COVER STORY • 2

Roundtable with Prof. Naoyuki Yoshino, Prof. Hiroaki Miyamoto, Prof. Tokuo Iwaisako and
Masakazu Toyoda

Recommendations for an Evolutionary Industrial
Policy to Achieve Broad Economic Security: What
Is to Be Done to Revitalize the Japanese Economy?

By Japan SPOTLIGHT
The Japan Economic Foundation (JEF) held a roundtable discussion on our recommendations for a new
industrial policy with the participation of the following distinguished economists, the members of ourresearch and study group having published the recommendations.
● Prof. Naoyuki Yoshino, Emeritus Professor at the Faculty of Economics of Keio University & Chairman of theGroup of Research and Study on “New Industrial Policy” organized by JEF● Prof. Hiroaki Miyamoto, Professor at the Faculty of Economics and Business Administration of Tokyo
Metropolitan University● Prof. Tokuo Iwaisako, Professor at the Institute of Economic Research, Hitotsubashi University● Masakazu Toyoda, Chairman and CEO of the Japan Economic Foundation (JEF)(Online Roundtable on July 29, 2022)
ParticipantsProf. Naoyuki Yoshino

Prof. Hiroaki Miyamoto

Comments on the Recommendations
as a Whole
Toyoda: Since the burst of the bubble economy in the early 1990s,
the Japanese economy has been stagnant for more than 30 years.
We call these years the “lost decades”. Meanwhile, in the regions
surrounding Japan, geopolitical uncertainty has been increasing, asshown by the intense US-China confrontation and North Korea’s
repeated offensive missile trials. The Russian invasion of Ukraine isalso not only a threat to Europeans but a serious threat to peace andstability in the regions around Japan. I believe that in thesecircumstances, the most effective way to achieve economic security
for Japan is to “maintain and expand” our national competitiveness.
Our research and study group aimed at assessing how to revitalize
Japan, with discussions among distinguished experts from businessand academic fields, and publishing our solutions in the form of
https://www.jef.or.jp/journal/

Prof. Tokuo Iwaisako

Masakazu Toyoda

policy recommendations.
Today, I would like the members of the roundtable to discuss why
they came up with these recommendations, how different they arefrom the policies of the current Japanese government and what
would be necessary for their realization. It is true that the Japanese
government has pursued a number of policies, such as those in the“Abenomics” package of late Prime Minister Shinzo Abe, and thecurrent prime minister, Fumio Kishida, has also recently announced
economic policies to realize a “new capitalism” with an emphasis on
income equality in his “General Guideline 2022 on Economic andFiscal Management and Reform”. However, we have not reached aperfect solution yet with any of these public policies.
First, Prof. Yoshino, our chairman of the group, could you pleasecomment on the recommendations overall?
Yoshino: Regarding Japan’s three decades of a stagnant economy, I
Japan SPOTLIGHT • November / December 20229

believe that the aging of society was – and is – one of the big
structural impediments. An aging society is said to be a structural
challenge facing South Korea and China also, and thereafter Vietnam
and Thailand. Japan is the frontrunner of aging societies, so I would
think we need to cope with it somehow to maintain economic vitality.
One of the issues in our aging society is the continuously
expanding fiscal deficit due to increased social welfare expenditure
for elderly people. What is most important about this fiscal questionis that there has been little change on the expenditure side these past
two decades, except for continuous increases in social welfare
spending that are now more than double what they were 20 years
ago. But expenditures on social infrastructure, education or defense
have little changed. Interest payments on the national debt have notincreased thanks to a special monetary policy keeping the interest
rate at zero or negative in spite of such a huge debt, and this is very
lucky for Japan. But at the same time, it is why politicians have neverbeen under pressure to reduce the fiscal deficit and it has not
actually decreased at all.
Another issue about the macroeconomic phenomenon around theaging society is the declining effect of monetary and fiscal policy due
to the larger percentage of elderly people who are less inclined to
expand their consumption.
Additionally, a Keynesian macro-policy would work to reduce
temporary unemployment but would not work well to resolve
structural economic issues. The relevant policies to deal with themmust focus on raising productivity by encouraging innovation.
Without such policies, the economy cannot be restored. The
challenge faced by the Japanese economy today is that there has
been little or no achievement in structural reform or innovation forthese 10-20 years. Our study group showed how we could achievethis.
I think that Japanese private businesses have not been working on
structural reforms so far. I believe that elderly people should
continue to work and contribute to society as much as possible
without having to retire so easily in order to maintain the vitality of
our aging society, but businesses must change their management
style. It is not a seniority-based salary and promotion system but a
productivity-based one that would provide all employees of everyclass and age with incentives to achieve their best performance.
Japan’s seniority-based system was established in the 1960s when
Japan enjoyed its highest growth era, since skilled workers had an
incentive to continue to work for small and medium-sized enterprises(SMEs) under this system and the burden for their labor costs
incurred was limited thanks to the high economic growth andinflation at that time.
In order to attract elderly workers to continue to work hard undera productivity-based salary system, companies can adopt ways to
10 Japan SPOTLIGHT • November / December 2022

