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Japan Enters Reiwa Era with New Identity:
Heisei Changes Were Subtle Yet ProfoundBy Nobuko Kobayashi

AuthorNobuko Kobayashi

On May 1, 2019, the new Reiwa Era began in the middle of a 10-day
stretch of holidays. The Japanese were expected to spend an
additional $10 billion on travel and shopping during that period.
Reiwa-branded cookies are being sold at every tourist destination.
Tokyo’s Meiji Shrine saw people queuing for 10 hours or more to get“divine” Reiwa seal stamps. The atmosphere has been festive as there
was no mourning associated with the abdication of Emperor Akihito at
the age of 85. It marked the end of his three-decade reign, an era
called Heisei in Japan, as well as the start of the new era under his son
Naruhito, the newly enthroned emperor of Japan.
An era change marks a significant reset of time in Japan. Unlike a
decade, an era is long enough to envelope the majority of one’s life.
Japanese, therefore, tend to recognize their peers by the era in which
they were born and grew up. After all, Reiwa is only the fifth era since
the Meiji Restoration in 1868, which began the awakening of a modern
nation that had been closed to the outside world for more than 250
years.
Growing up in the 1980s, I recall some survivors of the Meiji (18681912) generation, some of whom had experienced World War II as
adults and helped rebuild the nation in its aftermath. They were thetough ones with the backbone of old-school Japanese. People born in

the Taisho Era (1912-1926) were fewer as the period only lasted 15
years. Those born in the Showa Era (1926-1989), by contrast, include
my parents’ generation as well as mine. Showa was a traumatic
period. Those who were born in early Showa (who would be in their
80s today) saw the rise of pre-war militarism, its catastrophic downfall
and the postwar economic rise of Japan. A rising militaristic power in
the Far East at the dawn of it, the nation had been completelytransformed as Showa drew to its close.

Uneventful Heisei?
Even if Heisei still seems quite new for us Showa-born lot, 30 years
is a long enough time for a nation to emerge transformed. Yet, on thesurface, what is notable about Heisei is that nothing particularly
significant happened despite the burst of a horrendous financial
bubble in 1989 and two major natural disasters – the Great Hanshin
Earthquake in 1995 and the Great East Japan Earthquake and tsunami
in 2011 (Chart 1).
Domestically, life in Japan proceeded without much drama. Even
though property prices plummeted in the early Heisei years, overall
consumer prices were remarkably stable, rising by a scant 0.5%

CHART 1Heisei marked by traumatic events
Historical timeline (Nikkei average)
40,000Showa Era (1926-1989)

Heisei Era (1989-2019)35,0002008

30,0001964

25,00020,00015,000Tokyo Olympics

1952

Treaty of San Francisco signed,
ending US occupation of Japan

1995

1985

January: Great Hanshin
Earthquake
March: AUM Shinrikyo sarin
gas attack

Bubble economy begins

1973

First oil shock

Financial crisis

2012

Launch of “Abenomics”

2011

1990

Great East Japan Earthquake

Bubble economy collapses

10,0000

1949-06-01
1950-06-01
1951-06-01
1952-06-01
1953-06-01
1954-06-01
1955-06-01
1956-06-01
1957-06-01
1958-06-01
1959-06-01
1960-06-01
1961-06-01
1962-06-01
1963-06-01
1964-06-01
1965-06-01
1966-06-01
1967-06-01
1968-06-01
1969-06-01
1970-06-01
1971-06-01
1972-06-01
1973-06-01
1974-06-01
1975-06-01
1976-06-01
1977-06-01
1978-06-01
1979-06-01
1980-06-01
1981-06-01
1982-06-01
1983-06-01
1984-06-01
1985-06-01
1986-06-01
1987-06-01
1988-06-01
1989-06-01
1990-06-01
1991-06-01
1992-06-01
1993-06-01
1994-06-01
1995-06-01
1996-06-01
1997-06-01
1998-06-01
1999-06-01
2000-06-01
2001-06-01
2002-06-01
2003-06-01
2004-06-01
2005-06-01
2006-06-01
2007-06-01
2008-06-01
2009-06-01
2010-06-01
2011-06-01
2012-06-01
2013-06-01
2014-06-01
2015-06-01
2016-06-01
2017-06-01
2018-06-01

