"We are living in a world that is not an extension of the past"

On Kishida's New Capitalism

Source: Prime Minister’s Office of Japan

The Kishida government has released drafts of two fundamental economic policy documents, its “grand vision” (pdf; jp) for what Prime Minister Kishida Fumio calls the “New Capitalism,” and the 2022 basic policies (pdf; jp) on economic and fiscal management and reform (widely known as the honebuto 骨太 [big boned] policy). These documents fit together, with the former being something of a manifesto for Kishida and the latter – an annual paper dating back to the Koizumi administration – serving as a practical guide to the budgetary process for the next fiscal year.

Naturally, with the Kishida government’s issuing these documents for the first time, there is a greater level of public interest than we have seen since perhaps the beginning of the Abe administration. This interest in part reflects a certain fuzziness around Kishida’s economic policy ideas, which has enabled investors and other observers to extrapolate from stray comments about redistribution or financial income taxes to assume that Kishida’s “New Capitalism” marks a “leftward shift” in Japanese policymaking. This recent Bloomberg article – with a misleading title – by Gearoid Reidy and Yuko Takeo captures the debate about Kishida.

However, within the Japanese media itself, the debate about Kishida’s New Capitalism has been entirely different. The Mainichi Shimbun’s editorial (jp) on the new policy drafts says it all: “The PM’s New Capitalism Is a Relapse Into Abenomics.” After outlining some of the prime minister’s more leftish ideas voiced during the LDP’s leadership campaign and shortly thereafter, the editorial notes:

Despite this, the prime minister reiterates his intention to follow Abenomics, saying “We will pursue bold monetary policy, flexible fiscal policy, and a growth strategy.” Does one recognize the influence of former prime minister Abe Shinzō, who heads the largest faction?

This is by no means something that only left-of-center news sources have noticed. As the headline of this news analysis piece in the Sankei Shimbun says (jp), “New Capitalism, Fading Kishida Color – Taking After Abenomics.” The article notes that there is little of the redistributive policies that Kishida talked about earlier and noted that the New Capital grand vision shares Abenomics’s focus on investment and growth.

Even when Kishida was running for the LDP’s leadership and the premiership, I generally thought that Kishida was not promising much more than “Abenomics-lite,” notwithstanding his declaration that the age of neoliberalism was over. His government would stay the course on monetary and fiscal policy, and, while some of his priorities for strategic investment differed from Abe, on the whole he would continue the state-guided growth strategy pursued by Abe. To be sure, the reason for continuity may be more because Abe’s approach was statist than because of Kishida’s inability to break with neoliberalism.

Under Abe, the Japanese government not only used a variety of policy tools to promote value-added growth in critical sectors, but also intervened in wage-setting, offered tax incentives for wage increases, raised the minimum wage, and explored ways to create new opportunities for women, the elderly, the young, and non-Japanese workers. Other policies in the new Kishida government documents aimed at encouraging start-up formation, increasing the availability of venture capital, and promoting digital and green transformations have plenty of precedents from the Abe and Suga governments. Given that Kishida is also pairing these growth policies with macroeconomic policies aimed at overcoming deflation and boosting growth in the short run, it is entirely appropriate to ask what’s new about Kishida’s New Capitalism.

What’s different is less the approach or the substance than the strategic context for Kishida’s growth policies. As Kishida made clear in his speech in London last month (see my post here), his government recognizes that it is navigating a dramatically different domestic and global environment than Abe was for most of his tenure. The introduction of the honebuto policy draft drives home this overarching theme.

“We are living in a world that is not an extension of the past,” it begins. It continues:

The novel coronavirus infection has transformed the world, Russia's aggression against Ukraine has shaken the very foundations of the international order by unilaterally changing the status quo by force, authoritarian states are challenging democracy and liberalism, and climate change that cannot be postponed for even a moment are all structural changes that could be called tectonic shifts in the environment surrounding our country. In Japan, economic recovery remains fragile, and the country is simultaneously facing a host of domestic and international challenges that compound, including the outflow of income overseas due to soaring prices of imported resources, a declining and aging population and declining birthrate worsened by the Corona shock, stagnant potential growth, and more frequent and severe disasters.

While Abe talked about inheriting in 2012 a uniquely severe set of challenges due to three years of misrule by the Democratic Party of Japan, the crises Abe faced pale in comparison to what Kishida is grappling with now.

Accordingly, to the extent that there’s something new in Kishida’s economic program, it is a genuine attempt to grapple with a significantly more challenging global environment. Whereas Abenomics was about boosting Japan’s competitiveness in a global economy still playing by the rules of neoliberal globalization, Kishida’s government is trying to position Japan to compete in a post-globalizing or de-globalizing world economy.

The draft New Capitalism policy paper states this explicitly. Its introduction notes:

From the 1980s to the 2000s, the rise of the way of thinking known as ‘neoliberalism’ — the idea that if things were left to markets and competition they would work out — and the advance of globalization restored economic vitality and led to significant growth in the world economy.

However, it continues, neoliberalism carried in its wake growing inequality, worsening environmental degradation, economic security risks due to over-dependence on foreign markets, urban over-concentration, and market failures, among other problems. Picking up on the themes from Kishida’s address in London, the paper stresses how the Covid-19 pandemic has revealed the dangers of supply chains concentrated in particular countries or regions and how Russia’s war against Ukraine has revealed the extent to which liberalism and democracy are waging a struggle against “authoritarian state capitalism,” regimes that have taken advantage of the rules-based global economy to achieve high-speed growth. Finally, the introduction notes the extensive competition to invest in advanced technologies and build more resilient supply chains in the post-Covid world.

These changes amount to a historic turning point in the history of capitalism, the paper argues. Whereas in previous eras the key questions were “state or market” or “public or private,” this paper argues that the guiding theme will be “state and market.”

The New Capitalism must realize the sustainable happiness of each and every citizen. The fruits of solving social issues through public-private partnerships and the resulting creation of new markets and growth must be widely distributed to many people, regions, and fields to create a virtuous cycle of growth and distribution.

The connection between this approach to economic policymaking and national security policy is also made explicit. “Against the backdrop of the fluid international situation, strengthening economic security, including energy and food security, is a prerequisite for the New Capitalism,” the paper notes. This will have implications for foreign economic policy and foreign and security policy more broadly, because, the paper argues, “countries that stress universal values such as freedom, democracy, human rights, and the rule of law must unite to maintain and strengthen a free and open economic order, promote free trade, and strengthen their response to unfair economic activities.”

Thus, while many of the policies included in the two drafts have ample precedents during the Abe administration, the Kishida government is being explicit about the need for the Japanese state to use industrial policy tools, often in coordination with the private sector, to ensure the prosperity and security of the Japanese people.

As I argued about Kishida’s London speech, it is of great significance that the Japanese government is deliberate grappling with the idea of deglobalization and its consequences for Japan. Perhaps the upshot of the Kishida government’s draft documents is that we should think of the “New Capitalism” less as something of Kishida’s making and more a term to characterize the new economic order in the process of being born, to which Japan must react. If Japan’s economic policymakers think that these trends are here to stay and are making policies to prepare for a long-term shift in how the global economy functions, Japan’s peers in the developed world should be doing the same.