keep hourly wages the same but fix their working days withoutbonus payments in accordance with their work performance. This is
how salaries can be changed in accordance with productivity but can
avoid damaging the working incentive of older workers.
It should be noted that in the high economic growth era in Japan,
with high interest rates for bank deposits, the money deposited
doubled in 10 years and thus workers’ income increased as well. It
was an economy that effectively achieved double income for all.
However, with the economy continuously declining today in Japan,
private business cannot afford to maintain a seniority-based salarysystem which expands their labor costs enormously.
If we abolish the seniority-based salary system and let older
workers continue to work under a productivity-based system, we
would need robots that could help them so, and this can lead todigital innovation. With such innovation over a wide range oftechnologies related to the aging society in Japan, we could develop
a large exporting industry triggered by new technologies.
Digitalization would wholly transform education and encourage theflow of residents into local areas. At this moment, the pandemic hasforced younger people to move to local areas with lower populations
than urban areas. Their primary concern is education for theirchildren. With digital education expanding all over the nation, allJapanese kids can take lessons from the best teachers wherever theygo. All that local teachers would have to do is supplement what theirstudents learned from their ‘virtual’ teachers. Thus, even without
good preparatory schools in local spots, remote education as such
could provide anybody willing to learn, wherever they live andwhatever their family background may be, with high-quality learning
opportunities. The local teachers could support them with
supplementary lessons on the spot. This would eventually improve
the quality of education overall and build up human capital as well as
enhance productivity.
Current government policies in Japan seem to be rather oriented
towards helping the weak. They help the less competitive business
firms to survive by providing them with credit guarantees. But forsurvival, I believe they have to achieve structural reforms, as thecurrent policies simply encourage these firms to continue the samebusiness operations and do not help them restructure their businessor raise productivity. This eventually leads to sluggish productivity
overall in Japan.
On the issue of the Environment, Society and Governance (ESG)and SDG investment for realizing a sustainable society, there is apoint to be corrected in promoting green investment. That is thedifferentiated definitions of ESG and SDG among the rating agencies.
Investors and large enterprises change the allocation of theirinvested capital in consideration of ESG or SDG after consultations
with the rating agencies. But with these differing definitions by therating agencies, their invested capital is not necessarily flowing into
sectors with the highest growth.
To correct it, theoretically, a unanimously agreed rate on a carbon
tax worldwide should be adopted, increasing taxes on firms withmore carbon gas emissions and lowering their profit rate, which
would eventually lead to a decline on returns for their investors.
Investors would monitor such after-tax returns and their invested
capital would be allocated to firms with the highest returns after tax.
On the final part of the recommendations, the possibility ofJapanese policy support for the development of Asia, high-quality
infrastructure and support for SMEs are the principal areas where
Japanese experience could contribute most to their economic
development. I think we can enhance such contributions from nowon.
Miyamoto: The Japanese economy has been stagnant for the last
three decades. As for GDP per capita, a good indicator of national
wealth, Japan exceeded the United States early in the 1990s, but now
Japan’s ranking has declined to 28th in the world. This means thatthe problem is structural rather than cyclical. In order to reverse thedeclining trend of the Japanese economy and put it back on a robust
growth path, drastic structural reforms are needed. I agree that thevarious points raised by Prof. Yoshino would lead to improved
productivity and long-term economic growth.
Iwaisako: It is true that Japan has been lagging behind in term of
economic growth. On the other hand, while income inequality has
increased significantly around the world, the increase in inequality inJapan has been only mild. I consider the current situation to be aconsequence of Japanese businesses and individuals having been
exposed to less rigorous competition. This may have been abeneficial choice for Japanese companies and workers in somerespects, but from now on, when we need to promote structuralreforms, we have to be ready for a temporary widening of inequality
at least. I would like to add that promotion of the structural policies
we recommended as a study group summarized by Prof. Yoshino
will not necessarily free us from the pains accompanying them.
Yoshino: Structural reform policies attempting to transform zombie
companies into competitive ones would create pains in the form of
increased unemployment in the sectors losing their competitiveness.
In order to mitigate such pains in changing jobs, we would need toprovide sufficient retraining opportunities, which have not been
widely implemented so far in Japan. We can now take advantage ofthe digital economy and make it possible for those leaving a job toreeducate themselves in various ways by using smartphones.
Digital technology could be applied to not only education at

schools but also professional training programs. With such
retraining programs free of charge provided by the government andprivate businesses through digital technology for everybody at any
time, income inequality would be reduced. Such education by digitaltechnology ensuring equal opportunities for learning would
encourage competition in the long run. With this, we can pursue asociety where people studying hard and doing their best would be
successful, while a safety net for the weak would also have to be welldeveloped.
Another point to be noted about our policy recommendations is
the proposal for improving the quality of bureaucrats in charge ofpolicymaking in Japan. Unfortunately, the quality of their work is
declining and officials increasingly quit jobs in government offices
while they are still young. This means that they find their jobs lessattractive.
I have been thinking about the requirements for bureaucrats inGermany, Japan and France at the international conferences that I
attended. American and British officials can work freely in English,
their mother tongue and the language used at various conferences
and in international organizations and even in Asia. Americans workin English and promote business development without the help ofgovernment officials, but Japanese, German and Frenchbusinesspeople could face a challenge in international competition as
English is not their mother tongue. Germany has a governmentorganization similar to JETRO in charge of helping businesspeople inbusiness negotiations and attending international conferences. The
French are also engaged in similar government-private sector
collaboration. In this regard, without competent bureaucrats, theJapanese would find doing international business more challenging.

