate for the digital age.
8. Response to climate change
At the beginning of this article, I mentioned the worsening environmental problems including climate change as examples of the side effects of capitalism.
Japan, through the concerted effort of the public and private sectors, will make bold investments to tackle climate change, an issue of concern to all humankind. To achieve our goal of “reaching carbon neutrality by 2050” and “reducing greenhouse gas emissions by 46% [compared with fiscal 2013] by fiscal 2030,” we will review restrictions on the maximum introduction of renewable energy while pushing forward with bold investments in the field of clean energy.
We have already begun to take specific steps to create a supply chain, including the development of a large hydrogen transport vessel, and to develop next-generation batteries and motors that hold the key to the spread of electric vehicles (EVs) by tapping a two-trillion-yen green innovation fund. Further, we will move forward with the upgrading of the power distribution network and the mass introduction of storage batteries to electrify all manner of sectors throughout society.
As we work towards reducing emissions from thermal power to zero, we will press ahead in transitioning to the use of ammonia and hydrogen as fuels. And, making use of that technology and infrastructure, we will contribute to the decarbonization of other countries in Asia.
We are also committed to popularizing EVs.
But promoting EVs does not solve all problems. We must consider the livelihoods of the many people who work in the auto industry. So, looking ahead to the future, we will take such measures as providing support for capital investment to shift from the production of parts for gasoline-powered vehicles to those for EVs.
Also, it is not realistic to think that renewable energy sources alone will enable Japan to achieve its greenhouse gas reduction target. By pursuing not only renewable energy sources but also nuclear power, hydrogen, and various other options, we will ensure a stable and inexpensive energy supply in future years and use this for further economic growth.
To that end, we will craft a clean energy strategy this summer.
9. Raise the incomes of the young generation and childrearing households
Some say there will be no distribution without growth in a new form of capitalism. That is true.
But it is also true that there will be no growth without distribution.
In other words, we think distribution that serves as the basis for growth is necessary as is discussion of the need for growth to fund distribution, because growth requires the demand side to purchase finished products and services as well as the innovations and improved productivity of suppliers.
Japan’s economic growth rate was 1.0% in the 2010s. In the breakdown of growth, household consumption grew only by 0.3% and investment (gross capital formation) by 0.5%. In the U.S., the economic growth rate was 2.3% and investment grew by 0.8% while household consumption grew by as much as 1.7%.
It has been statistically confirmed that growth in household consumption is strongly related to the growth of disposal income. But Japan’s real wages grew only 1.05 times in the period from 1991 to 2019. It is indispensable to increase everyone’s income and disposal income and to increase consumption for the Japanese economy to grow. Distribution can also be defined as a path to a growth strategy.
I proposed the “Reiwa era [2019 –] income doubling plan” to indicate the basic direction of my economic policy of creating a “virtuous cycle of growth and distribution” with the public and private sectors sharing roles. The key to accelerating the creation of the virtuous cycle is the young generation and childrearing households. So we will focus on them and aim to significantly boost their incomes, by, among other measures, investing in human resources in the broad sense.
Specifically, to create a society in which men and women can work in the way they wish, we will review systems that act as restrictions on women’s employment, bring about universal workers’ insurance, provide support for people working while childrearing, reduce the burden of home nursing care, and create a system for university students to pay back their tuition after graduation according to their income. Also, we will launch an agency dedicated to child and family policies to implement administration from the children’s perspective. While we will help families with small children pay for their children’s schooling, we will aim to curb the increase in the burden of insurance premiums on young people and on childrearing households by increasing the number of people who support the social security system and creating a sustainable social security system under which people help each other according to their ability.
And by utilizing all these policies, we will try to increase household consumption. I believe these policies will also contribute to securing the medium- to long-term sustainability of finances and to measures to reverse the declining birthrate.
These are my ideas for a new form of capitalism. With an eye to the summit of the Group of Seven (G7) to be held in Japan in 2023, this summer we will flesh out the grand design I described above and draw up an action plan that includes detailed steps and a clear road map. Next I will present to the world a concrete vision for a new form of capitalism that can overcome the global challenges of “division” and “disparity.”
To achieve that goal, the Japanese government will make an all-out effort, but it cannot do so alone. The government, companies, universities, and the public must each play their respective roles for the solutions of problems.
I’m always impressed by public-interest foundations and associations that originated with companies, such as the Bill & Melinda Gates Foundation in the U.S. The Gates Foundation is playing a major public role in the fight against infections. I have mentioned a new public-private collaboration several times. I want to create an environment where the private sector can play such a public role.
I would like everyone together with me to make use of Japanese traditions and create a society brimming with fresh innovations.