5,000

Note: (1) not an exhaustive list of historical milestones

Source: Statistics Bureau of Japan, National Institute of Population and Social Security Research, Mizuho Research Institute, EY-Parthenon analysis

https://www.jef.or.jp/journal/

Japan SPOTLIGHT • July / August 201951

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annually. The unemployment rate at the beginning and end of Heisei
are both coincidentally 2% with a surge to 5% only twice, around2001-02 and 2009. Politically speaking, the once-dominant Liberal
Democratic Party briefly lost its grip on power but the non-LDP
administrations barely had an impact before voters returned to the
LDP, which now faces only weak challengers. Under the security
blanket of the US-Japan alliance, possible invasion by a foreign force
was a non-issue to ordinary people, with the exception of North
Korean provocation.
Moreover, a strict immigration policy resulted in a mere 2% of the
population being foreign born, which helped contribute to politicalstability unlike in European Union countries or the United States.
Large-scale immigration, the root cause of political unrest in many
developed nations, left Japan untouched. Between 1990 and 2017, theratio of foreign-born nationals grew from 8% to 14% for the US and
23% to 29% in Australia. Japan, on the other hand, saw an increase
from only 1% to 2%, according to Pew Research.
The most notable demographic phenomenon in fact is not about
foreign-born citizens but about aging. Japan’s population, among theyoungest in the developed world at the start of Heisei, is now theoldest (Chart 2). The total population hit a peak in 2008, and is now
declining at a pace approaching 400,000 a year. The population
increase over the whole of Heisei was just 3% compared to 32% in the
US and 23% in China. On the bright side, the average lifespan of aJapanese male grew from 76 to 81, and of a female from 82 to 87. As
a result of longevity and a low fertility rate, the population over 65 shot
up from 15% of the total at the beginning of Heisei to 36% in 2019
(Chart 3).
Relative to the rest of the world, the changes point to a quietly
sinking sun. In the second half of Heisei, 2009 saw Japan being
overtaken by China and falling into its current position of third in termsof GDP (Chart 4). While real GDP measured in US dollars grew by
59% in Japan in 1989-2017, it pales by comparison with the US at

243% and China at an astounding 3,419%.
In the global ranking of companies by market capitalization in 1989,
there were 32 Japanese names in the top 50, whereas in 2018 there
was only one, Toyota Motors. With the automobile industry being arather anomalous bright spot, the technology industries oncebrandished as the Japanese hallmark of industrial success have losttheir way to global competitors – firstly to South Korea and Taiwan,
then more recently to China. While the Japanese market share ofsemiconductors reached 49% in 1990, it was at a dismal level of 7%
in 2017.
In lockstep with its declining industrial position, gone are the days
when traditional Japanese management practices symbolized by lifetime employment were touted as the best.

The Fraying System
Could an aged Japan be discreetly moving away from the center ofthe global stage, whose audience is transfixed by the new Cold War
between China and the US? The stagnant-looking surface only needs aripple to reveal dramatic change. In fact, it would be quite wrong towrite off Japan as a geriatric sunset country where the only changes
that can be expected signal decline.
Heisei Japan, too, went through a profound transformation, but it
has been a subtle and much less tangible transformation compared tothat of Showa. The change, in a nutshell, is the crumbling of a rigidsocio-economic system, in which government ministries and large
companies dominated very much in the Showa fashion. The 30 years
of Heisei can be seen as the period of this transformation, during
which the deep-seated skepticism at the beginning was broadly
confirmed as we emerged from the era.
The underlying fabric of postwar Japanese success was an efficientclass system organized with a clear hierarchy. The public sector during
Showa, with its powerful army of career bureaucrats, successfully led

CHART 2

Japan undergoes rapid aging in short time
Aging (>65) in G7* + China statesJapan

Germany

FranceUK

Canada

US

China

30%

~39% by 2050

Japan
25%

Germany
FranceUK
Canada
US

20%
15%

China

10%

~30% by 2050

5%

19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16

62

19

19

60

0%

Note: *I Excludes Italy

Source: World Bank, EY-Parthenon analysis

52 Japan SPOTLIGHT • July / August 2019

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CHART 3

Japan’s shrinking population turns silver
Total population by age bracket (Million people, ratio of workers to beneficiaries)
Showa Era
Workers per
beneficiary