Transformation of Business Management
Toyoda: On the question of business management reform, ourrecommendations refer to not only large enterprises but also SMEs
on their need to change their management style. On large enterprises
in particular, they need reform of their management style from aseniority-oriented one to competency-oriented one. What is to bedone specifically for this? Why do they have to do so? Prof.
Miyamoto, please start the discussion.
Miyamoto: After the burst of the bubble economy, the Japanese
economy fell into long-term stagnation. During this period, Japanesebusinesses have become less aggressive and their management has
become defensive. To be more specific, they ceased to invest in
human resources and capital. Wages also remain stagnant. Wages
are basically determined by managerial judgement and thus without
a positive business outlook or a rise in labor productivity, theyJapan SPOTLIGHT • November / December 202211

cannot be raised.
What could firms do to break through such a closed situation? Our
research and study group proposed that the seniority-based wage
system be abolished and replaced with a merit-based wage system.
A notable characteristic of the seniority-based wage system is thediscordance between productivity and wages. In this system, while
young workers get a salary lower than their productivity, the aged
have a salary higher than their productivity. By continuing to work
until retirement age, a full working life salary and overall productivity
can be well balanced.
But what would happen if this system does not work well?
Talented young workers are discouraged to work hard, since they
have to work with wages lower than their productivity. On the other
hand, companies would be reluctant to employ older people, eventhough many of them are competent and experienced with goodbusiness networks, since companies would have to pay them higher
wages under the seniority-based wage system. Indeed, companies
tend to lower the elderly’s wages by rehiring them as non-regular
workers after their retirement. This means that competent older
workers are not given good working opportunities or high wages.
Our solution is simply to make productivity and wages equal, thatis a merit-based wage system. Its largest merit is to provide anybody
from any age group with working opportunities. The more competent
they are, the higher salary they could earn, regardless of age or
gender. This is a good system in terms of the possibility of raising acompany’s produced value-added by enabling diverse people to work
together, which would lead to enhanced productivity. One challenge
is to have proper work performance assessment in a merit-based
system. Japanese companies have unfortunately been incompetentin fair and objective assessments of job performance based on aworker’s skills or what they achieved in their jobs, since they havebeen used to salary and promotion decisions based on the numberof working years or faithfulness to faction leaders within a company.
So now we must start developing fair and objective working
performance assessments.
In the US, for example, wages are determined in negotiations
between the employee and the manager according to how many of
the goals set by the employee have been actually achieved and how
much reward is to be paid for them. In this way, objective
assessment of the work performance has been established.
An additional merit of performance-related pay is to make it easy
to practice a new working style. Many companies in Japan adopted
teleworking during the pandemic. But according to a survey onteleworking, managers pointed out that “they do not know how welltheir staff are working” and employees say that “they do not know if
the managers correctly evaluate their working performance.” Thismeans that they do not have any job performance assessment
12 Japan SPOTLIGHT • November / December 2022

system. In Japan, without person-to-person contact between an
employee and a manager, it would be difficult to demonstrate how
well he or she has worked.
This is very inefficient, because long working hours would notnecessarily lead to high productivity. With a relevant work
performance assessment, shorter working hours producing
sufficient output could be correctly evaluated. A merit-based wage
system thus encourages a more efficient working style.
As for SMEs, we could avoid producing inefficient zombie
companies. There have been industrial policies in Japan, in particular
related to SMEs, that have prevented or retarded the entry and exit offirms, which could have an adverse effect on competitiveness. From
now on, with a proper understanding of efficiency by both businesspeople and politicians, there need to be drastic reforms to promote
new entrants and eliminate vested interests to strengthen Japan’scompetitiveness.
One example of various policies negatively affecting businessgrowth is subsidies for employment adjustment. This may have beeneffective in stopping bankruptcies during the pandemic andpreventing an increase in unemployment, but at the same time it istrue that it has retarded business and structural reforms.
According to the Tokyo Shoko Research Survey on corporatebankruptcies, there were fewer bankruptcies in 2020 in the midst of
the pandemic than in 2019 before the outbreak of the pandemic. It
may be true that employment adjustment subsidies worked well, but
it may also be the case that the subsidies saved companies thatshould have gone bankrupt in accordance with the market
mechanism. I think such policies which could prevent efficiency need
to be gradually changed.
On the role of financial institutions in structural economic reformin Japan, I would like to mention a view introduced in our researchgroup discussion – that it is important for financial institutions toraise their business value from now on by sharing their businessplans with their supporting companies.
Toyoda: How is it that Japanese companies cannot seem totransform their seniority-based system into a competency-based
one? Any additional remarks on this issue?
Yoshino: I think Japanese business firms find it difficult to assess
differences in competency. In the US this is not true. For example, in
US universities professors can be fired or their salary reduced if they
produce few academic research outcomes or poor teaching inclasses. In Japan, managers hesitate to make distinctions inassessments of their employees’ performances, but I think theyshould be more used to doing so.

