Abenomics: The Sequel

Prior to working for the government affairs team at Goldman Sachs, Brunswick Director Yoichiro Sato served with Japan’s Ministry of Foreign Affairs and was instrumental in the negotiations for the economic partnership agreement between Japan and the EU, in addition to his two-year station in Pakistan as a front line of war on terrorism. From 2013 to 2015, he was a special assistant to Prime Minister Abe on foreign affairs. In that position, he worked directly not only with Mr. Abe, but with the team of Suga as Mr. Abe’s Chief Cabinet Secretary.

Now a Director at Brunswick’s newly established Tokyo office, Yoichiro spoke to Brunswick Partner Daisuke Tsuchiya, another former Japanese government official whom Yoichiro worked closely with during the WTO Doha Round negotiations, and who himself knew Shinzo Abe personally early on in his career during Abe’s first tenure as Prime Minister in 2006-2007 as his interpreter on occasions such as the G8 Summit and other meetings with global leaders, about the legacy of Prime Minister Abe, and what to expect from the incoming administration of Yoshihide Suga.

Japan, home to over 3,000 of the world’s 5,000 oldest companies is a tough market for anyone to launch a new business. Yoichiro discussed the challenges as well as the opportunities of the Japanese market and what, if any, the change in government means for business.

From your point of view, what do you think are the main achievements of the Abe administration?
In a nutshell, I think the prime minister was successful in fostering hope for Japan, for the people of Japan. He was very, very good at changing the narrative for the country. He made the people of Japan feel more confident about the future.

His focus was revitalizing Japanese economy—his administration started in 2012, just after the Great East Japan Earthquake. We didn’t have a lot of hope for the future then. We had spent almost two decades of economic stagnation and price deflation. So Abenomics aimed to push national growth through easing monetary policy, boost fiscal stimulus and push structural reform.

What are some concrete things he did for business and the economy?
The administration put in place reforms or measures to facilitate dialogue between Japanese corporations and investors, that is, the governance code and stewardship code. The aim was to make the market more attractive for both domestic and international investors and by doing so, to incentivize Japanese corporates to create greater value through their businesses as well as to achieve share prices that more closely reflect their value. They’re now more expected to share and disclose their information. The government also pushed Japanese corporates to enhance governance and increase productivity. This includes work-related reforms and promoting diversity with female empowerment. Such measures had not been undertaken with the same rigor by previous administrations due to strong opposition from vested interest groups, even parliament members or ministries within the government.

In the economy, the unemployment rate dropped from around 4.3 percent to 2.4 percent, which produced over 4 million new hirings, and the employment of women dramatically increased. Although this year we’ve suffered a big negative impact due to the COVID-19 pandemic, we are still seeing long term trends with positive impacts from the work of this administration, from inbound tourism as well as foreign direct investment. Combined with monetary easing and fiscal stimulus, more and more foreign investors put a lot of money in the Japanese market in the last decade.

Career civil service is at the core of Japanese government. Lifetime civil servants continue to enjoy strong respect and are at the heart of a lot of long-term policy development. Were Abe’s accomplishments a factor of his personality, which could be reversed with the change in leadership, or a sign of a shift in underlying, institutional trends that have moved the Japanese government machine for the long term?
I think that’s a great point. Prime Minister Abe’s administration is one of the most powerful in the history of Japan as a democratic country. During his second term, seven and half years in office, he won six times through the national election, either in the lower house or upper house. The Abe administration also managed to establish the agency for human resources—the cabinet bureau of personnel affairs—in order to have more influence over personnel decisions of especially senior civil servants. The robust policies of reform pushed forward by Abe’s administration are definitely a result of more coordination among key ministries, thanks to the political capital that he had, and the increased political power over the civil service. 

However, there is also a more underlying sense of urgency in all areas of government to revitalize the economy, given international competition and a fast-aging population. Without that, the Japanese ministries and government agencies that have such an important role to play in realizing long-term policy change in Japan would not have been mobilized as effectively as they were. I feel this is a trend that will continue under Prime Minister Suga and subsequent administrations.