65+

12.1

84
4

50

11.5

90
5

55

Forecast

Heisei Era

94
5

60

11.2

105

112

9
10.8
99
7
9.8
6

117
11

121

123

125

127

127

127

12

15

18

22

26

29

67

72

76

79

7.4
83

86
6.6

87
5.8

86

15-64

0-14
0

84

81

4.8

30

28

33

124

36

121

117

37

37

112

37

8.5

3.9

30

125

26

25

27

28

26

22

20

18

18

3.3

76

2.8

17

16

73

71

2.3 2.0
15

68

1.9

13

12

63

1.8
11

107

102

39

39

58

1.7

54
1.5

11

10

97

38

50
1.4

92

36

47
1.3

9

87
35

44
1.3

9

1.3

8

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Source: Mitsubishi UFJ, Ministry of International Affairs and Communications, Statistics Bureau of Japan, National Institute of Population and Social Security
Research, Reuters
CHART 4

Japan’s GDP outgrown by China’s during Heisei
GDP (current US$)Showa Era90

GDP value

Heisei Era

GDP share

ROW

Japan

China

Japan

China

EU1

US
US
35%

80

30%
25%

60
50

20%

40

15%

30

GDP share (%)

Trillion US$

70

10%

20
5%

10

0%

19

80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17

0

Note: (1) includes Germany, UK, France

Source: World Bank, EY-Parthenon analysis

the rise of Japanese export-oriented industries from steel tosemiconductors under the convoy system. The industries in turn wereorganized in a clear order, visualized by the cascading median salary of
their employees, within which the top position was often occupied byzaibatsu-related bluechip companies. The zaibatsu web of capital andnon-capital ties spread cross-sector to allow optimal coordination. The
mighty sogo-shosha or general trading companies sat in the middle ofthese webs functioning as the center node.
Within a sector, say automotive, there was a clear separation of tiers
which distinguished original equipment manufacturers (OEMs) fromTier-1, Tier-2 and Tier-3 component suppliers. Tier-1s acted as generalcontractors to source and integrate the necessary ingredients fromvarious Tier-2s, so that OEMs seldom interacted directly with Tier-2s
or Tier-3s. The vertical chain of keiretsu allowed for both division ofrole and coordination. The loyalty of those at the bottom of the
pyramid was rewarded with the unwritten assurance that OEMs would
always provide more than enough work to guarantee their survival.
In fact, this godfather-like mentality had its mirror within individualcompanies’ organizations. Lifetime employment meant that once youentered a company out of high-school or university, the employer
would take care of you as long as you remained loyal. The senioritybased promotion system encouraged workers to grow within theorganization. Lack of 401K-like transferable company pension
schemes further tipped the balance for those who stayed put.
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Before the enactment of the Equal Employment Opportunity Law in1986 at the end of Showa, one could argue that even marriages were
often arranged by employers. The young women in the workforce weretreated as bride candidates for the junior staff rather than serious
talent to nurture. As late as in the early 1990s it was assumed thatwomen would retire after marriage, never the case for their husbands.
Marriage for women therefore had the moniker “eternal employment”,
where one does not ever have to worry about job loss. After all, thefirst employment was more or less eternal for men as well.
For the workers, however, loyalty had its price. For example, itmeant having little say in an unexpected transfer to a remote location
regardless of family situation. Once you left your employer, God forbid,
it was almost impossible to re-enter.