Iwaisako: In order to enhance labor mobility we will need to reformthe Japanese labor law system which excessively protects theemployment of permanent employees. Japanese universities havestarted to introduce an annual salary system and it is mostly adopted
for younger faculty members. However, from the viewpoint of
employees, if the average salary remains the same, there is no
incentive to accept an annual salary system based on detailed
performance evaluation. If an annual salary system is to be used, thesalary must also go up on average. I believe in this regard that our
average salary should be raised if an annual salary system isadopted, not only the salaries of the professors with good
performance.

Reform of Universities
Toyoda: Our recommendation point out that universities need to bereformed as well. It is true that the global ranking of Japanese
universities is continuously declining. Prof. Iwaisako, could you tell
us what are the challenges Japanese universities face and how they
can be mitigated?
Iwaisako: Japan has failed to take any initiative in creating a global
ranking system of universities. We have just observed that the US
and European leading rankings have become global common
measures for assessment of university performances.
Japanese universities need to provide education both in English
and in Japanese. On the one hand, top universities in mature,developed countries have historically had a responsibility to thesocieties to which they belong to educate their own elite groups intheir native languages as well as in international languages, such as
English and French. Japanese universities face the challenge of how
to balance such social responsibility and the need to meet thedemands of globalization.
Put another way, it is important to clarify what role the country
and its people want their universities to play, and to what extent.
Unlike in South Korea and China, which are interested only in raising
their universities’ global rankings, there are social responsibilities
that universities in Japan and in Europe have been taking historicallyto foster elites in society and enhance the overall level of national
education. We cannot give up these responsibilities just to raise
global rankings.
So a nation needs to think seriously about how it can achieve
consistency between both global rankings and the national role ofuniversities in its own society. But it is an undeniable fact thatJapanese universities are behind in globalization. This is self-evident
in looking at the number of foreign faculty staff. This lack of diversity
is an issue faced by Japanese businesses as well. What matters here

is how we can attract to Japanese universities or Japan as a country
to live and work in not only superstar professors or CEOs but also
medium-level experts with an annual salary from 10 to 50 million
yen whose professional skills would be welcomed anywhere in theworld.
The primary factor in attracting such high-skilled workers is salary.
It is true that the wage level of Japanese workers is low and inparticular professors’ salaries are low. However, I also would like topoint out that higher education has become rapidly commercialized
on a global level since the beginning of the 21st century. So in top
universities, in particular in departments or academic areas closely
related to business opportunities, the salaries of professors havebeen rising significantly. It will be extremely difficult to attractcompetent academics to Japanese universities based on the salarystandard of the average Japanese professor. With current salarylevels, it is also hopeless to attract even Japanese academics
working in overseas universities to return to Japan.
In US universities, the salary level differs among areas. In
business schools, medical schools or some areas in engineeringschools, a professor’s salary is extremely high, but low in otherfields like language studies, literature or in education schools.
Whether similar differences in salaries would be accepted in Japan isa challenging question. In Japan as well, different salary standards
have existed among universities since the old days, but there havenever been any differences among the faculties in a university.
Changing this salary system in a Japanese university would be rather
a decisive reform.
In addition to salaries, in order to attract high-skilled foreign
workers a Japanese university would need to conduct faculty
meetings in English and prepare its administrative procedures inEnglish as well. More importantly, questions about family matters,
particularly their children’s education in Japan, need to be properly
addressed. To attract competent researchers from around the world
to Japan, we must accommodate high-quality education facilities fortheir kids in Japan. They are thinking about enabling their children
ultimately to enter top universities the US or elsewhere. In this light,
they need to be educated in English in Japan. But such an
educational environment is difficult to facilitate in Japan. This is achallenge not only for universities but also for businesses.
My last point is that there is a sensitive issue remaining between
the Japanese Ministry of Education (known as MEXT) anduniversities. That is, once they can collect large funds on their own,
the ministry’s influence over them will inevitably decline. The
bureaucrats would not like any policy limiting their power. So MEXT
is reluctant to allow universities greater fund-raising capacity. Thismeans that politics needs to play a key role in achieving fundamental
university reform to expand a university’s autonomy. We needJapan SPOTLIGHT • November / December 202213

