from Asia Unbound

Yasuchika Hasegawa: Japan’s Untold Potential

December 06, 2012

Buildings are silhouetted against the setting sun in front of Mount Fuji in Tokyo December 2, 2009
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This blog post is part of a series entitled Is Japan in Decline?, in which leading experts analyze Japan’s economy, politics, and society and give their assessment of Japan’s future.

I am often asked whether Japan is in decline. The short answer is “yes”—and it has been since the beginning of the Lost Decades in the 1990s due to Japan’s inability to return to the growth after its economic bubble collapsed at the end of the 1980s. However, there are many who tend to respond in an overly negative fashion about the outlook for Japan, as if its days are numbered. The truth is that Japan faces similar issues to many other mature economies, such as an aging population, debt deflation, and the impact of globalization and the flattening of the world. If we assume Japan cannot recover, are we to assume that Europe also cannot recover from its current crisis? This “declinist” view assumes that humans have no capacity for responding to crisis and adapting in innovative ways.

Many in the public realm have already commented negatively on Japan’s current standing on the global stage and the future outlook of its economy. So I do not wish to repeat the same old reasons for lackluster economic performance and for Japan being overtaken by China in terms of GDP and in terms of news coverage. In this short passage I would prefer to leave out the negativity and point out a few key options Japan has to return from its economic malaise. Most notably, what Japan needs in the short term—which would also help set it up for continued competitiveness in the long term—is significant change in government and bureaucracy. As you are no doubt aware, Japan’s politics and legislative processes have been in a state of paralysis and instability for some time—thanks to the almost yearly resignation of the prime minister and reshuffling of the cabinet—and this is mainly due to an outdated and ineffective government structure. The prime minister does not have enough authority to reorganize the overwhelming power of the ministries—which is a main cause of the political and legislative gridlock in Japan, which is something the Democratic Party of Japan (DPJ) has not been able to overcome despite it being one of the reasons for the DPJ’s election three years ago. Additionally, the practice of civil servants retiring into related private sector jobs—known as Amakudari—remains a big problem that should be solved. That is one significant change that would have far-reaching effects.

Another issue is the balance of government and regulatory authority itself. In Japan, power is far too centralized and concentrated in Tokyo—including the distribution of tax revenues from all over the country. A critical part of revitalizing Japan is not just revitalizing Tokyo—it has to be a country-wide effort, which entails giving more authority, financial resources with no strings attached, and vital human resources to the prefectural and local governments. This includes regulatory policy that is tailored for their specific needs. Even more crucially it also means giving those governments much more decision-making power regarding the tax revenues that are not only collected in their respective territories but also allocated by the central government. The beauty of this kind of reform is that it does not require tax payer money to implement; all it needs is lawmakers’ leadership and determination.

Moving on to economic challenges, Japan is known as the most rapidly aging society in the world, with one of the world’s lowest birth rates as well. While the issue of an aging population is a challenge for economic growth, people forget that it is also a result of great success in healthcare and creating prosperity through economic development. While the overall demographic trend is likely irreversible, the effects of the trend can be greatly mitigated and turned from a challenge into various opportunities. Overhauling Japan’s welfare system from its outdated pay-as-you-go model to a comprehensive social security model, and pushing through reforms such as the increase in the consumption tax, can go a long way in alleviating the concerns over Japan’s fiscal sustainability. In addition, we need to re-think the retirement age to allow healthy elders to continue working a little longer.

More importantly, while progress is being made, Japan is still missing out on utilizing the other half of its labor force: women. I recently spoke with Christine Lagarde, managing director of the International Monetary Fund (IMF), on an NHK TV special about the topic of “Can Women Save Japan?” And the answer is, yes they can. In fact, according to the IMF report by the same name, if Japan could increase its female labor participation rate to that of Norway, Japan’s GDP per capita would be permanently higher by approximately 8 percent. However, we need faster progress in the regulatory, corporate and cultural environment to encourage more women to join and remain in the work force. Even more importantly, we need to continue fostering a culture in the public and private sectors of training and promoting talented women to become leaders and entrepreneurs.

Something else that would significantly benefit Japan’s economy, which has been given some thought especially since the Great East Japan Earthquake last year, is to create special economic zones in key locations. These areas could have special corporate tax rates, easy access to startup funding, and more relaxed regulations with the aim of attracting foreign direct investment (FDI) and global talent, while also encouraging local and foreign entrepreneurs and venture capital firms to set up shop in Japan. In conjunction with the establishment of these special zones, Japan needs to focus on making it easier to get work permits for foreign employees and entrepreneurs, as well as establish the necessary social infrastructure to support them, such as housing and education for children, etc. Continuing to promote innovation and Japan’s entry into new industries remains a key issue to ensure Japan’s future success.

Lastly for this brief narrative, I want to emphasize Japan’s relationship with its global peers, and the great potential there is for further collaboration and friendship across borders. It is true that the United States is Japan’s greatest ally and that the two countries depend greatly upon one another for a range of things from economic growth (whether by partnership or healthy competition) to security to international development. Yet for Japan to become an even stronger partner to the United States, Japan also needs to play a stronger role in regional diplomacy. I do not need to emphasize the obvious importance of improving economic and political relations with China, however what is just as important to Japan as the United States or China is moving closer to its other Asian neighbors—especially the ASEAN countries. There is enormous potential and economic growth in this region, and Japan has the opportunity to not only provide development through FDI—something Japan has historically excelled at—but also to provide support and guidance in a variety of areas. In this respect, the Japan International Cooperation Agency has recently been supporting the Vietnamese government to enhance the country’s legal framework. Crucially, Japan needs to take a more active role in creating shared prosperity in the region and around the world through bilateral and multilateral trade and economic agreements such as the Trans-Pacific Partnership.

So, in short, although Japan is in decline today, that does not carry with it all the implications of perpetuity. Yes, Japan has been having difficulties for a number of years, but there is untold potential to turn the challenges facing Japan into countless opportunities for sustainable growth and competitiveness into the future.

Yasuchika Hasegawa is chairman of the Japan Association of Corporate Executives (Keizai Doyukai) and president and chief executive officer of Takeda Pharmaceutical Company, Ltd.