Japan’s quest for a sustainable, virtuous circle of growth and innovation

ABSTRACT

Large Japanese corporations which have accumulated substantial reserves are now under pressure to spend them, but on what, or on whom? Should they increase their (domestic) capital and R&D expenditure, which languished between 2000 and 2020; or invest more in their employees, whose wages have stagnated; or increase their shareholder returns, which have already surged; or raise executive remuneration closer to overseas counterparts? This article examines tensions in recent developments in Japan’s political economy, from Society 5.0 to Kishida’s ‘new form of capitalism’ and Keidanren’s ‘rebuilding the middle class’, from the perspective of these dilemmas.

KEYWORDS:

• Corporate governance
• industrial and innovation policy
• Japan
• ‘job-based’ employment
• middle class
• new form of capitalism
• Society 5.0

Introduction

Acknowledging the virtues of capitalism and the market economy, in 2023 Japan’s main business federation Keidanren nonetheless lamented that an ‘excessive focus on shareholder capitalism and market fundamentalism has brought about various social issues, such as the destruction of the global environment and ecosystems, and the expansion and reproduction of inequality’ (Keidanren 2023). Earlier, in 2020, it had opined that ‘the updating of Japanese capitalism and the realization of growth that is sustainable and resilient against various types of risk would make Japan a pioneer in establishing a new vision for capitalism around the world’ (Tokura 2020). Here the business federation was proposing measures to rebuild Japan’s once-expansive middle class.

These views dovetailed with the ‘new form of capitalism’ agenda of Prime Minister Kishida, whose New Form of Capitalism Realization Council was confronted with the following statistics in their November 2021 meeting. Between 2000 and 2020, in large firms capitalized at ¥1 billion or more:

• Labour costs declined from ¥51.8 to ¥51.6 trillion

• Capital investment declined from ¥21.8 to ¥20.7 trillion

• Operating profits almost doubled, from ¥19.4 to ¥37.1 trillion

• Cash and deposits almost doubled, from ¥48.8 to ¥90.4 trillion

• Internal reserves almost trebled, from ¥88.0 to ¥242.1 trillion

• Dividends rose sixfold, from ¥3.5 to ¥20.2 trillion.¹

Together, the government and Keidanren have proposed the reform of Japanese capitalism, and more recently, rebuilding of its depleted middle class. Kishida’s growth strategy had four broad emphases: innovation through science and technology; infrastructure development plan for a Digital Garden City Nation; realization of ‘carbon neutral’; and economic security. It also had three distribution policies: strengthening of distribution for workers; enlargement of the middle class and countermeasures to the falling birthrate; and improved income for workers in nursing and daycare (Kishida 2021; Yamakoshi 2023). When it was first mooted, the ‘distribution’ side provoked a sharp sell-off of stocks – dubbed the ‘Kishida shock’ – and was promptly amended. ‘Income doubling’ became ‘investment income doubling’, and the new capitalism priorities were simplified to people; science, technology and innovation (STI); startups; and digital and green transformation (DX and GX) (Kishida 2022).

Are the government and big business serious about changing Japanese capitalism, and about creating a new growth model which is ‘people-centred’, or is this wishful thinking, or posturing? Restated for the purpose of this article, what are the prospects of Japan creating a new ‘virtuous circle of growth and distribution’, with a different configuration to that of the post-war model? That model was progressively undermined from the 1980s, and the intervening decades were characterized by partial financialization and, with exceptions, a conservative approach to addressing new competitive challenges, with domestic investment hesitancy and cost-containing people management.

Since 2014–15, however, an increasingly coordinated approach has sought to steer Japan in a new direction – towards Society 5.0 through DX, GX, and more recently sustainable and new capitalism. Seen from the perspective of corporate internal reserves, however, there are tensions, and indeed potential contradictions, in part arising from Japan’s interconnectedness with the global economy. These tensions, partly submerged under the appeal for growth – increasing the size of the pie before deciding how to divide it – are nonetheless real, and threaten to compromise the reform agenda.

The article is organized as follows. The first half looks at the background of the statistics above, starting with corporate finance and investment, then corporate governance and returns to shareholders, and finally employment relations. The second half turns to the macro level, and attempts to create a new ‘virtuous circle of growth and distribution’, starting with Society 5.0, DX and GX, followed by the reform of capitalism, including recent pronouncements on rebuilding the middle class and ‘new trinity’ labour market reforms. As well, it will consider the implications of the growing emphasis on various forms of security – defence, cyber and economic – which could pull Japan in yet a different direction. The Conclusion asks: Which way forward for Japan?

Finance and innovation

Let us start with the statistics given in the introduction, and add some more. First, as noted, capital expenditure of large firms was flat between 2000 and 2020, even as their profitability was restored. Instead of investment, the profits appear to have been squirrelled away, or distributed to shareholders, whose dividends increased sixfold. In terms of corporate activity, however, and especially in terms of innovation, this picture is partial, in at least two senses, namely overseas investments, and investment in intangible assets.

