17th Edition

Confronting Heightened Strategic
Challenges
Online, 19-20 October 2021, 17th edition

Executive Summary

THE GLOBAL ECONOMIC PICTURE AND ITS IMPLICATIONS FOR JAPANThe session started with opening remarks from Mr. Nishimura Yasutoshi, Former Minister in charge of Economic
Revitalization, Former Minister of State for Economic and Fiscal Policy, Former Minister in charge of Social Security
Reform. He emphasized that the vaccination process has been moving ahead in a successful way but that there is a needto ensure that there will be enough hospital beds available in case of a resurgence of cases. The government is also
taking additional economic measures to support activity and to strengthen the country’s national economic security interms of supplies whether regarding masks or vaccines – as they were in short supplies las year – or now regarding thesituation with semiconductors or parts from other countries. Japan needs to have these necessary resources onshore.
Legislative measures and systems must also be designed to support SMEs in their need to adapt to the new conditions
created by the pandemic, and also to support the disadvantaged categories of the population. There is a clear awarenessof the need to accelerate the digitalization of the economy and society, for instance with respect to the use of robots
and drones. In Prime Minister Kishida’s view of a “new capitalism” the priority of increasing growth and improving the
distribution of wealth and social goods have to go hand in hand to create a virtuous cycle and this should characterize
an approach to “reform with a human touch”.

ON GOING TRENDS AND NEW ONESThe global economy has escaped the worst after the emergence of the Covid pandemic. However, we have now to copewith many structural challenges in the supply side of the economy with major disruptions in supply chains, theavailability of the needed workforce, global value chains, and shortages in energy and prices going up. On the demandside there are major changes happening with demand in manufacturing going up while demand in services is going
down.
There is also the acceleration of pre-Covid trends such as the green transition, digitalization and changes in businessmodels. Additionaly there is an underlying trend of recognizing huge wealth inequalities as a crucial problem in major
economies, but also between different countries, with a big vaccine divide among the countries. At time of writing, only
4% of the population in poor countries has been vaccinated against at least 65% of the population in rich countries. This
explains why, according to the IMF, by 2025 the rich economies will be over and above their pre-Covid level while thedeveloping economy will be minus 5.5% their pre-Covid trend growth.

INFLATION…AND GROWTH?
We are in a period where we don’t know what will happen regarding inflation, especially in the US, but also in Europe
and this requires great attention and prudence. It is imperative to be ready to act quickly if signs multiply that inflation
is becoming more permanent and to do what is necessary for un-anchoring inflation expectations. All central banks are
keen to stabilize inflation around the famous 2% threshold to ensure stability. If they don’t succeed, we will be in a very
dangerous world.
Japan is a special case as it is a unique opportunity for the country to re-anchor inflation expectations in line withthe definition of the BOJ.
The Federal Reserve is now going into tapering its extremely loose monetary policy but the route from tapering tointerest rates increases is very uncertain. Looking at the last time when this move - from tapering to raising rates
happened from 2013 to 2015 - this was a smooth process. This will most probably not be the case this time, given
extraordinary uncertainties in the outlook. It is very hard to know what new variants of Covid may develop and theimpact they will have. There is no model for assessing what the impact of the extraordinary fiscal policies in the US andin Europe will be over time. The Brookings institution calculated that this extraordinary fiscal policy in the US contributed
5.5 points of growth over the four quarters ending earlier in 2021 and will subtract 2.5 points of growth rate next spring.
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HOW IS JAPAN POLICY DOING IN THIS EXTRAORDINARY GLOBAL CONTEXT?
The economy has been in quasi persistent deflation for quite some time because of low growth. Even if we have had a
1.5% productivity growth average the impact of the declining population has meant that this actual productivity growthhas just been 1% per year. The BOJ has tried many things in terms of expansionary monetary policy, such as yield curve
control. If there is now imported inflation, for instance because of higher oil prices, this will be negative for the Japanese
economy because the GDP deflator will go down even if the CPI is up and the BOJ will not be able to raise interest rates.
So, the Japanese situation is quite deep-rooted with its deflationary pressures because of the demographic issue.
Additionally, the government cannot have a more activist fiscal policy, allocating money to the poorer categories of
population as this will increase the ratio of public debt to GDP which is already at 260%. What is being done now is toutilize the savings of corporations and households for current spending such as social security, medical costs and so on
and this is not healthy. If Prime Minister Kishida wants to do something useful to prepare for the future he needs toallocate spending for growth.
Markets first reacted negatively to the appointment of Mr. Kishida as leader of LDP because his policies were seen as
unfavorable to investors. Another factor was the change in the composition of the Nikkei index at the end of September
with new big stocks included in the index moving it down. And a third factor in the decline of the Nikkei following theevolution of the situation in China.

