Innovation remains the key to prosperity

By Hiroshi Yoshikawa / Special to The Yomiuri ShimbunJapan began a new chapter in its history on May 1 when it ushered in the Reiwa era. This transformative moment must have made almost every Japanese ask: “What will our society and economy look like from now on?”

Shortly before the inauguration of the new era, a government research institute released the latest “household projections” for the whole of Japan. What shocked me was not a decrease in the total number of households, but an estimate that one-person households will account for almost 40 percent of all households in the country in 2040.

The projections released on April 19 by the National Institute of Population and Social Security Research (IPSS) also gave prefecture-by-prefecture estimates, especially focusing on the proportion of households headed by persons aged 65 or older. In 2040, the ratio of such elderly households for Tokyo will likely be 36.3 percent, the lowest across the country. But further analysis shows that the share of one-person households in all elderly households in Tokyo will stand at 45.8 percent, higher than any other prefecture. In other words, Tokyo and other densely populated urban areas will experience a steep increase in the number of elderly people living solitary lives.

The institute’s projections make us feel that the outlook for the future is far from bright. I think that since the Heisei era appeared to have begun entering its final stage, the phrase “population issue” became a keyword in addressing Japan’s economic and social issues. The country currently has a population of 126 million, but two years ago the IPSS, using its population projections for the century ahead based on medium fertility and medium mortality assumptions, said there would be only 50.5 million people in the country as of 2115 — almost equal to the population 100 years ago, in the early years of the Taisho era.

Today, it is widely accepted that a sharp population decrease and the aging of the population will cause grave social and economic problems for Japan. As such, the future of its social security and fiscal systems is at risk. Depopulation has been bringing certain rural cities, towns and villages to the verge of extinction. Those “vanishing” areas will be in increasingly dire straits as time goes by.

Society ages, inequality widens

As society ages, inequality increases. This is because, unlike younger generations, elderly people are prone to face a situation in which their circumstances differ greatly from person to person in terms of income, assets and health conditions. Against this background, when the percentage of elderly people within the overall population rises, inequality in the whole of society tends to inevitably intensify. This pattern is already becoming a social reality.

In Japan, inequality has widened not only in the elderly cohort but also in working generations. Inequality exists between regular and non-regular workers. At around the time the Heisei era started in 1989, one out of every six workers was a non-regular employee, but non-regular workers now account for nearly 40 percent of the country’s overall workforce.

Inequality has always been a serious issue in human society. The capitalist system is no exception — it has never been free from the issue of inequality throughout its approximately 200-year history. Only in and after the latter half of the 19th century did a group of advanced countries in Europe develop a social welfare system in an effort to deal with the issue. In 1961, Japan finally established the universal national pension and health insurance systems covering all of its population.

Under the existing public pension and health insurance systems, the working generation is mostly required to pay insurance premiums while the old-age generation receives benefits from both systems. As the birth rate falls and life spans continue to be extended, the number of those who pay as they earn declines while the number of beneficiaries increases. Amid this trend, it is difficult for the pension and health insurance systems to make ends meet. Social security expenditures in Japan now amount to more than ¥120 trillion a year, but premiums contributed by the working generations fall short of fully covering financial resources in this category. In fact, premium contributions account for less than 60 percent of the required resources. The shortfalls are made up for by public funds from the central and local governments, which rely on tax revenues. However, they have been suffering from chronic tax revenue shortfalls.

The public funds extended by the central and local governments to the public pension and health insurance systems have been automatically booked for many years now as fiscal deficits in their budgetary accounts.

The balance of fiscal deficits has been snowballing year after year. According to the International Monetary Fund, Japan’s general government debt, including central and local government debt and that of the social insurance systems, was equivalent to 237 percent of its gross domestic product in 2018. The debt-to-GDP ratio was the worst in the IMF survey of 188 countries in the world. It is glaringly obvious that Japan is saddled with a level of fiscal deficits that is not sustainable.