politicians determined to enact fundamental reform.
Toyoda: In the US, even state universities collect donations on alarger scale than the grants they receive from state governments. It
is certainly an issue whether the Japanese Education Ministry would
allow such freedom for Japanese universities. However, even in
Japan, there is a tax system for donations at least. Would auniversity’s autonomous action to raise salaries by taking advantageof this system not be allowed in Japan either?
Iwaisako: Only a limited number of universities are allowed to do soin Japan. Designated national universities enjoy this freedom assuch. The top national universities are eager to be designated ones,
not because they expect direct advantages from budget allocations,which are not so great, but because they want the freedom for fundprocurement. For example, they could scrap very old government
officials’ residential apartments on their campus sites and sell theland to private concerns or build new ones for rent to earn funds.
In the US, donations are socially well accepted and the names ofmany large donors to business schools are attached to the names of
those schools, but this would be most unlikely for Japanese national
universities, as it would not appear to be socially acceptable.
Special knowhow is necessary if a university’s management is todepend upon donations from outside the university. It is not an easytask. Sporadic donations every year will be affected by the donors’
financial situation, largely depending upon the general economic
situation, and thus these are not stable sources of revenue. To getstable revenue, there are endowment funds with large sums ofmoney piled up in US universities. These enormous sums guarantee
a large annual expenditure on routine costs such as salaries for
professors and research activities, as well as maintenance of large
facilities. I think it would take time to build up this system. Of course,
it is better for Japanese universities to start working on this
immediately, but even if they can collect donations more freely, it
would take another two or three decades for them to build up suchan American system.
Yoshino: In the international university rankings, the rating institutes
cover only papers and articles published in peer-reviewed English
professional journals for their evaluation. Papers written in Japanese,
German or French are not covered for evaluation.
Recently in Asia, a few Singaporean universities have achieved
higher ranks, but they are concentrating on this by such means as
inviting a number of leading scholars to their faculties orstrengthening job search guidance so their students can get goodjobs in big prestigious corporations. Meanwhile, many Japanese
universities concentrate only on raising their deviation value
14 Japan SPOTLIGHT • November / December 2022

estimated by large preparatory schools showing how difficult it is topass their entrance exams, meaning how smart their students are, astatus considered important in Japan.
On a different note, I believe professors of finance and monetary
policy would need to work hard to catch up with the latest trends inacademic progress in this area, and in this respect the efforts ofprofessors working in Economics Departments are different fromother human sciences professors’. I think we should take account of
their productivity in the salary system and pay higher salaries for
distinguished professors.
Miyamoto: The question is whether Japan provides a good working
and living environment for foreign experts working in Japan. Earlier,
we talked about the need for a proper education system for theirchildren. I think that we should seriously consider how Japan can bea country that attracts foreign high-skilled workers. The International
Institute for Management Development (IMD), a Swiss businessschool, created an index of attractiveness for foreign experts. It
ranked Japan at 49th among 64 countries, an extremely low level. It
is not only universities but also private corporations that cannot
attract distinguished experts from outside Japan due to the lack ofsocial institutions providing a good environment for their living andworking. We must change this.
Yoshino: What matters for foreign experts in living in Japan is not
only their children’s education but also jobs for their spouses, sincemost of them have jobs as well.
Toyoda: The whole of Japanese society must become more friendly
for English-speaking people. I guess English is not yet commonlyused in Japan.
Iwaisako: I do not think in the center of big cities like Tokyo you
would find it difficult to make yourself understood in English. Of
course, it is different from New York or London where you cancommunicate anywhere in the city in English. But even in Tokyo, you
can communicate rather well even if you speak only English. However,
it is one thing for ordinary foreigners to be able to live in Japan
without speaking Japanese that much, and another to be able to workat universities or in businesses when high-skilled foreign experts are
expected to play major roles, without being aware of language
barriers. The English required at such a level is very different.
In shopping at a supermarket or talking with a railway official at a
station, there would not be any great challenge but buying or renting
a house for a family would need more language skills.
While in US universities, there are staff in charge of life support for
the foreign faculty and also specialists providing advice or services

to find good schools for their kids, there are none in Japan, not onlyat universities but also in business corporations. In other words,
they would need to speak a high level of Japanese rather than daily
conversation level.
Japanese youth today, in particular in the big cities, can speak
better English than the global average. Young Americans, though allof them speak English as their mother tongue, are mainly interested
in their own country rather than other nations. I think young
Japanese are more internationalized than young Americans. Even
compared with Koreans, in the sense that there is a wider range ofinternationalized youth in Japan, I think young Japanese are moreinternationalized. So foreign experts having started to work in Japan
would find it easy to get used to daily life here. The problem is thatthey would find it not easy to work on more complex duties related
to their life and work in English, as they would find much fewer
Japanese who could speak high-level English and provide them withgood advice. Therefore, we must have more Japanese who are
comfortable with speaking and explaining about more complicatedmatters in English.

took a long time for the Tokyo Metropolitan Government to count the
number of people infected, since they counted the numbers of faxes
sent to them from each health center and put that data into a
computer. This is truly outdated and an unbelievable story. It would
be even more problematic if there was nobody in their offices who
was critical of it. Of course, there was a shortage of digitalequipment but what concerned us more was that there was none
who had the technical skills for digital operations. I agree with Prof.
Yoshino in saying that digitalization cannot progress unless theJapanese civil service system is reformed into a digital-friendly one.