CHINA
China has now more than 14 trillion dollars of GDP and its growth remains quite high. However, there are three risks:
Over-investment after the global financial crisis, a still unsound pension system and the over-indebtedness at almost alllevels of the Chinese economy and society, with the government still concerned by the persistence of financial risk,
particularly in the real-estate sector. The government has a lot of tools at hands and a lot of policy space to help manage
this risk, but their concern is that the economy will slow down and the impact of the rapid aging of the population will
be fully felt before China becomes rich enough to sustain this new situation.
The second issue is the relationship with other countries and regions such as the US, Japan or Europe - which helped a
lot the development of China - has deteriorated in the recent period. This could have a negative impact on thetechnological and business interaction between Beijing and its partners, then contributing to a slowdown in China’s
economic progression.
The third issue is the new emphasis put by the leadership on the notion of “common prosperity” in view of the huge
wealth distribution gap which has developed in the country among people and among the regions. They are trying toaddress this issue through fiscal policies and new rules towards the private sector and this is damaging confidence inthe business community. These policies should be implemented in a very smooth and predictable manner, and this does
not seem to be the case so far. Another element to take into consideration is the cost of the green transition which isvery heavy on China given their high reliance on coal.
There is no underestimating the impact that the evolution in China may have on markets. One key issue for the national
economic security of Japan is how much the Japanese financial institutions are connected with Chinese financial
institutions and their links to the Beijing government.
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GLOBAL RISKSIn terms of global economic stability one “black swan” development could be a big wake-up call from the markets as theextraordinary loose monetary policies begin to be tightened with the possibility of rates increases in the medium term,
the impact of the unprecedented levels of indebtedness created by the cumulative impact of the financial crisis and the
pandemic, and the possibility of high inflationary pressures evolving from a transitory to a longer lasting element shaping
expectations and fiscal and monetary policies. There is definitely a significant risk that would be created by a poor
management of this accumulation of debt and of the transition from a loose to a tighter monetary policy.
One needs also to think of the rising geopolitical risks that we see in the aggravation of tensions and the confrontation
between the US and Russia, the US and China, or the nuclear ambitions of Iran.

POST OLYMPICS, POST SUGA…STILL COVID
The Kishida cabinet is starting its mandate with three priorities:
Tackling the Covid 19 crisis
Formulating economic policies to target growth and income distribution
Continuing the security and foreign policies set by the previous administration
Prime Minister Kishida has also stated that more money will be spent on Research and Development, as well as on
economic security to promote some strategic industries to improve the sustainability of Japan’s supply chains. Mr.
Kishida’s policies will not change much from Mr. Suga’s on digitalization and green economy. He will not reverse themeasures taken so far and we can expect some results. In that context, the Prime Minister has put in place a stableadministration with a very solid cabinet and staff members.
Many people in Japan are talking about the tradeoff between economic growth and income distribution, however the
more important issue is the policy instruments available to tackle the crisis. A lot of countries are emphasizing income
distribution policies as the recovery of economy activity can negatively impact distribution. With a two-prong target economic growth and fair income distribution - and only one policy instrument – fiscal policy - there will have to be atradeoff. Two policy instruments – monetary and fiscal policies - may allow to achieve both targets.
Despite a strong stimulus on the demand side Japan growth rate has been disappointing due to low productivity. Capitalstock has not been expanding. This situation has led to some supply side problems. Prime Minister Kishida may have to
introduce more supply side stimulus. However, the kind of supply side stimulus that could be used is a very controversial
issue.
Should Japan think about restarting an industrial policy? There are issues – such as the environment and the safety ofsupply of semiconductors - that cannot be solved through conventional market mechanisms. Industrial policy is acontroversial issue. Historically the government tried to act in shaping the orientations of the automotive industry andthat did not work. Green policy is the most important challenge and it should be addressed in a way that will contributeto – and not hamper - economic growth.
The Kishida administration is also talking about tax breaks for companies to support R&D activities and thus enhance
productivity - as companies have not been investing enough in this domain. Despite the stimulus measures implemented
through Abenomics, productivity did not grow. There is however a limit to what the government can do. A lot ofJapanese companies are conservative and sticking to past business models.

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The pandemic has widened the income distribution gap in the country with the middle class becoming poorer and therich getting richer. The election pressure explains some of the focus on wealth distribution. The Prime Minister is also
trying to lessen the confrontation between his office and the non-ruling parties. It is worth noting that – as opposed to
Abe and Suga – he is not using the word reform in his messaging - thus creating a perception that he is not interested inreform, but this may well be just a cautious position before the elections in the Lower House.
Supporting more the weakest segments of the Japanese society is now the emphasis of the government policy, as well
as focusing on education and reskilling. The administration may need to modify the income tax system to redistributeto lower parts of society to support them. This is essential for the economy. Most advanced countries have seen awidening gap in the past twenty years and growth and wealth distribution must be addressed with more than two
policies. They are equally important. If the focus is only on growth the gap might widen further. The right policies haveto be combined. In addition to growth and distribution policies, effective policies in education and some others notdirectly connected to growth will achieve the desired results for a more balanced society. There is not enough debate
in Japan with respect to the policies that can address more efficiently wealth distribution inequalities.
The administration and its bureaucrats need to provide the appropriate environment for entrepreneurs to operate
easily. The corporate governance code falls in that category. One very important issue affecting domestic demand is thestagnation of wage levels in the past twenty or thirty years. Dividends are up but employees’ compensations have notincreased. The private sector has a lot of cash on hand, but the question is still about how to motivate companies toinvest? Prime Minister Kishida needs to make a commitment on wages to push domestic consumption up. If People areable to spend more, companies will then not hesitate to invest more because they will know there is more domestic
demand waiting to be satisfied.

