The coronavirus crisis can be turned into an opportunity to ensure sustained growth in Japan, according to a think tank.
In March 2020, the Tokyo Foundation for Policy Research outlined suggestions on how to encourage long-term structural reform.
It proposed relief measures to smaller companies devastated by the coronavirus outbreak, coupled with longer-term policies that facilitate the closure of inefficient businesses, as well as greater digitisation.
Expert Investor talked to Kazumasa Oguro, professor, faculty of economics, at Hosei University, about the proposal; whether chief cabinet secretary Yoshihide Suga, the presumptive successor to prime minister Shinzo Abe, will pursue these measures; and the impact of the crisis on Japan’s economy.
Q: Why is it key for Japan to encourage reforms, such as offering smaller companies relief measures and closing inefficient businesses to spur economic growth?
Japan’s productivity has been declining since the economic bubble burst, and many believe this is due to a delayed transition of its industrial structure.
A characteristic feature for the Japanese economy is that Gafa (Google, Amazon, Facebook, Apple) and Bat (Baidu, Alibaba, Tencent) companies have not emerged.
After the burst of the bubble economy, only companies such as Softbank, Rakuten, and Uniqlo have grown rapidly. In the global market, it is probably only the Japanese automobile industry that has a competitive edge.
However, there is a rapid change happening in areas such as automobile industry, electric vehicles, drones, autonomous driving technology, information and communications technology (ICT) and artificial intelligence.
To transition the industrial structure, it is necessary to advance the restructuring of companies, accelerate the development of the service industry using ICT, and to increase the productivity of resources — such as people, goods and money — to a high degree.
But this is hindered by inefficiently operating small and medium-sized enterprises (especially the service sector), which make up much of the industry. There are about 3.58 million SMEs in Japan, accounting for 99.7% of all companies.
What is usually driving the industrial structure to transition are the market mechanisms interest rate and wages. But interest rates are not effective, as they are low due to a ‘different dimension’ of monetary easing.
They are also not effective as the mobility of employment does not progress. As a result, recent policy proposals suggest to raise the minimum wage.
Q: Do you believe that the afore mentioned measures will be considered as part of long-term structural reform under the new prime minister?
The chief cabinet secretary, Yoshihide Suga, is aware of the problems that SMEs pose and has mentioned their restructuring, among other reforms.
He has also mentioned the revision of the Small and Medium-sized Enterprise Basic Act.
While I cannot say whether he will undertake a reform of the industrial structure if he becomes prime minister, I am certain that he will lay out some type of policy.
Q: What does this mean for fiscal measures in Japan?
In Japan, like in Europe and the US, the spread of the coronavirus infection continues.
Under these circumstances, it will be difficult to change fiscal and monetary policies and carry out painful fiscal consolidation. Once the virus is contained, it will be possible to consider fiscal and social security reforms to secure financial credibility.
Public finance has stabilised as the Bank of Japan has purchased a large amount of government bonds and keeps the interest rates low.
As part of countermeasures against the virus, the planned amount of government bond issuance for the financial market increased sharply from ¥128trn (initial budget) to ¥212trn, by about ¥84trn (€676bn).
The response to this crisis can’t be continued permanently. After the virus has been contained, fiscal consolidation has to be carried out, no matter who becomes the next prime minister.
Q: How much have digital companies in Japan accelerated due to the Covid-19 crisis and in which sectors?
In Japan, like in Europe and the US, IT companies are rapidly progressing, especially game companies such as Sony and Nintendo flourish because of nest-dweller consumption.
Besides Medley, a company which provides online medical care; businesses which support online work, teleconference and cloud services are growing. The stock prices of pharmaceutical companies providing vaccines and medicine are rising too.
Q: How can the crisis become an opportunity for Japan to achieve sustainable growth?
The total-factor productivity (TFP) growth rate rose after the financial crisis of 1997 and 1998 and after the Lehman shock, as they encouraged corporate efforts and restructuring.
I think that a crisis increases the possibility to open ‘a window for reform’.
This crisis, for example, has triggered changes in remote education, the ‘seal culture’ and in online medical treatment, which had been difficult in normal times because of resistance by the Japan Medical Association.
If Schumpeter’s concept of ‘creative destruction’ is effective, it should contribute to raising Japan’s potential growth rate to a certain degree.