Japan’s outbound foreign direct investment (FDI) increased massively between 2000 and 2022 – from $32 billion to $172 billion on a net, flow basis.² On the one hand, this generated an income and contributed to Japan’s current account surplus. In the decade to 2022 income derived from outbound FDI and portfolio investment almost trebled to ¥50 trillion ($378 billion), an amount equivalent to almost 10% of Japan’s GDP, creating a significant gap between gross national income (GNI) and gross domestic product (GDP). Much of the economic activity resulting from FDI, including capital expenditure, innovation and employment generation, accrues to the GDP figures of the recipient countries rather than to Japan. If this were balanced by inbound FDI it would not matter, but that is not the case. In terms of the inbound to outbound FDI ratio, and inbound FDI as a proportion of GDP, Japan falls near the bottom of UNCTAD’s country rankings (cf. Katz 2021). Consequently, Japan has become an investment powerhouse abroad, but depends on its own corporations for domestic investment, which has languished.

A second caveat is that capital expenditure is not necessarily an accurate indicator of innovation, since the latter includes intangible assets which may contribute substantially to productivity growth. Intangible assets are difficult to measure, and standardized statistics in Japan are lacking. Researchers have used the methodology of Corrado, Hulten, and Sichel (2005, 2006), who propose three major categories of intangible assets: computerized information (e.g. software, databases), scientific and creative property (R&D, mineral exploration, copyright and licence costs, other product development, design and research expenses), and economic competencies (brand equity, organization structure, firm-specific human resources). Using this methodology, Fukao et al. (2009), estimated that the share of intangible asset investment rose in Japan during the 1990s and first half of the 2000s to over 10% of GDP, but this was lower than in the US. Miyagawa and Kim (2010) produced similar figures, and found that Japan scored relatively low on the third category, which is ironic because Japanese companies were once renowned for organizational innovation and their firm-specific human resources (cf. Iwao 2023; Itami 2024; Lechevalier 2024 in this collection). More recently Kim (2023) found that the intangible asset to GDP ratio had hardly changed by 2018, and that in contrast to the US, where intangible asset investment overtook investment in tangible assets in the late 1990s, this had not happened in Japan.

Taking just two of the above intangible asset components, first, science and technology R&D investment as a proportion of GDP in Japan is by no means low in international comparisons, but since the Global Financial Crisis it has remained largely flat, vacillating between 3.3 and 3.6% of GDP, a similar share to company R&D investment relative to turnover (Sōmushō tōkeikyoku 2021). While R&D investment in real terms grew by 70% in the US and Germany between 2000 and 2019, however, and in the UK by 50%, in Japan (and France) it only grew by 30%, and hardly at all since 2008. Similarly, whereas university R&D expenditure more than doubled in the US, Germany and the UK between 2000 and 2018, and increased in France by 80%, in Japan it only increased by 10%.³

Second, despite Japan’s reputation for on-job training (OJT) in the 1980s, its recent firm-specific investment in human resources is even bleaker. A survey cited in the 2018 White Paper on Labour reported that the US, France, Germany, Italy and UK spend at least one percent of GDP on off-job-training, while in Japan it declined from 0.4% in 1995–99 to just 0.1% in 2010–14 (Kōsei rōdōshō 2018, 89). On-job training (OJT) is very difficult to measure, but a 2017 survey cited in the same White Paper showed that the number of Japanese companies which carried out OJT in 2017 was significantly less than the OECD average (87). Inoki (2016) disputes such claims by arguing that roughly 10% of working hours in Japan can be considered OJT, but Miyagawa (2018) in turn argues that OJT is mostly about learning existing work, and not learning new skills or knowledge which might link it to innovation – DX, for example – hence there is a disconnect between skills and innovation, which impedes growth of intangible assets.

Miyagawa further points to the delay in cleaning up the financial aftermath of the bubble burst, which dragged on through the 1990s, and impeded structural changes in the economy, including the shift to investment in intangible assets. Companies opted instead to curb labour costs, most strikingly by increasing their reliance on non-regular employees, whose share of the labour force grew from less than 20% in the late 1980s, to almost 40 in the late 2010s, in spite of an increasingly tight labour market and growing labour shortages (cf. Nakata 2024 in this collection).

Finance and corporate governance

The financial turbulence of the late 1990s and early 2000s brought about substantial changes in corporate finance. Companies reduced their borrowing and curtailed their investments as they set about rebuilding their balance sheets.⁴ Banks faced paper-thin margins on loans and deposits, as interest rates hovered around zero. Households kept more than half their financial assets in bank deposits, despite earning no interest.⁵ The ¥1 quadrillion of household savings (in 2020) was used by banks to purchase government bonds, or held as reserves at the Bank of Japan, both in amounts roughly equivalent to Japan’s GDP. Part of the government’s goal of doubling income investment hinges on encouraging households to make use of NISA (Nippon Individual Savings Account), while banks have increasingly turned their attention to startups, a particular emphasis of new capitalism (cf. Katz 2024).