REALIZING THE “GREEN SOCIETY”: WHAT THE GOAL OF CUTTINGEMISSIONS BY 46% FROM 2013 LEVELS MEANS
Climate change risk is an enormous threat to mankind, and a historical challenge for Japan as for all other countries.
However, the scarcity of natural resources, delayed power sector reform and delayed renewable development hinder asmooth transition to net zero emissions. In addition, more innovation in decarbonization technologies is required tomake an electricity system based on renewable energies function. This can increase the cost of electricity. While notsufficient discussion has occurred regarding possible reactivation of remaining nuclear power generation, there is noeasy answer to solve this complicated equation.
After the Fukushima nuclear accident, JERA - a 50-50 joint venture between TEPCO Fuel & Power, and Chubu ElectricPower - was established with the objective of procuring fuel – LNG - to meet Japan's electricity demand. JERA started
out as a fossil fuel and thermal power generation company, but JERA has two faces: one as the largest power generationcompany in Japan, producing 30% of the country's electricity and, as such, JERA has a natural social responsibility. The
other face of JERA is that it is engaged in global business where the commitment to achieve net-zero by 2050 is anadmission ticket.

DECARBONIZATIONJERA's basic policy is to draw up feasible transition scenarios to ensure decarbonization. This requires three policies:• Combining renewable energy with zero-emission thermal power (mixing with ammonia and hydrogen).
• Creating an optimal decarbonization roadmap for each country and region with different conditions• Implementing what we can do now and moving forward in a step-by-step manner to achieve decarbonization.
With regard to policy 1, decarbonization can be achieved more practically and economically by combining zero-emission
thermal power with renewable energy. Zero-emission thermal power plants take advantage of existing power
generation facilities to generate electricity using ammonia and hydrogen, making it possible to control output, and by
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combining these two sources, it is possible to create stable decarbonized energy. Existing power generation facilities
can be used to generate CO2-free energy using ammonia and hydrogen with only minor renovations. Existingtransmission networks, such as grids, can be used as they are, resulting in minimum social cost.
With regard to policy 2, each country and region is at a different stage of economic growth, and the renewable energies
that can be introduced and their potential are also different. It is impossible to promote decarbonization in a one-sizefit-all way.
With regard to policy 3, do what we can with current available and proven technology. As global warming is happening
now, we need to do everything we can to reduce carbon emissions as much as possible, and as new technologies emerge,
utilize them to accelerate low- and decarbonization.
Hydrogen is becoming more popular for decarbonization, but it has to be imported from overseas at a high cost. Since
it is not domestically produced, there is also the issue of energy security. The only domestically produced, high-capacity
power source, aside from nuclear power, is offshore wind power. It is only now that Japan has begun to take this up in
earnest. Even if the number of offshore wind turbines increases in the future, it will take 10 years before the first unit
becomes operational.

RENEWABLE ENERGIES
Why didn't Japan start developing offshore wind power sooner? After the Fukushima accident and until recently there
was a failure to take the necessary policy decisions to start developing offshore wind. Now there is an ambitious target
for producing 45 million KW on offshore wind in the next 40 years. A decisive factor seems to be the change on the
demand side. Companies are now demanding carbon neutrality in their supply and value chains.
From the perspective of Japan's industrial competitiveness, this is a major policy turning point. The government has set
a high target ratio of 36-38% for renewable energy in its 6th Basic Energy Policy renewed in October 2021, with windand solar as the biggest contributors. To accelerate the investment, it is important to present a clear long-term policy
for the development, especially for large initial investments, such as for offshore wind power. We also need to makesure to have an electricity system that allows renewable energy to become the main source of power. One of thechallenges is to reduce the system costs when introducing large amounts of renewable energy. In the context ofdecarbonization, how to integrate the social cost of carbon emissions into the power system is important, for thepromotion of new decarbonized energy technologies.

NUCLEARIn order to maintain its international competitiveness, Japan cannot afford not to consider the use of nuclear energy.
There still exists a relatively strong anti-nuclear sentiment in the public. It might be difficult for Japan to consider nuclear
power in a positive manner again under the current situation. How should Japan overcome the Fukushima trauma andmove forward? What kind of system is necessary for Japan, as a resource-poor country, to make positive use of nuclear
power a base load in the future?
Nuclear power is necessary to achieve net-zero emissions, as it is questionable whether it is possible to install large
numbers of solar and wind power farms in Japan where suitable land is very limited. Re-activating the existing nuclear
power plants is a cheaper option. Another problem is the tritium contaminated water that became apparent after the
Fukushima nuclear accident. Discharging it into the sea would cause reputational damage. Existing Russian technology
can separate 99.8% of the tritium, but disposing of the separated tritium will increase cost. Japan should join the Treaty
on the Prohibition of Nuclear Weapons but cannot ratify the treaty for the moment because it is under the American
nuclear umbrella. However, public sentiment in Japan will not allow a country that suffered the atomic bombings ofHiroshima and Nagasaki not to ratify the treaty. If Japan ratifies the Treaty on the Prohibition of Nuclear Weapons andnames the treaty as ‘Hiroshima-Nagasaki Treaty’ the U.S. will not be able to oppose.
Japan must make this commitment and be able to define nuclear energy as one of the sustainable energies. If we want
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paradigm and explain to the people that the government will take proper responsibility, that large Light Water Reactors
will be ended, and that small module reactors will be operating in more decentralized power system.

