The New Model of Japanese Capitalism in an Uncertain World

Author: Shujiro Urata, Waseda University

The year 2021 began with the hope that the successful development of a new vaccine would relieve the world of the COVID-19 pandemic. But while the vaccines were quickly rolled out in Europe and the United States, the slow Japanese government approval process delayed its rollout.

Under former Prime Minister Yoshihide Suga, the rollout of the vaccine was eventually accelerated after administrative and logistical issues were resolved, contributing to a drop in the number of infections. The state of emergency continued until September 30 as Suga needed to limit the number of cases to host the Olympics and increase his chances of being re-elected leader of the Liberal Democratic Party (LDP) in the election. from the end of September.

Suga hosted the Olympics in the face of opposition from the general public. The number of infections skyrocketed during the event, leading to a rapid decline in Suga’s approval rating and forcing him to hand over his leadership of the LDP. Fumio Kishida replaced Suga as Prime Minister and won the October general election thanks to the support of key members of the Conservative Party, weak opposition parties and a sharp drop in COVID-19 cases.

Japan’s economic performance has been stagnant throughout 2021. According to IMF projections, Japan recorded a GDP growth rate of 2.4% for the year – an improvement from -4.6% in 2020 – mainly due to idle consumption due to the continued uncertainty surrounding COVID-19. A shortage of semiconductors resulting from the pandemic has disrupted the production of automobiles and electronics, among other products, causing a slowdown in economic activity.

The economic consequences of COVID-19 are characterized by a K-shaped pattern reflecting two divergent trends — up and down. An increase in demand was seen in the technology sector, especially for products such as office machines, while a drop in demand was seen mainly in service sectors such as tourism. Another K-shaped consequence has been observed for rich and poor. The rich have seen the value of their financial assets increase, while the poor have suffered from falling wages and unemployment, leading to increased inequality.

Looking ahead to 2022, Kishida needs to achieve economic recovery and sustainable growth in an increasingly uncertain environment caused by the new Omicron variant of the virus, climate change and the US-China rivalry, among other factors. In response to COVID-19, Kishida stands ready to take the necessary actions, including expediting the rollout of vaccine boosters, accelerating the approval of oral treatments, and providing government support to people and businesses negatively impacted by the pandemic. .

Kishida advocated a ‘new model of capitalism‘ to simultaneously promote economic growth and equitable distribution. Both components of the model are to be achieved by generating a virtuous circle of economic growth and rising wages through public and private sector collaboration.

The first component of the model for economic growth has four sub-components, innovation, digital economy, climate change and economic security. The government must play an active role in each of these areas. For innovation, the government will support start-ups and develop human resources in science and technology. For the digital economy, it will build digital infrastructure to provide various services across 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 is aware of the growing risks of supply problems 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 responsible for economic security in his new office. It is also expected to pass the “Law for the Promotion of Economic Security,” which contains provisions to strengthen supply chains and build critical infrastructure.

A major element of the second component of the model, which focuses on achieving fair distribution, is wage increases. For this reason, fiscal measures, including tax breaks for companies, wage increases and direct subsidies to certain groups of workers such as nurses, are being considered. The impacts of these measures are likely to be small. Various government aids for raising children – such as expanding the capacity of crèches and childcare centers and providing housing allowance for families with children – are also included. Yet more drastic labor market reform must be undertaken to raise aggregate wages.

The possible economic consequences of Kishida’s new form of capitalism require closer examination. This is particularly the case for economic security, as national security is often viewed without regard to economic consequences or costs. Kishida’s new model of capitalism will require large government expenditures, increasing Japan’s already substantial fiscal debt. Kishida must provide a plan to achieve fiscal sustainability, otherwise citizens will fail to increase spending, contrary to his expectations.

Full implementation of Kishida’s policy depends on many variables, including a LDP victory in the upper house elections in July 2022. To win, Kishida must successfully manage the pandemic. While the IMF predicts 3.2% growth for the Japanese economy in 2022, this growth rate could be significantly lower if COVID-19 is not brought under control. Only time will tell the success of the new Japanese capitalism.

Shujiro Urata is a professor emeritus at Waseda University.

This article is part of a EAF Special Feature Series on 2021 in review and the year ahead.