Meanwhile, after their balance sheets were rebuilt and profitability was restored, large companies began to amass internal reserves. These grew by 80% in the decade to 2021, to over ¥500 trillion, also just shy of Japan’s GDP. Not only did large companies shun bank loans, they also reduced their bond and share issues. Yet they were not free from market pressures, especially from shareholders. Internal reserves make a tempting target for activist shareholders, of course, but there are other reasons why investor relations emerged to become the key institutional nexus for managers, replacing employment and industrial relations of the post-war period.

These are set out by Deakin and Buchanan (2024) in this collection. In brief, the changes began in the 1990s, when companies, and especially banks, began to sell off reciprocally held ‘stable shares’ to improve their balance sheets, and foreign investors stepped in to purchase them. Legal reforms in the late 1990s and early 2000s enabled corporate restructuring and choice in corporate governance structures, and activist shareholders began to challenge insider (management) control. A new wave of reforms came under the second Abe administration, with the Stewardship Code and Corporate Governance Code. Ostensibly these were meant to enhance ‘corporate value and sustainable growth through constructive engagement’, in the words of the Stewardship Code, but the background was a campaign to enhance returns on investment (ROE), from a Topix average of 6% to 10%, thereby making Japanese stocks more attractive to international investors. Over time the Corporate Governance Code’s ‘comply or explain’ requirements were tightened, making ‘soft’ law increasingly hard. Shareholders have become increasingly emboldened to challenge managers on the provisions, and corporate strategy.

This is the background to the sixfold rise in shareholder dividends that we saw in the introduction, as well as a rise in share buybacks. De-regulated in the US in the early 1980s, the latter have been widely used there to drive up stock prices, and to boost executive compensation. According to Lazonick (2014, 4), the 449 S&P500 Index companies which were publicly listed from 2003 to 2012 spent 54% of their profits on share buybacks. In Japan they were legalized in 1994, and in FY2022–23 listed companies spent ¥9 trillion on them, which was almost half as much as dividends. Together they accounted for 84% of net profits.⁶ While this suggests a swing towards shareholder primacy, Miyajima and Ogawa (2022) argue that buybacks in Japan are different from the US, in that they are often used by restructuring companies, especially banks, wishing to sell relational shares, and that they are mostly retained as treasury stocks to raise new funds later, for M&A, or allocation to third parties, including managers and employee shareholding associations. Hara (2009, 2017), on the other hand, who has influenced Kishida’s ‘new capitalism’, sees them as an importation of US corporate governance practices to Japan, and advocates restrictions on both share buybacks and on decision-making rights of short-term shareholders. Meanwhile, the surge of dividends and buybacks continued in 2023 and is expected to continue in 2024. The justification has moved from ROE to price-to-book (P/B) ratio, as the Tokyo Stock Exchange (TSE) is now requiring disclosure by prime listed companies with a ratio of less than 1, and measures to raise it (Nikkei Asia 2023b).

Such pressures are said to be a contributing factor in the rising number of delistings from the TSE, as well as the rise of domestic mergers and acquisitions (M&A), which rose by 80% in the first half of 2023. Although the buyout of Toshiba by the domestic consortium Japan Industrial Partners, and photoresist company JSR by the largely government Japan Investment Corporation, stole headlines, some 2000 M&A cases were recorded in that period. This rise will continue if the Ministry of Economy, Trade and Industry (METI) Fair Acquisitions Study Group has anything to do with it. The group is ‘eager to compile guidelines from the logic of financialization that would make sense to people in capital markets’, according to the responsible METI official (Nikkei Asia 29 December 2023; 2023d; cf. Japan Times 2023).

M&A, and buy-outs, can have a positive effect on corporate value through creating synergies, accelerating restructuring and building scale, not to mention providing an exit for owners with no successors. And facilitators like private equity (PE) firms have shed the ‘vulture’ image of the 2000s, with some gaining legitimacy, and indeed respect (Schaede 2020). But the METI official cited seems oblivious to the controversies surrounding ‘financialization’ and its connection to growing inequality, in contrast to the stated aims of the government.⁷

Demise of the employee-favouring firm

During the 1990s Japan entered an ‘employment ice age’. With almost two job seekers for every job advertised, fresh graduates found it difficult to secure regular jobs. Without fresh graduates, however, workforce ageing accelerated, and so did seniority-linked labour costs. To curb labour costs older workers were ‘loaned’ or transferred to subsidiaries, or offered early retirement. The portfolio of employment types proposed by the employer federation Nikkeiren’s (1995) Shinjidai no Nihonteki keiei (Japanese Style Management for a New Era) was gradually realized through labour market de-regulation, and the number of non-regular workers surged. Companies once depicted as ‘employee-favouring’ (Dore 2000) and practising ‘human capitalism’ (Itami 1987), now responded to their competitive, corporate governance and payroll challenges by curbing investment, including investment in employee education and training, and hiring non-regular workers. Wage growth stalled. Between 2000 and 2018 the labour share of value added in large firms (capitalized at ¥1 billion or more) fell from 60.9 to 51.3%, before recovering somewhat to 54.9% in 2019.⁸