FINANCING THE GREEN SOCIETY
On September 22, the Bank of Japan (BOJ) issued the modalities of its climate change new scheme, targeting activities
aimed at combating climate change, to align itself with a global push toward a greener society. In other countries, green
and sustainable finance have been widely used to bring funds into projects and technologies for decarbonization, butwhat is the status of demand for such funds in Japan? What criteria are required to implement sustainable finance?
What is needed to make this a facilitator of decarbonizing Japanese industry and society?
Is there a green premium for companies? Is there an economic benefit to cover the additional cost associated withgreen/sustainable finance? Individual companies do not currently have the scale to cover the additional costs of green
bonds at this time. With interest rates at an ultra-low level right now, it is conceivable that a rise in interest rates could
open up this gap. The market appetite will naturally lean toward green. In that case, the green premium is expected toincrease. In fact, the difficulty to obtain financing for coal-related projects will increase. In 2004, DBJ was the first to
introduce environmentally rated loans, in which environmental considerations are rated and reflected in the terms of
the loan. In some cases, customers are asked to take the assessment every year and the assessment is used to improvethe management of the company through the rating process, leading to higher stock prices and helping to strengthen
the company's long-term credibility.
The Bank of Japan was originally cautious about getting involved in climate change risk measures, but it has changed its
position due to the fact that major foreign banks have deepened their involvement in climate change risk measures, andbecause of the government's request for cooperation with carbon neutrality. Sustainability-linked loans, bonds, andtransition finance have just begun to be discussed in Japan, and if the Bank of Japan is directly involved in the screening
process when lenders and issuers greenwash their loans, the Bank of Japan itself bears the risk. The framework of theseGreen Operations is that the financial institutions themselves are responsible for their own classification, assessment,
and judgment.
The conditions for a financial institution to apply for Green Operations are the ones mentioned by the Task Force on
Climate-related Financial Disclosures (TCFD): governance, strategy, risk management, and disclosure of indicators andtargets. With regard to transition finance in particular, the Financial Services Agency and the Ministry of Economy, Tradeand Industry (METI) have taken the lead in formulating a basic policy. Currently, transition roadmaps are being presented
for each designated industry, starting with steel and chemicals. The key is how much can engagement between
companies and investors be strengthened by indirect financial institutions that do not have the coercive power of voting
rights. How can individual financial institutions understand the nature of their customers and projects, and how can they
ensure the commitment of companies?
As Japan moves toward decarbonization the vertical division of ministries and agencies in silos may be a major problem.
The UK created the Department for Business, Energy and Industrial Strategy (so-called BEIS), merging the previous
Department for Business, Innovation and Skills and the Department for Energy and Climate Change. Even before that,the same ministry was responsible for energy and climate change policy-making and implementation. In Japan, three
ministries are dealing with decarbonization: METI, the Ministry for Land, Infrastructure, Transport and Tourism and theMinistry of Environment.
The quickest way to bring in new wisdom and ideas is to change the organization. Now is the time for a new structure
to promote an industrial strategy for green, to achieve growth and green. Decarbonization has to be done withmultiple tools on the demand and supply side. We need to change the way we build our society and towns. We needto change the way we build infrastructure. Creating a decentralized, locally-produced and locally-consumed energy
community is synonymous with creating a city that is locally complete and has its own unique character. In order todo this, we need to create something like the Social Infrastructure Agency and send a clear message that we willbuild infrastructure in a completely different way.
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CAN JAPAN AFFORD TO ALIGN ITSELF SO MUCH WITH THE US ON THE
CHINA ISSUE
While the country is aligning ever more closely with the Biden administration’s anti-China policy, Japan's economy isincreasingly dependent on China – which has now replaced the United States as Japan’s largest export destinationaccounting for 22.9% of Japan's total exports. Until recently Japan’s China policy had been successful at not provoking
China too brashly thus ensuring Beijing’s acceptance of a hedging policy with the two super-powers. This was also madepossible by China’s keen interest in Japan’s investments and technology. However, this balancing act is becoming
increasingly difficult to sustain as Tokyo has aligned itself more fully with elements of America’s China policy – notably
the Taiwan issue - which are most offensive to Beijing.
There is no doubt that this rapprochement/alignment with the US China policy is increasing the risk of a backlash from
China and is creating a difficult situation for Japan. During his tenure former Prime Minister Abe handled the situation
very well because he was a very skilled negotiator but Japan’s balancing act between the two super-powers is becoming
much harder to perform. The situation was complicated later by the fact that - contrary to Mr. Abe - Prime Minister Suga
was unable to adopt a piecemeal approach towards China.
Prime Minister Kishida will try and hope to continue the present status quo with Beijing as much as possible but Taiwan
has re-emerged again as a central issue and it is almost certain that, at some stage, Beijing will react very negatively to
Japan’s latest rapprochement moves with Taiwan as the Taiwan issue is absolutely central for China. The Chinese
leadership is now seeing the US and Japan as enablers for Taiwan independence, and this is very dangerous. It is not
sure at all that China will back down if the US, Japan and even other countries take a much tougher stance on the Taiwan
issue.
There is no underestimating the increasing risk of a downward spiral in the Japan-China relationship. It is in this context
that Japanese corporations are trying to recalibrate their policies towards China, although they want nothing more thanbeing able to continue to benefit from the status quo. However, corporate Japan has come under growing pressure to
take sides. On the one hand Japanese companies are now unable to continue their relationship with Huawei, but on theother hand they face the increasing risk of being punished by Beijing for any boycott against Chinese companies given
the recent law that stipulates sanctions against foreign companies that would engage into a boycott of Chinese
corporations or products.
At the same time, Japanese corporations are increasingly concerned about China’s self-reliance policies which look at
the elimination of marginalization of foreign participation in key supply chains. Such a policy is now being pursued witheven more energy and efficiency, as a response to America’s containment policy towards China and this will increasingly
impact on Japan business prospects in China. Beijing considers that its domestic market is now so important that it can
dictate the terms of engagement to foreign companies This will not happen overnight but, over the medium term, weare going to see Japanese companies – large and small – having to adapt to a new era of doing business with China andhow to operate in this country. While there is no underestimating the challenges facing the Chinese economy, thesechallenges will be managed by the leadership, and it would be foolish to bet on a collapse or even a weakening of thiseconomy.
There is a risk that Japan’s closer alignment with America’s policy on China could lead not just to a boycott of someJapanese products or companies in China but to an anti-Japan mobilization as what happened in 2012. Then AntiJapanese demonstrations and violent protest erupted in a number of cities across China after Japanese nationalists
raised their country's flag on disputed islands.
As the Japanese government increasingly sees it in its interest to adopt policies which are viewed as hostile by Beijing,
the greater the possibility that something like 2012 can happen again. Many circles in Japan now consider that Japan is
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doing too much about Taiwan and that it would be time to tone down the rhetoric. If Japan takes a forward position
that the Biden administration will not support, then the country will pay a price for that. But it could be that Chinese
policies in Asia and Japan’s periphery in the recent years have heightened a sense of insecurity in Japan and this is the
motivation behind the emphasis now put by Tokyo on the Taiwan issue.
President Biden is trying to do a number of things to try and restore US leadership and America’s credibility as reliable
ally but, so far, his track record on the domestic as well as on the foreign policy fronts remains quite mixed and the US
society has never been so polarized and the political system so dysfunctional. In addition to that, despite all the talks ofdecoupling US companies continue to expand their investment in China and China’s exports to the US continue to grow.
In the present context, one can consider that any successor to Biden will be more to the right than any previous
president. The Chinese leadership sees this situation as an opportunity to move forward as it considers that if China
becomes strong enough it will have the ability to change the Western dominated global system. But looking at the
Chinese political calendar with the Winter Olympics and the 20th Party Congress at the end of 2022. So, what Xi Jinping
needs right now is stability and he is not going to take any precipitous action that would jeopardize the stability going
into that period. The Chinese government sees the business relationship as the ballast for the US-China relationship and
it is not going to take any action that would antagonize US businesses and reduces the role of this ballast. It has decided
not to attack or to put pressure on American companies.