During the 1989-2019 Heisei era, the government hoisted the flag of fiscal reconstruction many times, ending in vain every time. Every administration that emerged in the era made a half-hearted commitment to raising the consumption tax, the centerpiece of fiscal reconstruction efforts. They did not endeavor to fully explain to the nation the necessity of a consumption tax hike — along with the real state of affairs concerning social security finance. This is a major piece of homework Japanese society failed to complete in the Heisei era but remains obliged to do in the Reiwa era.

In the Reiwa era, as in the Heisei era, Japanese society has to tackle another major challenge. It needs to get its economy back on a robust economic growth track. It has been widely perceived that, considering the shrinking population, the Japanese economy would be in a position to either post zero growth at best or even suffer negative growth. This perception is wrong. It is true that population contraction itself has a negative effect on economic growth, but economic growth of developed countries typically results from growth in GDP per capita.

Innovation spurs growth

As a general rule, an increase in the average per capita income can be only realized by innovation. During the Heisei era, the Japanese economy was not able to overcome a prolonged period of stagnation not because of population contraction but because of the fact that the country lagged behind the United States, China and other countries in innovation.

At the beginning of the Heisei era, 15 of the world’s top 20 companies by market capitalization were Japanese, with Nippon Telegraph and Telephone Corp. (NTT) in the No. 1 spot. Fast-forward to today, and there are no Japanese companies on the list.

When companies are less innovative, they are inevitably weakened by a lack of brand power. As long as products have brand power, their makers can be globally competitive not due to lower prices but thanks to the quality of their products. Even if the prices of imported materials go up, companies with brand power will feel little pressure as they can afford to raise their export prices.

But Japanese companies are no longer in such an enviable position. As a result, a jump in crude oil prices causes a certain amount of income in Japan to flow abroad. This means a decline in “trading gains” — which reflect changes in the country’s trade-related purchasing power. The Cabinet Office’s National Accounts show that the country’s trading gains began decreasing in and around 2007 to the extent that it actually posted a “trading loss” of ¥2.3 trillion in 2014. Then, the comparative figures turned positive, though less pronounced, and, as of 2018, the gain stood at ¥3.05 trillion, down nearly 85 percent from ¥19.73 trillion in 2000.

Up until now, Japanese society has been persistently afraid of “yen appreciation.” When the yen strengthens against foreign currencies, Japanese companies may want to raise the dollar- or euro-denominated prices of their exports. But, as few actually do so out of fear that there would be a quantitative decrease in overseas sales, their earnings tend to fall, causing them financial difficulties. In this situation, too, a lack of brand power is to blame.

The Japanese economy during the Heisei era is likely to be remembered as one lacking in innovation, like a company having had no successful products, and failing to dispel a sense of stagnation despite trying various solutions.

Some people are skeptical that it is possible for Japan, a country where the population is now shrinking, to become competitive in terms of innovation. I want them to look at major private railway companies in this country. Their revenues, which traditionally rely on commuters, were earlier said to be in a downward spiral in the face of the contraction of the population, especially regarding the working generations.

Nevertheless, earnings statements from major private railway operators for the year to March 2019 show that all of them enjoyed an increase in revenues. Of course, they had foreign tourists to thank for increased train travel. But what actually contributed to improving performances was the popularity of “commuter limited express trains.” Railway operators have finally met the needs among commuters traveling long distances to work to get reserved seats, even at an extra fare. Thus, to use innovation to create new products or service solutions, it is vital to identify and focus on what consumers really desire. Apple co-founder Steve Jobs did the same thing.

I say for sure that the situation characteristic of the low birth rate and the aging of the population can be an opportunity to pursue innovation. Many people are struggling with problems caused by the situation.

The fact that there are many social problems means nothing but the presence of many people looking for innovative solutions. To make the Reiwa era into an era of economic revival for Japan, we need to have the courage to try new things — and we really need to have a society that encourages those who have such courage.

Special to The Yomiuri Shimbun

Yoshikawa is the president of Rissho University, a post he assumed in April this year after being a professor at the university for three years. Prior to that, he was a professor at the Graduate School of Economics of the University of Tokyo. He also serves as the chair of the Cabinet Office’s study panel on diffusion indexes for business conditions. Previously, he chaired the National Council for Social Security and the Fiscal System Council, and served as a member of the Council on Economic and Fiscal Policy.Speech

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