The government and companies were not oblivious to the negative effects of all this, including deflation. As early as 2006, after Koizumi’s neo-liberal reforms, policy began to change, and it accelerated under the second Abe administration from 2012. In the words of Vogel (2018, 262–63) policy became ‘more interested in improving working conditions than in helping firms to cut costs, because this would help increase the workforce and raise productivity. It was more interested in raising the status of women and nonregular workers than in giving employers more flexibility in hiring nonregular workers, because this would make it easier for women to combine work and childrearing. And it was more interested in raising wages than in suppressing them, because this could lift consumer demand’.

In particular, the government became concerned about how to increase the workforce as the population began to decrease. This would require bringing more women, elderly and non-Japanese into the workforce, each of which posed challenges to ‘Japanese-style’ employment. Employers by and large opted to ignore the challenges and placed the three groups into ‘non-regular’ employment. Most of the growth of women’s employment in the 1990s was in part time work, and from 2005 to 2020 the proportion of women who were in non-regular employment rose from 45% to 54%.⁹ By this time the female labour force participation rate had risen to over 77%, so women were no longer a vast, untapped reserve, at least quantitatively. Older workers, too, on reaching their company’s mandatory retirement age, were generally placed on annual contracts at a much lower rate of pay. And most of the roughly two million non-Japanese workers in Japan were also in non-regular categories, including so-called ‘trainees’.

The negative effects of such dualism were also recognized, not least in terms of productivity loss. Abe promised to create a ‘dynamic society of 100 million people’, a ‘society in which all women shine’. His Council for the Realization of Work Style Reform introduced a package of policy measures targeting work-life balance, childcare, parental leave and the gap in wages and conditions between regular and non-regular workers, which was passed in the 2018 ‘Work Style Reform’ Diet. The legislation was the result of compromise, however, and the provisions on overtime, equal pay for equal work and exemption were contentious. Critics pointed to contradictions, loopholes, and scope for evasion and exploitation (cf. Weathers 2018), and the package prodded employers to change rather than forcing them to do so.

As in other countries, moreover, the employed – self employed binary in Japan has been eroded by the rise of quasi-employment or contracting, an ever-growing category which includes gig and spot work. Such work is often undertaken in addition to other work – by necessity or by choice – but it can also be the main source of income. The number of people registered for spot work with four leading agencies reached 10.7 million in May 2023, although this figure includes multiple registrations (Nikkei Asia 2023c). Overall, the growth of this type of work has extended the ‘low road’ trajectory from the 1990s, of growing polarization and inequality accompanying flexibilization (cf. Lucács 2020; Shibata 2023).

Let us conclude the first part of this paper, which focuses on the statistics considered by the New Form of Capitalism Realization Council, cited in the Introduction. The reasons for corporate restraint on capital expenditure, curtailment of labour costs, increase of reserves and savings, and leap in shareholder returns are multiple, but are a far cry from the dynamic growth model of the post-war period. They point to a reactive approach to Japan’s competitive challenges, which include the emergence of China, and the new US model centred on venture-capital-backed Silicon Valley IT firms, and growth of global value chains linking the two (Sturgeon 2002). The loss of confidence in Japan’s post-war model and the assertion of US interests abroad saw corporate governance and investor relations gain increasing prominence, ultimately leading to the latter becoming the key institutional nexus, replacing the wage-labour nexus (Boyer and Saillard 2001). The ‘employee-favouring firm’ was replaced by the ‘shareholder-favouring firm’, albeit not yet shareholder interest maximization.

At the policy level, as Japan struggled to exit deflation, the second Abe administration from 2012 provided much-needed continuity. The ‘three arrows’ of Abenomics’ halted deflation but did not get Japan to its 2% inflation target, and the third arrow – ‘growth strategy to promote private investment’ – achieved some results, but did not ultimately provide a new growth model. The question for us to consider now is whether the flurry of new reforms which have gained momentum in recent years is likely to prove any different, and create a new ‘virtuous circle of growth and distribution’.

From society 5.0 to ‘new form of capitalism’ and beyond

Away from the trumpets and fanfare of the three arrows, and now a largely-forgotten second set of arrows launched in 2015, the Council for Science, Technology and Innovation (CSTI) produced the 5^th STI Basic Plan (2016–20), which introduced the concept of ‘Society 5.0’.¹⁰ This was peremptorily dismissed by some as one-upmanship vis-à-vis Germany’s Industrie 4.0, but it gained considerable traction. One reason is that it provided a future-oriented direction to Japan’s reform efforts, at least in terms of innovation, and it opened the way for an approach which balances market incentives, government direction, and industry-based collaboration, which had been missing hitherto. It also called for a change of approach in Japan’s STI policy, from a focus on technology-push, to focus on social issues, like societal ageing and depopulation, and flexibility to respond to unpredicted events like Japan’s earthquake, tsunami and earthquake triple disaster of 2011.