CORPORATE GOVERNANCE: TIME FOR A STATUS REPORT AS CORPORATE
JAPAN GETS SERIOUS ABOUT ESG
Since the development of the Corporate Governance Code a lot of progress has been achieve on evaluating managers’
performance based on ESG parameters. However, Japan is in a race to improve its governance and management skillset
in order to retain its financial hub status, but the country is lagging behind in Asia in some of these areas. As one speakerremarked, “everybody knows in Japan that business as usual is not an option”. The ecosystem has really changed.
Investors have an incredibly diverse opportunity set in terms of unlocking the value that is in Japan. Monex set up theJapan Catalyst Fund to unlock Japan from the value trap that it is in.
Recent changes to Japan’s regulatory environment:
Second revision of Japan’s corporate governance code in June 2021 with 3 important elements:o The code aims to strengthen the board’s monitoring role
▪ Independent directors need to account for one-third or more for prime companies▪ Higher standard corporate governance required for companies listed on the Prime Market▪ Required establishment of nomination and compensation committees and the use of skills
matrixo The code focuses on diversity of core talent – diversity of management rather than diversity of board
memberso Requirement for prime market listed companies to disclose climate change related information on the
Task Force on Climate-related Financial Disclosure (TCFD).
Over 3700 companies are listed on five market segments, they are being restructured into three markets
segments: Prime, Standard and Growth. The Prime Market is targeted for global investors.
About 2200 are currently listed in the first section and they wish to transfer to the Prime market which means
they will need to qualify based on numerous criteria such as trading value, market cap etc… About 1800
companies are expected to qualify.
 There will be pressures to reduce core shareholdings as they will be excluded from the number of shares incirculation.
 There will also be pressure on smaller companies to keep the market cap of tradeable shares over 10 billion
yen to maintain the listing Companies under 10 billion yen will be excluded over the next few years.

