Japan enters the Reiwa era with renewed hope

Yoshihide Suga, announcing new imperial era, "Reiwa", to reporters.

Australia & Japan in the Region

Volume 7, No 5, May 2019

Emperor Akihito’s abdication at the end of April marked the end of three decades of the Heisei era (1989-2019). And on 1 May 2019 Japan’s new Reiwa era began with Emperor Naruhito’s ascension to the throne.

On the surface, the significance of the Heisei era is that nothing happened aside from a horrendous financial bubble bursting and two large natural disasters, the Great Hanshin earthquake (1995) and the Eastern Japan earthquake and tsunami (2011). Overall consumer prices were remarkably stable. The unemployment rate remained low. The Liberal Democratic Party briefly lost its grip on power, but now faces only weak challengers. A strong US–Japan alliance ensured invasion by a foreign force was a non-issue. And strict immigration policy contributed to political stability.

The most notable phenomenon was ageing. Japan’s population was among the youngest in the developed world at Heisei’s start, but is now the oldest. The population is declining at almost 400,000 people a year and the proportion of people over 65 increased from 15 per cent in 1989 to 36 per cent in 2019.

These changes paint a picture of a quietly sinking sun. While Japan’s real GDP grew by 59 per cent from 1989–2017, it pales in comparison to the United States’ 243 per cent and China’s astounding 3419 per cent. In 1989, there were 32 Japanese names in the global top 50 companies. In 2018 there was only one — Toyota.

The underlying fabric of post-World War II Japanese success was an efficient economic system organised with clear hierarchy

But it would be wrong to write off Japan as a geriatric country expecting further decline. Despite outward appearances, Heisei Japan went through a profound transformation, only more subtle than previous eras.

The underlying fabric of post-World War II Japanese success was an efficient economic system organised with clear hierarchy. The public sector successfully led the rise of Japanese export-oriented industries from steel to semiconductors under the convoy system. Within any given sector there was clear separation of tiers that distinguished original export manufacturers (OEM) from tiers of component suppliers. The keiretsu system of capital and non-capital ties spread like a web across sectors to allow optimal coordination.

Lifetime employment meant that once you entered a company out of high-school or university, your employer would take care of you as long as you remained loyal. The seniority-based promotion system encouraged workers to grow within their organisation.

Before the 1986 Equal Employment Opportunity Law, even marriages were often indirectly arranged by employers. Young women in the workforce were implicitly treated as potential brides for junior staff, not serious talent to nurture. It was assumed that women would retire after marriage.

Within the past three decades, this rigid socio-economic structure crumbled at a speed that few predicted.

Traditionally regarded as too high-risk, joining a start-up is now a reasonable option for graduates from top universities

The most fundamental driver of change has been the technology-driven so-called ‘fourth industrial revolution’ under which the value-add shifted to software and application-driven innovation as the internet became ubiquitous. It was a disturbing thought for OEMs to exit their keiretsu and form alliances with completely new partners, such as internet platforms. But keiretsu are now dissolving as companies prioritise their own survival.

Globalisation and rising emerging markets are other factors. Foreign direct investment overtook the export model. Less reliance on exports and a greater need for speed to market diminished the competitive advantage of the traditional convoy system under public sector leadership. Domestic sector-wide coordination became too time-consuming and much less effective.

These changes were mirrored within the Japanese labour market. Under the Koizumi administration (2001–2006), Japan experimented with neo-liberalism. Meritocracy was promoted to replace seniority-based promotion and the once-sacred notion of lifetime employment lost its untouchable status.

Demographic trends are also driving change. With fewer young applicants entering the workforce, companies entice them by raising starting salaries, flattening the compensation curve and discouraging older employees from staying longer. This labour mobility coincides with the rise of entrepreneurism. Traditionally regarded as too high-risk, joining a start-up is now a reasonable option for graduates from top universities.

Women are now an important part of the labour force — 50.3 per cent of it in 2017 — and working mothers are the norm. Japan is far from achieving true gender equality, but it has come a long way over three decades. As women obtain more financial freedom, they marry later — showing acceptance of diverse lifestyles. Individuals don’t need to blindly follow the social norm.

The end goal is not just productivity, but the well-being of all

Japan now presents a more fluid, if less secure, society. The Reiwa era will only dissolve hierarchy further. But Japan must maintain its competitive strength and economic power. Caring for the elderly is costing 6 per cent of GDP and national debt stands at 200 per cent of GDP.

What can Japan do in the Reiwa era of newly-found labour mobility and entrepreneurism?

Japan could leverage its existential demographic crisis. The population is forecast to decrease to around 100 million by 2050, down from today’s 127 million. The best lever to maintain the economy’s size is improved productivity.

Improving productivity has two sides — organising and revamping fraying existing infrastructure and injecting new technology. Rather than making new infrastructure investments, the public sector may re-organise the old. Once reorganised into a compact and liveable model, communities should use available technologies from smart homes to autonomous vehicles. The end goal is not just productivity, but the well-being of all, including the elderly and the less-privileged.

Productivity gains should be balanced with environmental sustainability. The model of a technology-enabled community maximising quality of life will be a collection of innovation and new ideas, mixing hardware and software technologies.

Japan is now a mature country with considerable experience — perhaps no longer a living miracle, but a country with strength and past failures to learn from. It also has the fortune of political stability. In middle age, an individual has two choices: to resist change and yearn for the glory days or accept reality and be the best one can be according to age. The turning point to Reiwa stands just at this fork in the road.

About the author

Nobuko Kobayashi is a partner with EY-Parthenon, a strategic consulting group within EY Transaction Advisory Services. Based in Tokyo, she specialises in the consumer sector with a special focus on multinational corporations operating in Japan.

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