Kishida’s New Form of Capitalism

The discussion has been more active in Japan because the movement toward a new and better form of capitalism has now gained a powerful advocate: Prime Minister Fumio Kishida.

In many parts of the world, capitalism is under attack. Capitalism, especially its recent neo-liberal form, is alleged to have widened inequality, destroyed the middle class, and exacerbated if not caused climate change. Japan is not an exception.  If anything, the discussion has been more active in Japan because the movement toward a new and better form of capitalism has now gained a powerful advocate: Prime Minister Fumio Kishida.

Mr. Kishida, who became the Prime Minister in October last year, put forward the “new form of capitalism” as the main theme for his economic policy. At the beginning, the concept of and the policy package that would lead to the “new form of capitalism” were not entirely clear. Through the discussion in the Committees to Implement the New Form of Capitalism that the Kishida Administration has established and through various speeches that Kishida delivered, the concept and the contents of the new form of capitalism have become clearer. The idea of Kishida’s new form of capitalism is expressed most clearly in an article written by Mr. Kishida himself and published in the February 2022 issue of Bungei Shunju (a monthly magazine roughly comparable to the Atlantic and the New Yorker in the U.S.). 

I start by briefly summarizing this Bungei Shunju article to clarify what the new form of capitalism is. I then discuss how much Kishida’s policy is different from his immediate predecessors’ policies. Finally, I ask whether the new form of capitalism, if pursued seriously, is a right prescription for the current Japan.

Japanese corporations used to care about various stakeholders including employees, customers, suppliers, and communities, in addition to shareholders, but now the shareholders dominate and everything is determined by the market and competition.

Kishida points out that neoliberal capitalism became the mainstream for advanced economies since the 1980s but its harmful effects including expansion of income inequality and increased burden on the natural environment are now clear. Japanese corporations used to care about various stakeholders including employees, customers, suppliers, and communities, in addition to shareholders, but now the shareholders dominate and everything is determined by the market and competition. Kishida argues that Japan now needs to reverse the course and lead the world in the efforts to establish the new form of capitalism “that overcomes the global challenges of division and disparity.”

Kishida lists three keywords for his policy toward the new form of capitalism: human capital investment, public-private partnership, and local communities. First, investing in “people” should be the hallmark of new capitalism: a corporation should measure the value of human capital and disclose that on the balance sheet. Second, rather than leaving it to the market and competition, public and private sectors should cooperate to create industries with high value-added components. Startups will play an especially important role and the government should foster them. Third, the new form of capitalism should promote local economies. To do that, the government will invest in the digital infrastructure such as high speed communication networks under the banner of “digital garden city concept.” 

To these key three policies, Kishida adds economic security, green transformation, and a virtuous cycle of growth and distribution as essential parts of the new form of capitalism. Enhancing economic security is important in global society with increasing volatility. Through green transformation, Japan aims to reduce greenhouse gas emissions by 46% by 2030 and reach carbon neutrality by 2050. Finally, the government encourages corporations to increase wages and salaries to achieve the virtuous cycle of growth and distribution.

Kishida’s new form of capitalism is very much similar to other concepts of improved and sustainable capitalism, such as “responsible capitalism.” 

Thus, Kishida’s new form of capitalism is very much similar to other concepts of improved and sustainable capitalism, such as “responsible capitalism.” It tries to reduce the influence of shareholders and market competition on corporate management, encourage corporate social responsibility, and emphasize the role of government involvement/partnership with private business.  This concept of the new form of capitalism appears quite a contrast to the economic policies of Kishida’s predecessors. Prime Minister Shinzo Abe, for example, placed corporate governance reform as one of the most important parts of the agenda in his Abenomics reforms and tried to make the management of Japanese companies more responsive to the interests of shareholders and investors. Kishida now argues that the corporations are swayed too much by shareholders and markets at the expense of social welfare.