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There have been remarkable changes since 2015; among them in the number and ratio of independent directors
increased dramatically, 73% of TSE first section companies appoint one third or more of independent directors. Researchshows that independent directors have raised the effectiveness of board meetings, enhanced the monitoring role of theboard, invigorated discussions in the board room and improved governance in Japanese companies. The length of board
meetings on average now exceeds two hours when it used to be under an hour. It is worth noting that there is a lot of
disparity in Japanese companies based on the number of independent directors, split roles between CEO and Chairman
and use of nomination and compensation committees. There are also disparities in the management of Board meetings
such as time dedicated for discussions and the level of engagement of independent directors. The way independent
directors see their role (more as advisor than monitor) also makes a difference.
Challenges:
Diversity: Female directors are still less than 10%. The ratio of non-Japanese Directors is much smaller
compared to Western companies. There is also a need to enhance diversity in background and experience sincesenior management is dominated by executives who have only worked for one company. Age diversity is also
a problem. People in their 60s account for 47% of all directors of TSE first section.
Another challenge is the responses to ESG issues. Japanese Executives have embraced the importance of ESG
and over 600 companies publish integral reports, but the quality of these reports is mixed. Some companies
need to improve disclosure especially on social issues. Many Japanese companies still look at climate change
initiatives as a cost not a focal point for innovation.
Quality engagement is crucial to reinforce and speed up positive change. In Japan internal executives still control mostboards and there are not that many truly active fund managers who take the time to properly engage.
Recommendations:
The governance code should set the compliance bar for independent directors at a majority – this should bedone for all listed companies so that internal directors cannot influence decisions.
TSE should amend its own governance code to no longer permit companies to define their own criteria for
independence as it is the case now. This would boost diversity and skillset by forcing companies to look more
widely for candidates The present practice is confusing for investors and makes comparisons hard.
The governance code needs to set forth more specific criteria for the composition, responsibility and operationsof Boards. For example, the CEO should not be a permanent Board member so that discussions on his/her
performance can happen unhampered.
Director training is crucial, more governance related training and learning is needed at both companies andinvesting institutions. Often, fund managers do not know enough about the dynamics of Japanese Boards andthus cannot engage effectively. Historically proxy voting did not have a lot of impact in Japan but this is starting
to change and this would increase investors’ influence on companies’ strategies.
There should be a merging and standardization of disclosure reports for TSE, FSA, MOJ to avoid redundant
reports and for reports to be published before – not after - shareholders meetings. Reports should be machinereadable to permit the use of AI. Disclosure rules should focus more on what companies actually did. If the ISSB
manages to globally standardize ESE reporting requirements, it will increase pressure on Japanese regulators
to further standardize their own disclosure framework and electronic formatting. Disclosure in Japan is unevenand the minimum level needs to be raised in order to allow for efficient comparisons.
A company’s strategic goal must be communicated clearly. Japanese companies often set forth medium term plans for
only 3 years. Otherwise, they have a really long-term plan for 2050. A more flexible period of planning is required.
From an investors perspective given that more than half of corporate Japan has net cash balances simple engagement
strategies around improving return on equity and shareholder returns - or actually having a dividend policy - will achievea lot. One issue is the “lethargy” of the traditional asset manager in Japan. Big Japanese asset management companies
are content with ticking the various ESG requirements and diversity boxes but there is not much in terms of actuallyengaging with management to improve the well-being of all stakeholders in the company they are invested in. The allies
are predominantly non-Japanese asset managers while Japanese asset managers are still very silent, passive andprocess-driven in their strategies.

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Another issue is the lack of policy framework set forth by the government, for instance on climate change. Japandeclared its 2050 net-zero goal but the government has not yet published a road map. Missing this kind of policy
framework for both investors and companies causes some difficulties.
In the context of a global race for global best practices, there could be a risk of backpaddling under the Kishidaadministration, where the Prime Minister may be looking for exceptions for mid and small companies rather thanpushing for better governance, greater diversity, ESG, etc… It is crucial to keep momentum. In Japan, global companies
are really ahead of the pack, putting pressure on the government to solve the energy problem, threatening to relocate
factories outside Japan in order to meet investors demand, etc). Global companies and investors have a key role inapplying pressure. There is a disparity with smaller companies. It is the JPIF, government pension system that was thefront runner and help set the global standard on ESG investment. However, the Japanese industry associations have notfollowed through. If this does not improve, necessary changes will need to continue to come from foreign pressure andfrom big companies.

ACCELERATING DIGITALIZATION AS JAPAN PRIORITY IN THE FIGHT FOR
PRODUCTIVITY GAINSThe use of AI, digitalization and new technologies can transform business processes and create additional value, increase
productivity and provide new experiences. However, if the pandemic had not considerably accelerated the digitalization
pace, Japanese companies were expecting a potential loss of up to 12 trillion yen by 2025.
There are three digitalization steps:▪ Within the company with cloud and security as the infrastructure supporting the process▪ The creation of a new business ecosystems with an evolution of business models▪ A paradigm shift with digital technology as the new frontier to solve social issues.
87% of Dx, or digital transformation, initiatives fail because:• There is too much emphasis on the technology• People fail to realize that a change management process has to bring everyone along• People fail to realize that mindsets have to be changed in addition to training people and getting the needed
knowledge and technology.
Successful digital transformation is about an organizational change leading to business performance improvement. For
some it can be process improvement and for others it can be product innovation.
Companies first start by piloting digital transformation in small business units (process, product or geographical unit
level) and then scaling within the company. Some start with their core business like retail or service companies whichusually start with product innovation. Others make a strategic decision to start with a periphery process or productinnovation. Are corporations in Japan ready enough to make the necessary adjustments for successful digitalization?
Role models and best practices are needed to show the way with success stories and a mix of top down and bottom-up
approaches, addressing Japan’s unique specificity and needs.
Digital transformation goes beyond the corporate framework, spreading across companies and industries and fosteringcollaboration. The issue is how to make the technology and data connected and open to all. The key is how to use
technology and foster a collaborative culture critical to progress.
In terms of the labor market impact, digital transformation has brought in some positive elements such as handling
repetitive and physically taxing tasks. In the hospitality industry for instance, humans are reallocated to higher valueadded tasks, hence increasing productivity while not leading to an overall reduction of hires. Nomura Research Instituteresearch has shown that 49% of work in Japan will potentially be automated in the next two to three decades. These