With the changes in the governance code and the stewardship code, more foreign investors are buying shares of Japanese companies. Activist shareholders are also more engaged, as a result of Abe’s encouragements for more dialogue with shareholders. Do you see that trend continuing?
Yes. I think it’s a long-term trend, a fundamental vector. The ruling parties—LDP and the alliance with Komeito—want to push the national economy, leveraging foreign investment and welcoming more people from the rest of the world. That’s been one of the key elements of Abenomics, and they want to push harder.

The current focus is to address the COVID-19 situation where they have to strike a balance between economic growth and public health. But in the long term, once we’ve recovered, they want to celebrate the Olympics and to welcome more people and visitors through various measures. The government has relaxed the restrictions on immigrants or professional workers from the other parts of the world, for instance. Tourism was on an astronomical rise in the last decade before the pandemic started. I think the new administration will have the support to continue policies to connect Japan and other markets. 

Yes, it is startling how much tourism has increased—something like fivefold over the seven and a half years that Abe was in power. But foreign direct investment as a percentage of GDP, even as it has increased, is still very low in Japan, putting Japan at around 190^th in the world, despite all of the measures that Abe has undertaken. What do you think are the challenges for foreign businesses to enter Japan?
That’s one of the most important questions we have to ask ourselves. One initiative taken by the Tokyo municipal government is to establish and brand the city as a new Asian regional hub for finance, to attract more and more investors or fund managers on the ground in Tokyo. They have discussed a variety of these challenges for international corporates or financial institutions working in Tokyo or in Japan—taxation, language issues, complexity of regulations, and others. They understand without cooperation by the national government and the business sectors they cannot achieve high-level investment or more transition from business corporates from the rest of the world.

However there is only so much that national and local government initiatives can achieve. There will be work required on the side of foreign businesses as well, to crack the Japanese market, which as data shows, is not an easy market to succeed in.  

Yes, it is not an easy market not only for new foreign businesses to succeed in, it is the case of new Japanese businesses too. Developing trust and credibility in the long run is perhaps more important than in any other market. Do you have any advice regarding practical steps foreign businesses be taking to establish themselves in Japan?
First, they should try to have a good understanding of the Japanese market. I’m not saying the Japanese market is very unique. We do have many things in common with other markets of the world. But there are cultural and regulatory differences, and generally a much longer period required for establishing credibility as you point out. Showing that you understand those differences would be a good signal in marketing and branding. They would likely receive more positive trust or feedback from Japanese consumers or clients.

Second, I would suggest foreign companies make the effort to engage stakeholders in the local market for the long term. Regulatory matters or some differences in rules or commercial practices across industries—those might pose challenges for international corporates who want to disrupt or enter a new market here. But without having a good level of trust with some key Japanese stakeholders—government, regulators, trade associations, consumers, business suppliers or media outlets—I don’t think anyone could be successful in the long term. So having strategic engagement with key stakeholders is critical when you want enter the Japanese market.

That’s an interesting point. Stakeholder capitalism has been all the rage globally in the last couple of years. Japan has been doing this for a few centuries. The Omi shonin (Omi merchants) had the concept of “sanpo Yoshi” or “three ways good”—business has to be good for the buyer, seller and for society. So you’re saying that understanding that mindset is needed to succeed in business in Japan?
Yes. I think not only Japan but also in the global market, multi-stakeholder engagement is a powerful way to stand out these days. But absolutely the case is true in Japan—an old and yet a new trend.

In 2024, we will have a new version of 10,000-yen bill with a picture of Eiichi Shibusawa, a former civil servant at the Ministry of Finance and the venture capitalist from the Meiji Era, more than 100 years ago. He left a long-lasting imprint on the Japanese society through helping to establish over 500 companies, hospitals and universities, as well as promoting diplomatic relations with the US, France, China, India and others. Shibusawa talked about the importance of achieving the dual goal of business success and constructive public policy. I believe it’s in the DNA of Japanese business and Japanese society.

You worked with Mr. Suga’s team when he was Chief Cabinet Secretary. What insights do you have into what sort of prime minister he will be?
Mr. Suga has been a very important key player in the cabinet as a very close partner for Prime Minister Abe, especially around coordinating with key ministries. When the government planned reforms or new initiatives, they needed strong support from key ministries such as taxation or education or labor reform or anything.