Digitalization & Regulatory Reform

Iwaisako: Well, I think this is not limited to Japan. But in Japan wehave a very robust hierarchy system. Once the seniors decide on
something, their subordinates cannot change it without the seniors’
agreement, and thus excessive security protection can be inflexible.

Toyoda: We need more deregulation to promote the digital economy.
On the digitalization and deregulation of the Japanese economy, how
do you think foreigners would view it?
Yoshino: When foreigners try to undertake difficult administrative
procedures, they have to hire lawyers able to speak Japanese
fluently, as they cannot do it in English. Administrative forms forvarious procedures are not digitalized and they have to go to offices
and get forms and fill them in and explain about the forms in face-toface meetings with the responsible officials.
This is truly laborious work. To reduce this we must reform thesystem and digitalize all such procedures so they can be done inEnglish and be easy to do very quickly. In order to achieve this, wewould need to reform the Japanese civil service system eventually.
We need more English-speaking government officials involved inadministrative procedures who could talk with foreign customers in
English. They would then find Japan a very business-friendly society.
Above all, the financial sector is the one in strong need of such
reform. In order to make Tokyo the most competitive financial
market in Asia, we would need to enable all administrative
procedures to be done in English rather than Japanese, otherwise all
the large financial institutions will be gone to Singapore.
Miyamoto: Japanese government offices are still working with paperand fax machines. At the beginning of the pandemic, I heard that it

Iwaisako: Japanese government officials in the lower ranks tend
automatically to protect information that is not necessarily importantwith security passwords. That prevents the smooth flow of
information. The situation is the same both in government offices
and business corporation offices. We must be determined to fix it.
Toyoda: Is there no excessive protection of security in the US andEurope?

Civil Service System Reform in Japan
Toyoda: Reform of the Japanese civil service system is unanimously
considered important by all of us in our recommendation. Prof.
Yoshino, could you tell us what needs to be done for this reform
specifically?
Yoshino: First, in the case of a vertically divided administration likethe Japanese one, every official tends to be strongly conscious ofprotecting their own ministry’s or agency’s interests. But I think
Japanese government officials need to work for the whole national
government. To lead them in this direction, all government officials
must be recruited as a whole, not by each ministry or by only two or
three groups. Then they should be transferred among the ministries
horizontally. This is how they need to be educated comprehensively
as civil servants working for the whole national government and not
as officials working in the interest of each ministry.
Next, Japanese government officials’ working time is excessively
devoted to Diet discussions. I think that working on assumed Q&A
prepared for ministers in advance by government officials is a wasteof time and energy. It is important for each minister to discuss policy
issues intensively with Diet members in each session without
Japan SPOTLIGHT • November / December 202215

prepared Q&A, just like in an academic conference. So I think, inprinciple, that notification of questions in Diet sessions can be donea week beforehand and the persons responding to those questions
should be the ministers.
Toyoda: Asking young officials about a vertically divided
administration, they answered solidly that it would be fine with themto eliminate such an administration. The thinking of reformers lags
behind that of these young officials, and this gap could discourage
incentives for the latter.
Miyamoto: It is an undeniable fact that the country runs smoothly
because bureaucrats are excellent and work well in driving theadministration. Even with long hours on Diet affairs and insufficient
overtime pay, they support the administration well. But there arefewer candidates for bureaucrats among young people and moreover
many of them increasingly quit soon after having started work. Thisis the time when we need to change the civil service system toenhance attractiveness of work as a bureaucrat.
Iwaisako: I have a concern about the recent criticism of bureaucrats
in Japan. The scandals regarding government statistics in recent
year have revealed that officials in some ministries working on
statistics have not done their job well for a long time, prompting theargument that the nation should not spend so much money on theirsalaries and the number of civil servants should be decreased. But all
this occurred because of the shortage of human resources for dataand statistics compiling sections. There are very few Japanese
government officials in terms of their ratio to GDP. In this regard, it iswrong to say the number of government officials should be reduced,
and there must be many cases where the number should be
increased in response to the needs of the work.
In particular, in the case of the government’s economic statistics,
private businesspersons on temporary transfer to government
offices are also engaged in this statistic-making. But we cannot get
precise data unless the administration acknowledges these workers
as professionals and pays them accordingly and provides sufficientnumbers of such statistical workers.
The argument over reducing the fiscal deficit for fiscal
sustainability must be fundamentally related to the question of social
security expenditures, and whether the government increases ordecreases the number of statistical workers will not change so muchthe overall fiscal deficit.
Toyoda: As you mentioned, the percentage of young bureaucrats
quitting their jobs after only a few years is increasing. In this light,
we see the Japanese media today highlighting the need to improve
16 Japan SPOTLIGHT • November / December 2022

their working environment as well as the quality of their work. Could
you elaborate on this?
Yoshino: I believe that they should build up a competency-basedsalary system and pay salaries as high as in the private sector for
those with high competency. For example, the salary of officials on
the managerial track should be same as the average among the 100
companies listed on the first section of the Tokyo Stock Exchange
and their pensions should be equivalent to those in other major
nations in the world. They should also enrich programs for training
and studying abroad and set up an online education system. As wehave seen an increasing number of remote meetings since thepandemic, we should promote online training for bureaucrats suchas web seminars among global leaders when they are not so busy.
That, I believe, would lead to the establishment of a support system
by Japanese bureaucrats for the global development of private
businesses.