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figures are not much different from those in the US, with the difference that Japan will experience a labor shortage.
Digitalization will bring agility and speed but a sectoral approach is needed.
One concern with automation is de-skilling. With digitalization, tasks will be fragmented, and workers will only handle asmall fragment of the process. This will lead to skills elimination and monotony accompanied with physical, mental andpsychological issues. The other problem is wage drops as human and robot’s performances are compared. Labor
conditions could become more stringent and there could be a large discrepancy between highly skilled workers and socalled 4K workers. In that respect, Japan has not seen wage increases in a long time.
Digital transformation brings four categories of relearning, reskilling, upskilling:
1) Technology: the type of digital tools that a person can learn such as AI or blockchain
2) Data: the ability to understand and extract data and work with different data sets
3) Processes: the understanding of different processes and the development of new processes related totechnology
4) Change management: going from digitalization to digital transformation.
Companies are starting to focus on hiring digital talent which, added to the existing labor shortages in the digital service
industry, is fostering a competitive environment. This is enhanced by workstyle changes, the ability to work fromanywhere and the “cross skilling” brought on by new technologies allowing people to add new skills to their resume.
The Japanese government is starting to focus on the digital talent shortage but unfortunately much of the labor market
is not yet digitally oriented.
Companies usually deal with three different types of employees:
1) Digital natives: who have grown up with technology but need to understand change management.
2) Digital immigrants: who may not be completely comfortable with digital and are willing to learn but need thetechnology, data and process skills.
3) Digital ignoranst: who find digital technology alien, frustrating and have a negative attitude towards it. This
population needs change management in addition to content skills.
IBM, as a pioneer Japanese company, introduced system development where the core system was outsourced andrenewed every couple of years and the company focused on customizing the hardware and software. With theacceleration brought by technology, companies need more agile digital products developed in house which implies
having the IT people in house. This is a confirmed trend and the issue is to keep talent evolving at the same pace of aconstantly evolving technology.
IMD business school published in 2021 a world digital competitiveness ranking (capacity and readiness of countries toadopt and explore technologies as a key driver for economic transformation) in which countries are ranked in three
categories: digital knowledge, digital technology, future readiness. Japan ranked 28 out of 64 economies. The ranking
identified weaknesses in the Japanese digitalization process in the following areas: Digital technology and skills,
individuals with international experience, understanding of the opportunities and threats linked to digital disruption andthe use of big data and analytics. These areas should be of particular focus for the new Japanese Digital Transformation
Agency.
Guidelines still have to be outlined in terms of digital governance and corporate digital responsibility: how to achieve
digital transformation in a responsible manner? How to develop practices and behavior that can help an organization ora government use data and digital technologies in ways socially, economically and environmentally responsible. We
need a holistic approach moving away from silos. The concept of digital governance and of corporate digital
responsibility could help in terms of finding appropriate ways to spread resources – such as the ten trillion yen university
innovation fund – amongst different priorities such as climate changes, digital transformation et.

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THE LEAP FORWARD THAT ACHIEVING GENUINE GENDER DIVERSITYWOULD MEAN FOR JAPANJapan has implemented several policies to involve women more in the corporate and political domains with mixed
success. For instance, the 2003 policy targeting women to reach 30% of management and leadership positions and the2015 proposal to reach 10% of women board directors, both goals to be achieved by 2020, both unmet. Japan is now
implementing its fifth basic plan for gender equality “where all women and girls can thrive and achieve their fullpotential”. The plan does not go as far as setting quotas but aims at increasing the number of women in politics as wellas in managerial and director positions in corporations.
The issue is most acute in politics, as Japan is ranked 120th on the World Economic Forum general gender gap index,
117th in terms of economic participation and opportunity, 92nd in terms of educational attainment and 147th in termsof political empowerment. Japan is also lagging in terms of speed of change. As an example, in 2012 there were only 2%of female mayors in Japan and still only 3% in 2020. At the National level, only 10% of house representatives are womenand only 23% of senators are women. These percentages have not changed in the past 10 years.
There is no pressure in the political arena. Voters are not discriminating but the system is skewed towards theincumbents who generally are men.
 Pressure and change need to come from voters (majority of women).
 Quotas may force change but come with a set of issues.
In the corporate world, there is an undeniable shift, and change has been faster thanks to tremendous outside pressure.
For instance, Nissan’s Board now counts two women out of eight board members. The company has embraced diversity
as a strategy aiming at better competitiveness and better profits. At Nissan, 7% of managerial positions were held by
women 20 years ago. This has increased to about 11-12% nowadays. Change was initiated by a top down approach but
has now morphed into a trend through initiatives such as the company’s women leadership program that has also madea difference in men’s attitude. Some of the bottlenecks are social pressures as women are expected to shoulder the
responsibility for taking care of aging parents and raising children. However, mindsets are also changing on this front.
For instance, in 2012 Almost 60% of women would quit their jobs after having children as they could not find childcare.
This makes it difficult to find female talent that is willing and able to embrace new opportunities (like promotions abroad
etc…)
The pandemic may be helping to create a women friendly work environment. In April 2020, female unemployment was
double the male one because women were more likely to be part-time workers and thus easier to fire according to laborlaws. Even though remote work existed before, it was a limited option. The pandemic has changed Japanese workstyle,democratizing telework with the potential to transform the Japanese society and help the employment of more womenbeing involved through teleworking.
In terms of the role of Boards for diversity promotion, the revision of the corporate governance code in 2021 hasgenerated tangible pressure and a sense of urgency even if it does not quite go as far as introducing quotas, so actions
are being taken by many corporations. For instance, Itochu Corporation has set up a committee to promote women. For
the sake of objectivity and transparency the committee is an external body, advising the Board of Directors and counting
six members (half of them outsiders and half of them women).
Japan definitely needs to create a more women work friendly environment: Investors and social pressure are paramount to change Talent nurturing from school to the workplace: Only 6% of engineering students are women, and promotion
campaigns could open new education paths for young women. Later, while employed in corporations, womenneed to be nurtured to develop managerial experience to become as competitive as men with comparable
exposure.