The concept spread to other government policy documents, and to Keidanren (Japan Business Federation) and its members, which is not surprising since a prominent member of the CSTI, Nakanishi Hiroaki, was also the chairman of Keidanren, and of the Hitachi group. Keidanren’s (2017) ‘Revitalizing Japan by Realizing Society 5.0’ proposed an action plan to 2030. An economic analysis it subsequently commissioned claimed that the individual and combined impacts of investing in 57 emerging technologies critical for Society 5.0 – in next generation healthcare, smart mobility, energy, AI, etc. – would grow the economy from ¥531 trillion in 2015 to ¥900 trillion by 2030, as against ¥650 trillion for ‘business as usual’ (Nomura 2020).

Society 5.0 started as a vision of Japan’s digital future, and the subsequent ‘digital transformation’ campaign (DX) became a vehicle for its realization. It began to incorporate other elements as well, however, especially ‘green transformation’ (GX) and realization of the UN’s Strategic Development Goals (SDGs). DX and GX became the ‘two wheels’ driving Japan’s economic transformation, according to the Green Growth Strategy, first released in December 2020 (Cabinet Office and 9 Ministries and Agencies 2021). Keidanren (2020), the Government Pension Investment Fund and the Institute of Future Initiatives at Tokyo University issued a joint report in 2020 which argued that if Society 5.0 and ESG (environment, social, governance) are combined, ‘the problem-solving innovation ecosystem will evolve autonomously, Society 5.0 will be realized, and SDGs will be truly achieved’ (14).

Reforming capitalism

Growth strategies alone, however, are insufficient to address deep-seated social issues, including growing inequality, demographic decline, and the need for rural revitalization. Concerns within Japan echoed growing calls for the reform of capitalism outside Japan, from the likes of BlackRock CEO Larry Fink, the US Business Roundtable, the World Economic Forum, the Financial Times, and more, who called on companies to serve a social purpose through stakeholder governance, and not just serve the pecuniary interests of their shareholders.

Abe had begun to address some of Japan’s social issues, as well as wage stagnation, but Kishida more explicitly took up the ‘distribution’ side of ‘growth and distribution’. As noted in the introduction, his new growth strategy was balanced by distribution policies, although he backtracked on income doubling when investors took fright.¹¹ If investment income doubling is really implemented, this would increase rather than decrease income and wealth disparities. Kishida was not pursuing the reform of capitalism in isolation. Before he came to power, Keidanren had announced its ‘new growth strategy’ and stakeholder-oriented ‘sustainable capitalism’, eliding the two and declaring that ‘the extension of our current path of gradual reform offers no future for capitalism, and we intend to take bold steps to embark on this new strategy’ (Tokura 2021). Indeed, government and Keidanren pronouncements were increasingly synchronized. Nor did Kishida give up. By the spring wage bargaining round of 2023 the more traditional understanding of ‘growth and distribution’ – that productivity growth should come first, and distribution should come from the resulting profits – was reinterpreted to assert that without wage growth there would not be productivity growth. In the shuntō wage round the government, supported by Keidanren and the trade union confederation Rengo, urged employers to give above-inflation wage increases wherever they could. Some did so, with headline-grabbing double-digit increases, but the problem was that overall, wage increases were subsequently nullified by rising inflation, so the recipients often found themselves no better off, and sometimes worse off.

A further concern was that large firms would be able to raise their prices, and wages, but small firms, lacking market power, could not. In fact, large firms might abuse their power to raise their prices and wages at the expense of their suppliers. The government and Keidanren organized a campaign called the partnership kōchiku sengen (partnership construction declaration), in which signatories promised to negotiate with their suppliers over price increases in good faith. By early 2023, over 22,000 companies had signed the declaration, and by late 2023, over 38,000 companies. A Nikkei company survey in late 2023 found not just a greater prospective willingness to concede above-inflation wage increases in 2024, but also acceptance of higher prices from suppliers so they could do the same (Nikkei Asia 2023e). In other words, the government and big business were playing a (cautious) role in wage and price coordination – echoing 1970s shuntō and corporatism, or alternatively a distinctively Japanese approach to coordinated capitalism (Witt 2006), with Rengo (Japan Trade Union Confederation) incorporated as a junior partner.