New Japan Emerges
Within the past three decades, this rigid socio-economic structure
has crumbled at an accelerated speed few were able to predict at thedawn of Heisei. The most fundamental driver has been the technologydriven so-called Fourth Industrial Revolution, defined as theconcurrent commercial arrival of artificial intelligence (AI) and theInternet of Things (IoT) which blurs the boundaries of the physical anddigital world and which swiftly rewrote the rules of the game for manyindustries. The incremental benefit of perfecting mature, hardwarebased, mechanical engineering experienced a diminishing rate return.
On the contrary, the value-added shifted to software and applicationdriven innovation as the Internet became ubiquitous after the turn ofthe century.
Because of the Fourth Industrial Revolution, the world has moved
on from vertical to horizontal integration. This is the new regime thatmost established Japanese companies were ill-equipped to lead, to say
the least. For example, the past glory of the Japanese automotive
sector was built on the eco-system of tier companies that have been
loyal to OEMs through thick and thin. It is therefore a disturbing
thought for OEMs to exit the keiretsu and form alliances withcompletely new partners, such as Internet platformers, to makeconnected cars. The dissolution of keiretsu, however, is happening as
companies prioritize their own survival. Just last October, Toyota andSoftbank formed a joint venture, Monet Technologies, to addressmobility services.
It is important to note, however, that this breakdown is not all grimnews for smaller keiretsu suppliers. Once freed from the implicit chainof loyalty, competitive suppliers with differentiated technologies can
now openly seek business opportunities with other OEMs, even nonJapanese.
Globalization, with rising emerging markets as the backdrop, isanother driver for change. The export model has now been overtaken
by direct foreign investment as Japanese companies prefer to localize
operations rather than depend on exports, which involves high laborcosts and transportation. Less reliance on exports by Japan, Inc.
coupled with a greater need for speed to market has diminished thecompetitive advantage of the traditional convoy system under theleadership of the public sector, as domestic sector-wide coordination
54 Japan SPOTLIGHT • July / August 2019was too time-consuming and much less effective. The once invincible
trading companies, too, seek new identities beyond being the hubs of
information and trade flows.

Labor Market Mobility
Again, the crumbling of the system is mirrored within the Japaneselabor market. At the turn of the century under the administration ofPrime Minister Junichiro Koizumi (2001-2006), Heisei Japan
experimented with neo-liberalism. Meritocracy was promoted toreplace seniority-based promotion. Triggered by Koizumi’s reforms,
the once sacred notion of lifetime employment ceased to maintain its
untouchable status. This political trend aside, the demographic trend is
the major driver in the change in Japanese labor practices. With fewer
young applicants entering the workforce, companies now opt to entice
the promising young by raising starting salaries, making thecompensation curve less steep. This discourages the middle to senior
employees from staying longer. In fact, 2018 saw an increase in jobchangers for the eighth consecutive year to 3.3 million, approximately
5% of total workers. Among them, those aged 45 and over accounted
for 38%, an 11 point increase over a decade.
This labor mobility has coincided with the rise of entrepreneurism.
Traditionally regarded as too high risk with iffy returns, now joining astart-up is a reasonable option for graduates from top universities.
This is encouraged by the emerging fair shots for small companies tosucceed, in the wake of a crumbling industrial hierarchy.
Women now constitute an important labor force, 50.3% of the total
in 2017, which Japan, Inc. cannot do without. Around 1998 in theearly Heisei years, the number of double-income households exceededthat of single-income and the gap between the two has continued towiden. Working mothers are the norm. Granted that Japan has a long
way to go to achieve true gender equality at the level of Scandinavian
countries where working women are more or less on an equal footingwith men, we have nonetheless come a long way over three decades,
increasing the labor participation rate of women by 13+ points from
59.5% to 72.7%.
As women obtain more financial freedom, they marry later. The
average age of a first-time bride was 26 at the beginning of Heisei in1990 and 29 in 2017. Accordingly, the groom’s age went up from 28 to
31. According to a government survey in 2015, 8% of women declared
they would remain unmarried, up from 5% in 1992. While low fertility
rates present an existential threat for Japan, on the bright side this canbe interpreted as evidence of acceptance of diverse lifestyles.
Individuals feel free to make conscious choices regarding marriage
and children, not blindly following the social norm.

Reiwa – Rebirth or Regression?
In summary, Japan at the end of Heisei presents a more fluid, if lesssecure, society. Reiwa will only accelerate the trend of a dissolving
hierarchy. I see the change on a personal level as largely favorable. In
the absence of Godfathers, there are more individual choices available,
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learn will be tolerated and there will be fewer penalties for trying. A
career will be regarded as a long and winding journey, not always astraight road as we pictured in late Showa or the earlier part of Heisei.
With more seniors staying active longer, we may completely do awaywith the notion of a retirement age within Reiwa.
The utopia of individual choices, however, will only be possible if
Japan manages to maintain its competitive strength and therefore its
economic power. The social security costs of caring for the elderly aremounting to ¥34 trillion, or 6% of GDP. Japan is the only country inthe developed world with a level of national debt at 200% of its GDP.
The speculation of super inflation at the end of the expansionary
monetary policy in place under the current administration of Prime
Minister Shinzo Abe will never be put to bed.
In fact, the main failure of Heisei is that Japan lost its visible
hallmark industries, other than perhaps its automotive sector. Even
though Toyota Motors continues to be a mark of Japanesemanufacturing excellence, the competition is now on a new
playground of connected cars, something even the mighty Toyota
struggles to stay ahead of the game in. In the Reiwa Era of newly
found labor mobility and entrepreneurism, it is not yet clear what
sectors will emerge as the bright stars of Japan.