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women – to benefit from their experience would be helpful.
 Changing mindsets: Europe got to 50% of female directors through the introduction of quotas which might
help changing mindsets, making the presence of women on boards something that is expected as the norm.
As a transitional solution this might help create a new reality.

LESSONS ON RESILIENCE AND BOUNCING BACKJapan is still on the arduous road to recovery from the shock and crisis created by the pandemic – and once again thehope and expectation is to see Japan’s resilience prevailing over the challenges and difficulties, as has been the case on
so many occasions in the past.
Of course, there have been many criticisms about the way the government in Tokyo has managed the crisis and this has
led to the resignation of Prime Minister Suga. But it is interesting to note that, contrary to what was the cases in almost
all other countries, the Japanese government did not act through edicts but rather proceeding with “recommendations”
that the people, by and large, followed even with some grumblings.
What constitutes the basis of Japan’s resilience when facing challenges and disasters? How to characterize thisresilience? How can it be strengthened further?
Is there any kind of “Japan exceptionalism”? Resilience is what is in stock among the Japanese and is in ample supply. It
comes from people’s voluntary commitment. It is not the result of any societal engineering process. In fact, this societal
system engineering was in scarce supply during the pandemic. Japan had no enforcement law to contain the pandemic
even during the Olympic games. The government could not do anything to get the hospitals to provide more beds forthe victims of the pandemic. Prioritization of policies could have been much more efficient had the country familiarized
itself with the notion of social system engineering approach.
Resilience is founded in the civic spirit and the patience of the citizenry. However, one key lesson to be learnt now is tore-design the nation’s provision of resilience. If one relies only on the patience of citizens for societal resilience, thesociety will grow weary. According to a survey of the people of France, the US, Sweden, the UK and Germany from aninternational consultancy, Japan looks as an outlier as the Japanese people emerges as the most pessimistic people
among those surveyed.
European governments took a very strong leadership approach in addressing the Covid crisis. They looked at it as a war
against an unknown disease and this made people understand that they could not pursue their lives as before and thatthe cost of fighting this war will have an impact on the level of taxation that will have to be imposed on the citizens andthat there would be a toll on the security of lives. They also emphasized that people should accept changes in policies
because this a war against an unknown enemy. By setting this stage they ensured that there could not be too highexpectations from the part of the people. This is a major difference with Japan where the government did not explainor emphasize enough the nature of crisis and people assumed that they could pursue their life as before. This made itdifficult to take the necessary measures without mentioning the cost.
In a way, the resilience of Japan is the resilience of its people and it has played its role in sustaining the country
throughout the crisis almost – one would say – despite the lack of proper leadership and of enough action from the partof the government. However, resilience is also the result of innovative and entrepreneurial spirit. It has been interesting
to see the capability of some Japanese companies to invent and to re-invent themselves in the face of adversity. Startups
were able to continue their business despite the restrictions and investment is now fully back. Revenues are going up
again and we are going back to normal.

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There are some worries about where Japan is going at the moment. Even before Covid hit in late 2019 the increase of
VAT created a small recession. Prime Minister Abe had a blueprint for action, great popularity, and the longest time inoffice. There was an opportunity to modernize labor market, to rekindle innovation, to reduce bureaucracy, to create
incentives for startups and innovation, to become a leader in renewable energy, to digitalize the economy and to invest
in 2025 – as China is doing. China is investing in the future, Japan is focusing on today. So, the resilience of Japan is due
to previous conditions and is not improving. And this should be a warning signal.
One can hope that Prime Minister Kishida will revitalize the economy but there is concern about the lack of new thinking.
This new thinking could become more visible once – having won the elections for the Lower House - Mr. Kishida canbring about his own signature policies. Japan budget is bigger in scale and size than Saudi Arabia or Turkey’s whole
economies. 73% of which is for fixed expenditures such as paying back government’s obligations, social welfare, etc.
The biggest task for any Japanese Prime Minister today is to rewrite the social contract, reduce social welfare for theelderly and give more to the younger generations. For any Prime Minister to be able to do that he, or she, must win
elections consecutively. We will need to see whether Mr. Kishida will win the elections for the Upper House in thesummer of 2022. One can hope that he could do that and come up with new plans for the future that will strengthen
the long-term resilience of the country. He knows how to run the government and how to make best use of thebureaucracy.
Japan’s resilience is difficult to fully understand for people who don’t know the country well. For instance, there is nounderestimating how Japan’s knowledge about China and its understanding of how China works and operates – which
is much better than European or American’s understanding of China - is also part of this resilience.
It is true that Japan is not investing enough in the future, contrary to China. In Japan only six out of one hundred newcompanies registered in the Tokyo Stock Exchange are hardware companies. We are losing diversity. We are losing therace towards digitalization, compared to some other countries.
Covid is an important test of Japan’s resilience. One key element for the future resilience of Japan is to make active useof the ample amount of cash and deposits which represent 40% of Japan’s GDP which are left sleeping. Covid is showing
the urgent need to make full use of these financial resources to prepare the future and improve its resilience. The
country has so much potential that Prime Minister Kishida could help unlock. No country is better positioned than Japanto provide the new sources of renewable energy that the countries around it, comprising three billion people,
desperately need.

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Roundtable Japan
thanks its sponsors

TOKAI TOKYO FINANCIAL HOLDINGS, INC.

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