The wage increase push was part of an effort to restore the health of Japan’s middle class. Acknowledging the role of capitalism and the market economy in bringing about unprecedented development, Keidanren (2023) nonetheless criticized the ‘excessive focus on shareholder capitalism and market fundamentalism’ that had depleted the middle class and ‘created various social problems, such as environmental and ecosystem destruction, and the expansion and reproduction of inequality’. Shareholders and corporate governance were not the main focus of its proposals to rebuild a ‘thick’ middle class however. Shareholders were only mentioned three times in the report, and dividends not at all. By contrast, wages were mentioned fifteen times, and labour mobility eight times, echoing New Form of Capitalism Realization Council’s ‘new trinity labour market reform’ proposals, announced just two weeks earlier (cf. Zou 2024 in this collection).

Dismantling ‘’Japanese-style’ employment

From around 2018 Keidanren had begun to call for its members to shift from ‘membership-based’ to ‘job-based’ employment. Following Hamaguchi (2009), post-war ‘Japanese-style’, ‘lifetime employment’ was now presented as ‘membership-based’, which no longer made sense because it trapped employees in companies and jobs they could no longer contribute to, and lacked incentives to draw them into emerging growth areas – especially IT and AI – after reskilling. Labour productivity would be improved, and wages would rise if the institutional obstacles to mobility were removed, so the argument went, but these deep-rooted and intertwined obstacles required a multi-pronged (‘trinity’) approach to reform. This consisted of 1) opportunities for re-skilling, which would enable workers to change jobs; 2) reform of the employment and wage system, especially moving from ‘seniority-based’ wages and promotion – the perennial bogeyman – to a ‘job-based’ system which would reward those acquired skills; and 3) support for labour mobility, especially to growth sectors.¹² Fundamentally, as the New Form of Capitalism Realization Council put it, it was a shift from ‘careers as given by the company’ to ‘each individual chooses his or her own career’. This would require measures to make pensions portable to reduce tax on lump sum retirement or severance payments, reduce the time for receiving unemployment benefit, better career consulting and job changing advice, increase the hiring of mid-career workers and wage reform by companies, and most importantly, increase the provision of reskilling, both by companies, and the government.

Ironically, while both the government and Keidanren have been critical of financialized ‘shareholder capitalism’ for depleting the middle class, together their proposals advocate its companion – ‘marketization’ (Dore 2008), of labour markets. They are doing so for several reasons, including the need to attract skilled overseas workers, managers and entrepreneurs, for whom ‘membership-based’ employment does not make sense; the need to open corporate doors to the skills of women more widely; as well as a chronic shortage of skills in digital technologies. Kishida acknowledges the skills problem: ‘The reality is that investment in education and training in the corporate sector in Japan is much lower than in other countries. My government has already introduced a three-year, 400 billion yen package’ to support vocational education and training and recurrent education (Kishida 2022).

In fact, one survey found shareholders to be more interested in employee education and training as a means of raising corporate value than managers. Both groups were asked to list three top mid-to-long-term investment and financial priorities from a list of nine. Shareholders chose IT investment, R&D investment and just behind, investment in people. This was only the fifth choice of managers, well behind capital investment, IT investment, R&D investment, and investor returns! (Nikkei shinbun 2022). Perhaps the nature of the survey influenced the responses, but when put together with the meagre off-JT and OJT figures cited earlier, it seems that managers need to regain some of the virtues of the post-war system, rather than trying to jettison it.

As does the government, which has also under-invested in VET, and universities, for many years. Japan has one of the highest rates of private funding of universities among OECD countries, but the lowest rate of public sector expenditure, at a mere 40% of the OECD average (MEXT 2016). And university investment in research has been flat – it was ¥3.70 trillion in 2013 to ¥3.68 trillion in 2020, with the public sector contributing less than half of that amount (Sōmushō tōkeikyoku 2021). There will no doubt be a divergence of opinions about who is primarily responsible for ‘reskilling’ part of the trinity (why would companies invest in training only to lose employees through mobility, Rengo’s chairperson pointed out?), and in practice if not in aspiration Japan remains far from being a social investment state which ‘focuses on human capital and the labour market as anchors for individual well-being’ (Leoni 2016, 196; cf. Kamimura 2021).

Evolving state-business relations

The government will have to play a more active role in labour market matters, such as investing more in its career advisory and job placement services, as well as public training facilities. In fact the agenda from Society 5.0 to new capitalism and beyond points to a bigger role for the state in other areas also. On the one hand, Lechevalier (2024) in this volume argues that financialization has weakened the government’s ability to carry out these new roles, and that it may also be weakened by the widely reported exodus of younger bureaucrats, reportedly to startups. Yet it is also evident that Asia’s first developmental state has been resurrected, albeit in a modified form which is less likely to ruffle the features of the country’s trade and investment partners. The Green Growth Strategy (GGS), for example, not only asserts that GX and growth are compatible, but is explicitly presented as industrial policy, based on five policy tools (grants, tax incentives, finance guidance, regulatory reform and international collaboration) and targeting fourteen ‘growth sectors’ in energy, transport, manufacturing, home and office. An initial government ¥2 trillion pump priming allocation, designed to elicit ¥15 trillion worth of private sector investment, was subsequently raised to ¥20 trillion in the more comprehensive GX Realization Basic Plan in 2023. International development initiatives complementing the GGS include the Asia Energy Transition Initiative (2021) and Asia Zero Emissions Community (2022) (See Arimoto 2024; Nakai 2024, in this collection for more details).