Tidying Things Up
My hypothesis is that Japan could leverage its demographic crisis –the aging and declining population. Looking ahead another 30 years,
the population is forecast to decrease to around 100 million by 2050,
more than 20% down from today’s 127 million. Once we accept thereality of a declining population, the only way of maintaining the size ofthe economy is through improved productivity.
Improvement of productivity has two elements: one is to organize
and revamp the fraying existing infrastructure and the other is to injecttechnology as new blood. Japan already suffers from decaying roads
and bridges built during the high economic growth era. Permanently
empty houses are on the rise at 13.6% of the national stock of
housing, posing a security issue for communities. Rather than making
new infrastructure investment, the public sector should put more effort
into reorganizing the old.
Once reorganized into a compact and liveable model, communities
should take full advantage of available technologies from smart homes
to autonomous driving. The end goal is not productivity for the sake ofproductivity, but the well-being of all, including the elderly and the lessprivileged. Productivity should also be balanced with the sustainabilityof the environment. The model of a technology-enabled community tomaximize the quality of life will be a collection of innovation and new
ideas, mixing hardware and software technologies. This is also amodel that other aging nations in Asia will look to import.

Japanese management was rewarded by a climb in economic power,
as was demonstrated by the popularity of made-in-Japan cars in the
US. We heard noises about trade friction, but the Kasumigaseki
bureaucrats managed to outsmart their American counterparts. In thistidal wave of growth, however, certain social injustices were swept
under the rug. For example, gender inequality was tolerated because
the nuclear family model with the husband being the sole anddedicated breadwinner worked just fine to prop up the system.
Now after three decades of economic stagnation in Heisei, thisinconvenient truth is palpable. We cannot sustain the labor population
without the traditional minorities – women, seniors and foreigners.
Rural Japan is depleted and faces the threat of extinction after the
young took off to the big cities to form these nuclear families. So
accustomed to non-growth times, millennials even question the very
worthiness of growth.
In other words, post-growth Japan faces an unprecedented degreeof uncertainties, made no easier by the fast-paced changes in theoutside world, both technological and geopolitical. The direction forindustries is not and cannot be dictated from the public sector any
longer. Protective keiretsu is no longer. The assumption that you willremain at the first company you join is shaky at best.
Today’s system is no longer hierarchical but dispersed. The
boundaries between industries are no longer rigid but porous so thatcompanies can form alliances cross-sector. Start-ups are sought-afterpartners for the established. In fact, what used to be a monopoly of
those with capital is no longer – 3D printing allows micro factories
with an output quality equivalent to mass production plants. On theindividual level, workers may handle multiple jobs at the same time.
This will be an interesting time for those who enjoy entrepreneurism
and fresh thinking. Reiwa will be an era of complexity and it is up to us
to embrace it.

Let’s Not Fool Ourselves
Japan was literally and figuratively a young developed nation at thestart of Heisei. Over its three decades, it has aged and matured at an
unprecedented speed. It is now a mature country with considerable
experience. Perhaps no longer a miracle, but a country with benchstrengths and past failures to learn from. It also has the fortune ofpolitical stability which is the envy of many other developed nations.
In middle age, an individual is faced with two choices: to resist
changes and yearn for the glorious old days or to accept reality and be
the best one can according to one’s age. Reiwa Japan needs to look at
itself in the mirror and come to terms with its maturity, which, just as
with vintage wines, comes with a good deal of complexity.

Embracing Complexity
With nations, as well as with corporations, growth hides
inconvenient truths. Life was simpler in pre-Heisei days as Japan rosein international status. A hard-working labor force directed by

Nobuko Kobayashi is a partner with EY-Parthenon, a strategic consulting
group within Ernst & Young Transaction Advisory Services. Based in Tokyo, she
specializes in the consumer sector with a special focus on multinational
corporations operating in Japan.

Japan SPOTLIGHT • July / August 201955