Mobilization of Labor Market
Toyoda: I agree that the government sector may as well get rid of its
seniority-based salary system and transform it into a productivitybased one, as well as in universities and business enterprises. Whatmatters would be a competency-based system rather than aseniority-based one that could achieve labor market mobility. Prof.
Miyamoto, what do you think about this? Enhancing labor market
mobility may cause pain, but do you think it is still necessary?
Miyamoto: I think that Japan should thoroughly promote labormarket mobility. There will be criticism that it would cause unstable
employment and have a negative impact on workers’ welfare. But I
think the opposite would be the case. With labor market mobility,
people would be able to work in accordance with their own lifestyleor preferred work-life balance. In order to achieve an individual
worker’s optimal career path as well, promotion of labor market
mobility would be an ideal policy option, as workers would be given
many job opportunities with it.
Mobility means not only active movement of labor, but also more
freedom for workers to move whenever they prefer. Thus, labormarket mobility does not necessarily mean the end of lifelong
employment. If some people want it and it is possible, they can stillchoose lifelong employment. So labor market mobility would have avery positive impact by enlarging the freedom to choose.
The Japanese employment system, such as lifelong employment
and seniority-based wages, has become ingrained. The Japaneseemployment system was created and prevailed in the postwar higheconomic growth era. There were two factors that made it possible:

rapid economic growth and a large youth population.
Since Japan’s economy kept growing, firms had to recruit moreworkers every year. The increased labor demand was met by thelarge youth population. Once hired, the employees were never asked
to leave the companies, and de facto lifelong employment wasestablished. With the economy growing for many years, salaries
continued to rise annually. And the longer people worked, the higher
their salary grew. This is how the seniority-based system was built
up. But regrettably, these two preconditions do not exist anymore in
Japan. We see stagnant economic growth and an aging society.
These changes have made it difficult to maintain this employment
system, and we now need labor market mobility to provide all thelabor force with job opportunities.
From a macroeconomic perspective as well, it is important topromote labor market mobility. Academic research shows that labormarket mobility would enhance productivity and achieve the “right
person in the right place”. The Japanese labor market is inflexible
and enhancing its mobility could be a challenge for some in the shortrun, but in the long run I believe its merits exceed its demerits.
According to a survey on employees’ satisfaction with theircurrent job in Asian countries conducted by Persol Research &Consulting Co., in Japan only 52% of respondents were willing tocontinue in their current job. This is the lowest among the Asian
countries covered by the survey. This means many Japanese
workers do not necessarily want to continue with their jobs.
However, on the question whether they will change their job, only
a quarter of the respondents say they would. This survey implies that
there are many people who are not satisfied with their current job but
have no choice but to stay in it. The reason for this is that theJapanese labor market is rigid. By enhancing mobility, I think there
would be many more chances and job opportunities for people, andthat is why I believe the Japanese labor market should be mobilized.

Role of Universities in Revitalization of Local
Economies
Toyoda: Regional governments and universities are expected to playa key role in the revitalization of local economies and collaboration
among industry, government and academics. With the developmentof regional economies, the whole Japanese economy can achieve
growth. What role do you think regional universities andgovernments must play to achieve it, Prof. Iwaisako?
Iwaisako: Such universities must think about what role they are
expected to play in local society, and it is important to encouragethem to contribute to their local economy through consultations
about regional situations and circumstances.

On regional governments, they need to select the services they
provide and concentrate their resources on them, integrating themwith local bodies under the prefectural government. Otherwise they
will suffer from fiscal challenges that could result in national fiscaldifficulties. Selection and concentration of regional governments’
public services is becoming a policy led by the national government.