The actual policies that Kishida suggests so far, however, are not much different from the economic policies of Abe and Yoshihide Suga. It was Abe who introduced the tax incentive for corporations that raise wages and salaries. Kishida is just expanding that to realize the “virtuous cycle of growth and distribution,” which is exactly the same slogan that Abe used. The public-private partnership to increase productivity and profitability was another approach that was emphasized in Abenomics. So was the promotion of startups. Increasing human capital investment and promoting local economies were also important parts of Abenomics. Digital transformation, green transformation, and economic security emerged as important policy areas toward the end of the Abe administration and became central parts of the economic policy of the Suga administration.

Kishida’s “new” form of capitalism is more rhetoric than an actual policy change

Thus, Kishida’s “new” form of capitalism is more rhetoric than an actual policy change. It does not represent a major departure from his predecessors’ policies.  But, we do not have to be disappointed, because reversing the direction of corporate governance reform in Japan does not seem to be the right prescription for Japan.

First, it is not obvious that Japan really suffers from the ill effects that are often associated with shareholder capitalism. The income inequality measured by Gini coefficient (after redistribution), for example, has not increased after Japan allegedly embarked on neoliberal reforms under the Koizumi administration in 2000.  The Gini coefficient actually fell slightly from 0.38 in 1999 to 0.37 in 2017. The proportion of Japanese people who consider themselves belonging to the middle class has also stayed high. It actually increased from 89.3% in 1980 to 92.7% in 2018.

Second, the shift toward shareholder capitalism in Japan, to the extent that it has happened, is not responsible for major economic problems.  For example, the stagnation of wages is not a result of more emphasis on market competition and shareholder governance. On the contrary, the wage stagnation in Japan has a lot to do with the lack of flexibility in the labor market. An easy way to tell this is to look at wages of full-time workers, whose employment is shielded from market forces, and those of part-time workers separately. The stagnation of wages turns out to be a result of stagnant full-time wages. As I showed in a paper with Anil Kashyap (“The Great Disconnect: The Decoupling of Wage and Price Inflation in Japan”), the average wage for full-time workers has been almost the same in nominal term since the late 1990s. In contrast, the average wage for part-time workers has increased steadily although the level is still lower than that for full-time workers. We also find that the full-time wages have been less responsive to market conditions (measured by the unemployment rate or the job offers to applicants ratio) than part-time wages. Thus, what Japan needs is more market forces, not less, at least in this aspect.

The new form of capitalism, by forcing the responsibility to address environmental issues to corporations, allows the government to avoid more effective but politically difficult solutions such as introducing a carbon tax.

Finally, we can list additional problems of the new form of capitalism for the current Japan. By focusing on harmful effects of market competition, the call for a new form of capitalism gives an excuse to the firms that do not make efforts to raise productivity and profitability. The pressure to pay attention to the environment and/or social impact of corporations may also end up hurting the endeavor by more serious managers to improve productivity and profitability. Perhaps even more importantly, the new form of capitalism, by forcing the responsibility to address environmental issues to corporations, allows the government to avoid more effective but politically difficult solutions such as introducing a carbon tax.

In summary, Kishida’s new form of capitalism is roughly the same as other concepts of improved and sustainable capitalism such as “responsible capitalism.” The contents of Kishida’s policy, however, do not represent much of a departure from his predecessors’ policies that allegedly moved Japanese corporate governance too much in the direction towards shareholder capitalism. It may be fortunate for Japan that the Kishida administration has not seriously embarked on changing the course (back) to the “new” form of capitalism, because it does not seem to be the right strategy currently for Japan.

Takeo Hoshi is Professor of Economics at the University of Tokyo and an ECGI Research Member. 

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Reference:

“The Great Disconnect: The Decoupling of Wage and Price Inflation in Japan” in Takeo Hoshi and Phillip Y. Lipscy (Eds.) The Political Economy of the Abe Government and Abenomics Reforms, Cambridge University Press, 2021, pp.170-199