Japan's cheap labour 'form of capitalism'
English original of column published today in Japanese in Nikkei Business
It would be fair to say that foreign observers of Japan have been deeply puzzled by all the talk from Prime Minister Fumio Kishida’s government of a need for “a new form of capitalism”, both when Mr Kishida was competing in the LDP leadership election and during the past 13 months of his government.
Foreign observers have been puzzled on two different levels. Some, especially those who are not so interested in corporate governance as an issue, feel puzzled because their basic view is that Japan’s form of capitalism has long been in many ways superior to their own, whether in Europe, South-East Asia, Australia or North America.
In recent years Japanese capitalism has not always been sufficiently innovative or creative, but in terms of the social contribution made by private companies the foreign perception is that Japan has less need to change its “form of capitalism” than most other developed countries.
The second level of puzzlement is related to this perception, but also concerns puzzlement about the public policy intentions of the Kishida government and its advisers.
In the speeches and other documents that have been published so far, it is hard to find either a clear, coherent definition of what problem of Japanese capitalism the Kishida government thinks will need to be solved, or any real clear policy options or intentions for how to do that job. What foreign observers see are quite fuzzy aspirations and few policy proposals that look capable of making a significant difference.
Amid all this lack of clarity and seriousness, however, there is actually a clear explanation for why the Kishida administration is failing to move decisively from fuzzy aspirations to hard actions.
It is that the only real, general, economy and society wide problem with Japanese capitalism is that there has been a long-term shift in the balance of power and rewards away from employees and their incomes and towards companies and their profits. This shift has been going on now for about 30 years, since the bursting of the bubble economy in 1990. But tackling this long-term shift would require the government to confront the big businesses that provide important backing for the ruling Liberal Democratic Party.
Sometimes, this shift from labour to capital has been described by the government misleadingly as being a problem of “distribution”, which tends to imply using taxes and spending to boost welfare schemes and reduce gaps in income between the rich and the poor. That makes it seem as if the issue is one chiefly of social justice. It also however focuses attention on levels of personal taxation, which tends to be politically controversial, and on social spending, which is difficult given the huge size of the country’s public debt.
Yet this is not a helpful way to think about the shift in power and rewards from labour to capital. Social justice does matter, of course. But rather than simply being a political matter of redistribution from one group to another, this shift away from labour is actually a general problem for the whole society and economy. The right way to understand the problem is that this shift has depressed household incomes, and even personal savings, for decades now, which has put a limit on how much contribution household consumption can make to the overall vitality of the economy, both directly and through the incentive it creates for business investment.
This change in Japanese capitalism following the end of the bubble transformed a country once famed for its high wages and (in some sectors) high productivity into a low-wage, low dynamism, low productivity economy. The most visible symptom of it has been the rise in the share of employment held by workers on non-regular, short term or part-time contracts from 20% in 1990 to 40% now, for these are the employees who are on low wages and insecure terms and who also have helped to keep the wages of full-time, regular-contract workers suppressed.
The “form of capitalism” that now characterises Japan is a cheap labour form, which is surprising both given the past, when household incomes were buoyant in the 1980s and 1970s, and given the labour scarcity that is now resulting from demographic forces (the overall Japanese population is now shrinking by about 500,000 (or 0.4%) each year). This “form of capitalism” is trapping Japan in conditions of low economic growth, depressed tax revenues and hence a chronic difficulty in affording the sort of public spending the country needs and wants, for example on stronger defence or on education.
Any serious attempt to change this “form of capitalism” would require serious efforts to address and reform the labour laws which give rise to so much insecurity for that 40% of workers, and would require quite aggressive government intervention in labour markets especially by sharply raising statutory minimum wage levels which would then have an effect on market-set wages too.
Yet there is no sign that either the government or its advisers is willing to tackle either of these big issues. The minimum wage has just been raised by only 3%, which is higher than in past years but is too small to have a major impact. And there is no serious discussion about labour law reform. All this is very puzzling to foreign observers. But what it means is that there is no chance that Japan’s cheap labour “form of capitalism” will change in the near future.
[Addition to Nikkei Business column: some analysts argued that Prime Minister Kishida would come up with serious reforms to tackle this once he and the LDP had secured victory in elections for the Upper House of Parliament in July. That victory duly happened, but no serious reforms have emerged. Now Mr Kishida’s approval rating among the public has plummeted to 33% in the latest polls, which is nearing the level at which internal dissent against party leaders tends to boil up. He has mishandled a number of scandals and has lost three ministers inside a month. Rumours are rife that he will not last long in the job. Which likely means that Japan’s cheap labour form of capitalism will last quite a lot longer.]