Arguments on the Fiscal Deficit
Toyoda: While some people continue to warn about Japan’s
expanding fiscal deficit due to a variety of issues ranging from the
Ukraine crisis to climate change, there are others such as advocatesfor Modern Monetary Theory (MMT) saying a fiscal deficit would notpose any challenge. What policy direction on this issue do you think
our research group has provided?
Yoshino: In the US, the MMT argument was that an increasing fiscal
debt should not be regarded as a great challenge, as the central bankcould increase money supply by taking on the burden of the fiscal
deficit. But this was found to be wrong in Europe and the US, andnow all the governments there have started monetary tightening
policies.
The biggest issue regarding the fiscal deficit is the increasingsocial welfare expenditure that is dragging significantly on theeconomy. In responding to this issue, our recommendations argue
that enabling elderly people to work as many years as possible byabolishing the seniority system and promoting labor market mobility
would greatly reduce social welfare expenditures. With older people
working longer as much as possible, their dependence upon social
welfare would decrease and thus the national debt would decrease as
well.
Meanwhile, we need to increase tax revenues. An environmental
tax is an effective way to do this. Climate change is a hot policy issue
worldwide. As Japan is the host country for the G7 in 2023, it would
be a good idea for Japan to propose a carbon tax or environmental
tax at a global standard rate at the G7 forum.
At this moment, many countries including the US and developing
nations need an incentive to have a new tax, as they suffer fromfiscal deficits. In order to reduce the burden on industries withextremely heavy CO2 emissions like the steel or automobile
industries, the concept of net CO2 emissions could be applied. For
example, with those industries’ green investment in forestry or solar
power or offshore power, the saved CO2 emissions achieved bythese investments would be subtracted from the original emissionsof these industries and thus the tax would be imposed on net CO2
emissions. Such an environmental tax at a globally standard ratewould total a huge amount. This idea could contribute to a reduction
Japan SPOTLIGHT • November / December 2022

17

in Japan’s fiscal deficit and avoid to the need to raise theconsumption tax significantly.

Conclusion – How Can Our Policy Proposals
Be Realized?
Toyoda: These policy recommendations are made from a perspective
different from that of the Japanese government. Could you each state
your view on how they can be realized?
Iwaisako: There is no silver bullet for fixing all the problems. It is not
only Japan but also the rest of the world that faces the need ofstructural reform. It is certainly true that the Japanese economy has
been stagnant for decades but income inequality has not been as
significant as in other advanced nations. On this point, I would like toemphasize that with policies to promote competition to raiseeconomic growth, income inequality must be accepted to someextent.
I also would like to say, however, that expanding income inequality
does not mean an increased need for a social safety net. There will
naturally be wealthy people and not so wealthy people as a result of
free competition, but this does not mean that the sociallydisadvantaged people’s interests will be neglected. We have topromote further competition to realize more efficiency in our
economy while securing a social safety net for the weak. This is myfirst point on achieving the goals of our policy recommendations.
One more point is that what the Japanese government must
protect from the economic difficulties of structural reforms areindividuals and households and not business corporations. The
government should build a new society where unemployed people
can find new jobs easily. It should concentrate on helping individuals
instead of saving zombie companies, and it should prepare aminimum safety net for those individuals.
Miyamoto: The most important thing is that we must have a
confirmed goal. We need a national consensus about what kind ofsociety we want to aim for.
Under the Abe administration, we had the goal of getting out of
deflation. Under the administration of Prime Minister Yoshihide
Suga, we set a digital economy and tackling climate change as goals.
We must now think seriously about the future direction of oureconomy and find a goal. In my personal opinion, we should reverse
the trend of economic decline during the past three decades. Our
research and study group stated the reasons for this decline in ourrecommendations and so we should try to tackle these factors.
As Prof. Iwaisako mentioned, Japan’s economy has not grown, but
income inequality has not widened either. In fact, Japan’s Gini18 Japan SPOTLIGHT • November / December 2022

coefficient, the indicator of income inequality, has not increased in
the last 20-30 years compared to the US and other advanced
economies. So should we keep our current economic situation as it
is? If not, it is important for citizens to discuss what kind of
economic society we should create.
In the US and other advanced economies, while “Neo-liberalism”
has promoted economic growth, it has had adverse effects onsociety, such as widening income inequality and climate change
issues. Given this background, there is a tendency to revise
capitalism, which I sympathize with. But I think that Japan has notreached that stage yet. The government is now advocating a “newcapitalism”, but I think it is important to firmly carry out “ordinary”
capitalism in the first place. I personally believe that with policies
encouraging the functions of market mechanisms, the Japanese
economy could achieve further growth.
Yoshino: I think the aging of society is one of the big factors behind
the Japanese economy being stagnant in recent decades. In
addressing this issue, a productivity-based salary system including
the elderly rather than a seniority-based one would raise Japanese
productivity. With this reform, I think competition among companies
would be encouraged. With the inclusion of older workers in thisreformed system, the need to think about innovation to help older
workers would bring forth new industries.
In Japan we have less inequality and the pains accompanying
structural reform are eased by a variety of policies which expand thefiscal deficit. In other words, though it is wonderful to correct
inequality by safety-net measures, this has invited the expansion of
the fiscal debt. We cannot adopt policies from now on that support
zombie companies and lead to the expansion of the fiscal deficit.
Instead, the government should provide equal opportunities for all
individuals and companies through digital technology.
With further digitalized education, children can listen to the bestteachers’ lectures on their smartphones wherever they may live, andthis would provide them with equal opportunities. Students atregional universities could benefit from remote education as well bylistening to the best professors’ lectures at any time online. This is
how remote education could expand the value of human capital.
Finally, I would like to emphasize that a productivity-based salarysystem which avoids the accompanying pains as much as possible
would lead to equal opportunities. The government should aid, withpublic finances as a last resort, those who would still be neglected bysocial welfare with this new system. I think this is the best policy forus.
Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Corporation.