Further, however, Japan’s security environment has changed dramatically, both in terms of geopolitics, and cybersecurity, which in turn have implications for economic security. Defence-related security, cybersecurity and economic security have all been given substantial boosts, and are increasingly integrated, conceptually, and administratively under the Kantei, or Prime Minister’s Office, which has grown to become the ‘control tower’ of Japan’s new developmental state. The shifts gained momentum under the second Abe administration, and have been given added urgency under Kishida.

Long sheltered under the US security umbrella, Abe began to shift Japan’s security stance with the establishment of the National Security Council in 2013. Article 9 of the Constitution was subsequently re-interpreted to include ‘collective self-defence’, and Kishida has proposed developing counterstrike capabilities and increasing defence spending to 2% of GDP by 2027. A Japanese version of the (US) Defence Advanced Research Projects Agency (DARPA) is mooted. The Cybersecurity Strategic Headquarters was also strengthened, while METI and its IT Promotion Agency began to issue Cybersecurity Management Guidelines to companies in 2015. Japan is still seen as a cybersecurity laggard – IISS (2021) for example, placed Japan in its bottom capability tier – and a serious breach of defence networks in 2020 and 2021, allegedly by China, shows much remains to be done in this area. More recently Japan passed the Economic Security Protection Act (2022), and appointed a cabinet-level Economic Security Minister. The law focuses on the stable supply of critical materials, critical infrastructure, critical technologies, and has a secret patent provision. The National Security Secretariat added an economic division to its existing six divisions in 2020, and by 2022 it had become the largest division.

Japan is increasingly closely coordinating its various security measures with its allies, especially the US, but also the Quad, which includes Australia and India, Chips 4 (US, Japan, Korea, Taiwan), US-Japan-South Korea, the EU. . . . How far this goes will depend on geopolitics and geoeconomics, including the securitization of trade and investment, but given that even seemingly innocuous technologies and products can be used for military purposes, the potential for further tightening of economic security is real. In sum, state-market relations are moving back towards a larger role for state-coordination, in innovation, distribution, and security, although this movement is not without contradictions. Bold rhetoric, cautious initiatives and a nascent new developmental state have not (yet) halted or reversed the march of financialized, shareholder capitalism.

Which way forward?

Companies have accumulated significant internal reserves, roughly equivalent to Japan’s GDP. There are growing pressures on them to deploy these reserves, but in which direction will they flow? There are some signs that large companies are regaining their appetite for (domestic) capital expenditure. The Development Bank of Japan’s annual survey found that companies were planning to increase their capital spending in 2022–23 by 27%. The next year’s survey found they had actually increased it by a more modest 11%, and the following year’s planned 21% increase will probably be tempered as well, but DX and GX have set a direction, and much of the investment is concentrated in electric vehicles, semiconductors, production equipment and decarbonization (DBJ 2023). They are also spending more on wages increases, although to date this has largely been negated by inflation. And when asked whether their provision of human resource development spending had changed over the past 3 years, 61% of human resource management (HRM) managers to a 2023 Recruit survey responded no, while only 21% reported any increase (Recruit 2023). Many reported the need for substantial revision to their human resource development systems. This remains a weak link in the growth and distribution circle concept.

Shareholders and executives, on the other hand, have benefited most from profit distribution and companies dipping into their internal reserves. In the year to March 2023 shareholders received the highest ever dividends for a second year in a row, which is expected to be repeated in 2024. Share buybacks are closing in on ¥10 trillion. Executive compensation jumped by a massive 33%, ostensibly through linking compensation to performance (in a rising stock market), and the quest to secure top non-Japanese talent. According to one calculation, average executive pay in firms with a turnover of ¥1 trillion or more was ¥270 million ($1.8 million), roughly one third of the level of UK, German and French executives, and one seventh of the US level (Nikkei Asia 2023a, 2023b). Pointedly, it is rare to find a comparison of executive compensation with average or new employee compensation in Japan nowadays – this was once a typical measure of the ‘employee-favouring firm’.

