Industrial Policy for the Age of Deglobalization

I attended a Brookings Institution panel on U.S.-Japan economic statecraft on Wednesday, 4 May, featuring the LDP’s Kōno Tarō and Yamashita Takashi, alongside the Wilson Center’s Shihoko Goto and Mireya Solis and David Dollar from Brookings. It was an extremely thorough discussion on the bilateral economic agenda and I strongly recommend watching the whole thing (my running thread on the discussion starts here).

Towards the end of the discussion, Kōno made what I think was an extremely important point about the new era that the global economy faces. “Deglobalization is already happening,” he says. He cites Huawei, saying that the age of “low prices always” is over; consumers, businesses, and governments will have to weigh other factors in their economic decisions.

Kōno’s remark immediately came to mind as I read Prime Minister Kishida Fumio’s speech (en) in the City of London on Thursday, 5 May, where — following the playbook of Abe Shinzō, who famously introduced (en) Abenomics to a Guildhall audience in 2013 — Kishida made the case for his economic program to investors in a major financial center.

What I found striking about Kishida’s speech was not the policies he announced, which for the most part he has already announced in the months since winning the Liberal Democratic Party (LDP) leadership and the premiership last year, and many of which are frankly carryovers from the Abe administration.

Rather, it was how Kishida chose to frame his economic program. Whereas Abe used Koizumian language of structural reform to mask a program of state-guided development (pdf) in a more competitive global economy — in his Guildhall speech he actually invoked Thatcher’s “There Is No Alternative” mantra to defend his reflationary policies — Kishida is no longer paying lip service to neoliberalism. This speech was notable mostly for its open embrace of industrial policy to bolster Japan’s competitiveness.¹ He openly discussed “national strategies” for advanced technology sectors and said, “We need to present a clear national strategy, and national growth-rate targets, which companies often use in guiding their investments, and then act as a priming agent to induce corporate investment.”

It bears stressing that this is not industrial policy in the service of protectionism. “Japan is and will continue to be a trading and investment powerhouse open to the world,” Kishida said. “Japan will grow by being connected to the rest of the world through the free movement of people, goods, money and digital technologies across borders.”

But it is clear that, like Kōno, the prime minister also believes that Japan is no longer competing in a global economy in which the pursuit of the lowest costs is paramount. He said:

One feature of the Japanese economy is stability. Because we live in an era of geopolitical uncertainty with supply chain disruptions and drastic shifts in energy and other resources, I see this as an advantage for Japan.

Sustained growth; stable markets; and safe, reliable companies, products and services. [emphasis added] This is why Japan is a "buy."

This may well be the biggest difference in Kishida’s economic program. Although many of the policies look similar, the emphasis is different. Whereas Abenomics was geared at boosting Japan’s productivity in a hyper-competitive global economy increasingly dominated by China, Kishida’s program is adapting industrial policy tools to a new era in which the partial decoupling of liberal democracies from authoritarian countries creates new challenges and opportunities. Kishida is explicit about this point: “Liberalism and democracy are under pressure from authoritarian regimes, including some that have achieved rapid economic growth. Too often this growth has come through unfair trade practices and other methods that ignore the rules of a liberal economy.” Fundamentally, Kishida wants to use industrial policy tools to strengthen Japan’s qualitative advantages for an age in which costs are no longer the only yardstick for competition.

Whether or not the policies he is offering under his “New Form of Capitalism” program — four pillars of investment in people, science and technology, startups, and green and digital initiatives — will work remains to be seen. There are ample precedents for virtually all of his proposals from the Abe years. The most significant difference I noticed was the emphasis on unlocking the tremendous savings of Japanese households and businesses to finance startups and advanced technology projects. Japanese households, for example, had accumulated ¥2.023 quadrillion (roughly $15.5 trillion) in assets as of the end of 2021, more than half in cash and low-yield savings accounts. He announced a new “Doubling Asset-based Incomes Plan” to encourage households to move their savings into higher-yield assets, some of which he suggested later in the speech, would go to support the creation of new startups. Elsewhere, he discussed the need for “innovative policy initiatives that connect the immediate and massive investment needs to the huge potential for financing,” drawing upon massive cash holdings to finance projects in energy and the digital economy, the government’s top priorities for high-valued-added growth in the future.

Again, there may be little in Kishida’s “New Capitalism” that is actually new, compared both to Abenomics and the longer history of postwar Japanese capitalism. But when the prime minister of Japan speaks unapologetically about industrial policy in a nerve center of global financial capitalism, his peers in the developed world should sit up and take notice.

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Link roundup

Also in London, Kishida inked (jp) a new defense cooperation agreement with the UK…South Korea’s new ambassador to Japan will likely be Japan hand Yun Duk-min (jp)…There’s a new “Friends of Shinzo Abe” (jp) group in Taiwan…New column (en) on the Ukraine war’s impact on Japan by Hiroyuki Akita, Nikkei’s excellent foreign affairs columnist…Brief interview (jp) in Sankei with Defense Minister Kishi Nobuo ahead of his recent trip to Washington.

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This photo of a baby-faced Abe Shinzō celebrating his thirty-second birthday with his wife-to-be Akie was an excellent find.

Simon Lee Is Probably 📖 @B4Btv

1. Interestingly, Kishida used the term “healthy economic metabolism.” The only time I can recall hearing the phrase “economic metabolism” was in a conversation several years ago with Takenaka Heizō, Koizumi’s pointman for economic reform.