Capitalism is at a crossroads.
The modern global economy—defined by free markets, light-touch government, and all-but-infinite rewards for the most successful—has created vast wealth and astonishing technological progress. The benefits have accrued to countries both rich and poor: in the past three decades, more than 1.2 billion people worldwide have been lifted out of extreme poverty.
But capitalism, at least as it is practiced today, can have major downsides if left unmanaged.
Growing Inequality Leading to Growing Instability
The prevailing winner-take-all approach has produced large and growing disparities. In developed countries, the gap between the highest income earners and everyone else has widened to levels not seen since the early 20th century. Rural areas, in particular, feel excluded from modern tech-driven prosperity. These divisions weaken our societies and make people susceptible to the false promises of populist authoritarians and autocrats. In short, inequality puts democracy at risk.
Then there is the environment. Unfettered pursuit of “shareholder value” -that is, profit—has resulted in a climate emergency whose effects are already being felt around the world. Future generations will bear an even greater burden. Exactly how heavy that burden will be depends on our willingness to take bold action now.
That is why Japan is making a change.
A New Plan for a Sustainable Future
Under the leadership of Prime Minister Fumio Kishida, who took office last year, the Japanese government is pursuing policies to reform and reinvigorate its economy. Prime Minister Kishida has called the approach a “new form of capitalism.” Speaking at a recent event, “An Updated Approach to Capitalism: New Opportunities for Japan-U.S. Cooperation,” hosted by the Wilson Center in Washington, the Cabinet Secretary for Public Affairs in the Kishida Administration Noriyuki Shikata said, “Simply put, this new form of capitalism is a way to update capitalism. At the same time, it is also intended for the healthy development of democracy.” The idea is to make the economy stronger, fairer, and more sustainable, so that it can keep generating prosperity for everyone—in this generation and those that follow.
What is essential is to strengthen “a virtuous cycle of growth and distribution.” The foundation is that growth—return from capital—first be realized to trigger this virtuous cycle. Once that is achieved, the returns—the fruit of the growth strategy—are appropriately distributed through society in the form of wages or household deductions, which will then fuel the sustainable progression of these interconnected growth and distribution strategies. This will bring about a healthier, truly sustainable economy with a stronger middle class and a skilled workforce that is well-compensated and confident about the future, which inseparably leads to a fairer economy.
There have already been calls for a shift away from business practices that put the interests of shareholders above those of all others, and toward what is known in Japan as “sampo yoshi” or “three benefits” in which the seller, the buyer, and society as a whole all come out ahead. Prime Minister Kishida spoke about this recently, saying “It is necessary for companies to manage themselves in a “Sampo Yoshi” style, so that not just shareholders, but all stakeholders, including employees and customers, also benefit.” Japan is also seeking to avoid protectionism by establishing fair and robust trade links with like-minded economies that are in the best position to deliver prosperity to all their citizens.
A Strategy of Growth and Distribution
So what exactly is Japan doing to realize this vision?
The growth and distribution strategies which comprise the plan are designed to build upon each other. The growth strategy is centered first around investment in technology and innovation, including a 10 trillion yen fund for scientific research for universities, including creating a supportive environment for young researchers in which to work on cutting-edge innovations and collaborate in joint research projects with their international colleagues.
Japan is also going digital, with an expanded new program of digital transformation covering both government administration and the private sector. Based on the idea that a more connected society can be a fairer society, Japan has devised a new “Digital Garden City Nation for Achieving Rural-Urban Digital Integration and Transformation” plan, intended to eliminate the disparities between rural areas and big cities like Tokyo by making it easier for more people to work, start businesses, or see doctors remotely. In addition, a new Digital Agency established last year is overseeing efforts that include investment in next-generation IT infrastructure and a review of some 40,000 laws and regulations to ensure that government is making the best of new technologies.
A third aim of the government’s growth strategy is tackling climate change. Investing in climate-related technology, for instance, is an area where Japan believes huge benefits for both the environment and the economy are possible. Japan’s long-term climate goal is to achieve net-zero emissions by 2050, with an interim reduction of 46% by 2030. Programs such as a 2 trillion yen Green Innovation Fund will help get us there. The fund will support development of next-generation batteries and motors, as well as hydrogen and other clean energy systems, which hold the key to bringing innovations for decarbonizing transportation, industry, and consumer applications into the global mainstream.
The distribution strategy calls for increased investment in people, which will in turn act as a foundation for further growth. By encouraging increases in wages, along with increased support for childcare, education, and vocational training, Japan is aiming to support businesses by creating a sustainable increase in consumer demand. At the same time, these initiatives are helping to realize a more open and diverse society that benefits from the participation of every individual.
Insulating the economy from disruptive crises is also crucial, as the Covid-19 pandemic has shown. Working together with other countries, including the United States, Japan is aiming to safeguard supply chains in areas such as semiconductors, the crucial component of virtually all modern technology. The goal is increased security for businesses, workers, and consumers.
A final pillar of Japan’s vision for a new and more sustainable form of capitalism is international cooperation. No country can transform its economy or protect its citizens alone. One important goal is to help developing nations make their economies greener, and Japan is doing so through the Asia Energy Transition Initiative (AETI), which includes supporting projects worth $100 million to transform fossil-fuel power plants into zero-emission plants that extract energy from ammonia and hydrogen. “Prime Minister Kishida is trying to establish an Asian zero-emission community,” said Mr. Shikata, “which will take the lead in decarbonization technology standards and quality infrastructure development with other countries in Asia.”
Working Together to Support Sustainable International Growth
Japan’s plan is to collaborate with other nations and encourage sustainable growth in order to prevent world democracies from succumbing to authoritarianism. In this regard, Japan’s vision for a more sustainable form of capitalism shares a good deal in common with President Biden’s Build Back Better in its policies of countering climate change and bolstering the middle class. Together, Japan and the US are working to deepen cooperation on several fronts with an economic version of the “2 plus 2” talks, and increased efforts to achieve a free and open Indo-Pacific region.
Additionally, Japan is hoping to work together with the US in the Indo-Pacific, supporting infrastructure development and providing advanced technologies in a variety of sectors, including secure and open 5G networks, smart power grids, and renewables. “Funding issues for developing countries when it comes to climate adaptation is a very contentious issue,” says Yumiko Murakami, Co-Founder of MPower Partners, who joined the Wilson Center discussion, “but if the US and Japan can collaborate strategically on these issues, I believe we can potentially expect a very meaningful and impactful outcome.” Finally, on trade, Japan has signed 21 Economic Partnership Agreements with 24 countries and regions, and such agreements now cover more than 80 percent of its external trade, with more under negotiation. Only by sticking together can democracies such as the United States and Japan ensure that nations in this region continue to enjoy sustainable economic growth, and that the playing field of global trade remains free and fair.
Remaking capitalism won’t be easy, but the task is a crucial one. Fairness demands it. The Earth’s climate demands it. And the future of capitalism itself demands it, for in the long term our economic system—and the prosperity and innovation it creates—can only survive if it works for everybody.