At the national, policy level there is evidence that policy making has become less siloed, and more joined up under the the Kantei. And yet, while the Kishida administration and Keidanren call for curbing shareholder capitalism and the restoration of a broad middle class, with a greater distribution to labour, the Financial Services Agency, together with the Tokyo Stock Exchange, continue their drive to make Japanese companies more attractive to investors, particularly overseas investors, now with their demand for P/B ratios above 1. This contradiction, which is partly structural due to Japan’s integration into the US-led global economy, is seldom commented on. This might reflect the assertion by the architects of the Stewardship and Corporate Governance Codes that shareholders and managers share a common interest in increasing ‘corporate value’ for the medium-to-long term, or at least an ‘increase-the-pie-first’ strategy. The assertion of unitary values is drawn into question by cases like Toshiba, but on the other hand, it may be an attempt to create the very norms they are asserting. Private equity (PE), decried in the 2000s as vulture capital, has acquired a certain respectability in the intervening years by adhering to the norms of corporate value creation, thereby diverging from PE behaviour in other countries (Schaede 2020). If anyone can reconcile these seemingly divergent forces, it may be Japan, but it is a big ‘if’, and a more fundamental rethink of corporate governance may be needed.

Although Society 5.0 and ‘new capitalism’ claim to be people-centred, there is a long way to go before reality meets the aspiration. Japan is still far from being a social investment state. It can claim to have a revivified developmental state, promoting digital and green technologies, with evolved tools such as guidelines and codes, and mission-oriented industrial and innovation policy, and the promotion of startups, but it could also be pulled in a different direction if the security situation in East Asia deteriorates further.

Japan may not have created its new growth model which is equitable and green yet, but in terms of avoiding the extremes of Big Tech market oligopoly and financialized capitalism on the one hand, and an overbearing state on the other, it is worth taking its attempts to build Society 5.0 and reform its capitalism seriously.

Acknowledgments

I would like to thank Kurosawa Yoshitaka for helpful discussions related to finance and investment in Japan. This paper draws on parts of my book Building a New Economy: Japan’s Digital and Green Transformation (Oxford University Press, 2024).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

D. Hugh Whittaker

D. Hugh Whittaker is Professor in the Economy and Business of Japan and Director of the Nissan Institute of Japanese Studies at the University of Oxford. His new book is called Building a New Economy: Japan’s Digital and Green Transformation (Oxford University Press, 2024).

Notes

1. Naikaku kanbō atarashii shihonshugi jitsugen honbu jimukyoku (November, 2021) ‘Chingin, jinteki shihon ni kansuru dētashū’ (Data on Wages and Human Capital), p. 2. ‘New capitalism’ will be used here rather than the government’s preferred ‘new form of capitalism’.

2. https://www.jetro.go.jp/en/reports/statistics.html accessed 27 December, 2023. The figures are listed in US$.

3. OECD figures for 2019 put Japanese R&D expenditure at 18 trillion; Japanese estimates are ¥19.6 trillion. Over the same period South Korean R&D expenditure more than quadrupled, and Chinese R&D expenditure grew more than twelve-fold. NISTEP 2021 and 2020: https://www.nistep.go.jp/sti_indicator/2021/RM311_11.html and https://www.nistep.go.jp/sti_indicator/2020/RM295_15.html accessed 14 August 2023.

4. In the first half of the 2000s alone they reduced their borrowing from banks by ¥40 trillion: T. Kawanami in Nikkei shinbun 17 December 2022 (‘Semaru Reiwa no ginkō no saihen’ [Looming Reiwa Bank Re-organization]).

5. In 2020 Japanese households held 54% of their financial assets in cash and bank deposits, compared with 14% in the US and 37% in the Euro 19: Kurosawa, (2020, 6).

6. Sumitomo Mitsui DS Asset Management Market Daily figures (5 July 2022, in Japanese).

https://www.smd-am.co.jp/market/daily/marketreport/2022/07/news220705jp/ accessed 15 August 2023.

7. Financialization is ‘the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies’ (Epstein 2005, 3), or ‘a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production’ (Krippner 2005, 12).

8. In smaller firms labour’s share is higher, and the fall was less, but still substantial. Naikaku kanbō atarashii shihonshugi jitsugen honbu jimukyoku, 2021.

9. Dalton (2017); https://www.gender.go.jp/about_danjo/whitepaper/r03/zentai/html/zuhyo/zuhyo01-02-07.html accessed 16 August 2023. The proportion of men in non-regular employment increased from 9 to 22% over the same time period. Cf. Nagase (2024) in this volume.

10. Simply put, Society 5.0 is ‘a human-centered society that achieves both economic development and solutions to social issues through a system that highly integrates cyberspace and physical space’. https://www.openaccessgovernment.org/japans-6th-science-technology-and-innovation-basic-plan/120486/ accessed 14 June 2022. Society 5.0 follows hunting and gathering (1.0), agricultural (2.0), industrial (3.0) and information (4.0) societies.

11. Income doubling was an echo of the 1960s policy of Ikeda Hayato, Prime Minister and head of Kishida’s LDP faction. This policy linked growth and distribution through the shuntō wage bargaining mechanism.

12. In fact, as Nakata (2023) points out, the membership- versus job-based employment dichotomy is a false one; the careers of the majority of workers are already occupationally-based. And ‘seniority-based’ wages and promotion is misleading, as there has long been an ability or performance component in wages.