Mr. Suga has been vocal in promoting the key initiatives that push the national economy, including relaxing visas for visitors and restrictions on professional workers. Suga also strongly supported an initiative in taxation, what we call Furusato Nozei, a policy aiming to revitalize regional economies by allowing tax-deductible donations to municipalities. He comes from a rural background as well, so decentralization and revitalizing regions in Japan is an important theme for him.

Suga really understands the importance of leveraging the global economy for Japan’s benefit. He was a strong supporter for promoting and exporting Japanese agriculture products to other parts of the world, a key mindset change, as traditionally Japanese agriculture has not been export-orientated. One common theme that runs through all of this is, he has been very focused on revitalizing the Japanese regional economy through attracting foreign investment and people.

He has already publicly expressed that he wants to have a strong reform-oriented minister for each position, which shows his strong commitment to continue Mr. Abe’s economic policies, especially around structural reform. And he wants to further push regulatory reform as a key driver for the national economy.

Consistency is key. Some analysts are already saying that “Suganomics” will take over Abenomics. In terms of monetary policy, Bank of Japan Governor Kuroda is highly appreciated by Mr. Suga, who has already said that he supports further fiscal stimulus. The national economy or economic growth is a key theme for Suga, although he understands that the top priority is addressing the coronavirus situation.

In terms of geopolitics, I think the main thing on the minds of many is the US-China relationship. How do you see that affecting Japanese businesses abroad and as non-Japanese businesses interested in Japan?
Yes, the general geopolitical tension affects Japanese politics as well as the Japanese economy and business environment. Aligned with the security measures or political measures taken by the US or other countries, the Japanese government has implemented restrictions or new rules around trade with foreign countries.

Japanese corporations have been affected by a decrease in trade volume with China, while seeking more partners in South East Asian countries. However, Japanese corporates really understand the importance of keeping business ties with China, and hence the key going forward will be whether some perceived security concerns can be addressed and whether trust in China and Chinese companies can be improved.

In terms of regional or international security, Mr. Suga will likely take over the course charted by Mr Abe and emphasize the US-Japan alliance and partnership with India, Australia, as well as important relationships with China and other Asian countries in order to secure this region.

Prime Minister Abe formed some significant trade deals. How do you think Mr. Suga will handle foreign trade?
It’s very important for us, not only Japan but also for countries in Asia, to have transparent rules for trade and any other business rules. The Trans-Pacific Partnership, Japan-EU Economic Partnership Agreement, the Regional Comprehensive Economic Partnership and other trading trade negotiations and agreements that Mr. Abe formed will remain key for Japan. We cannot separate ourselves from other countries. We cannot survive. Those open trading policies would be key for us to continue our economic growth and prosperity.

What are the opportunities for businesses looking to invest in Japan?
Japan’s business environment, especially in terms of political stability, make it one of the best places to be for predictability—I think that’s important for any corporates planning to invest for the long term. It is inevitable that Japan becomes a more friendly place to do business for domestic and foreign companies alike. An aging society means Japan will be looking to open the country to more companies and people from the rest of the world.

Your mention of the aging society reminds me of an interview in the Brunswick Review we had a few years ago with Hiroshi Komiyama, Chairman of the Mitsubishi Research Institute and former President of the University of Tokyo, one of the most respected academics in Japan. His point was that the aging society, often seen as one of the huge challenges that Japan faces, is also an opportunity, as whatever innovations Japan can develop to address the aging society—be it technology, services, policy mechanisms, etc.—will be applicable in other markets who will eventually face similar demographics. His point was that an aging workforce can be a catalyst for an economic evolutionary leap to what he calls a “Platinum Society.” This is one of various ways in which the Japanese market is still likely to continue to provide opportunities for businesses under the Suga administration and further on.  
I fully agree. We can provide a kind of sandbox for other countries, trying out many things. That’s what we should do, because we’ve enjoyed a very matured economy over the last century—we have a responsibility to show some willingness to help other countries by demonstrating approaches to an aging society.

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Daisuke Tsuchiya is a Partner based in London. He advises both Japanese clients on international communications and non-Japanese clients on communication needs in Japan. He has worked on various issues, including crisis, mergers and acquisitions (M&A), and corporate reputation building, utilizing his extensive contacts in media, government, and corporate sectors in Japan and internationally.

Photographs courtesy of Yoichiro Sato and Daisuke Tsuchiya.