Japanese business urged to act on ‘sustainable capitalism’ pledge

Three years after Japan’s powerful Keidanren business federation proposed that capitalism shift to a more sustainable model, its companies are under mounting pressure from government and employees to act on this pledge to look beyond short-term profit.

Long before America’s biggest businesses announced a move away from a focus on shareholder primacy in 2019, chief executives at Japanese companies had repeatedly argued that the wellbeing of workers and society should carry the same weight as returns to investors.

But, for most of the past three decades, with the economy struggling to escape deflation, companies have resisted lifting wages and the workforce has refrained from aggressive salary demands. Faced with a shrinking home market, businesses have invested in overseas expansion, leading to a decline in domestic capital investment.

That has gone against Keidanren’s strategy of encouraging its members to spend on expanding their manufacturing in Japan, in order to create a “fairer and more equitable society” to sustain long-term economic growth.

Now, though, with Japan’s consumer prices rising at the fastest pace in nearly 42 years, executives admit that the success of Keidanren’s push for “a sustainable capitalism” hinges heavily on whether companies can support wage increases and trigger a virtuous cycle of rising pay, consumption and prices.

“Japan will grow if it can revive the economic dynamism by facilitating wage hikes for workers, reskilling and labour mobility,” argues Masakazu Kubota, vice-chair at Keidanren. “If it fails, it will return to the past three decades” of low growth, he warns.

Since prime minister Fumio Kishida took office in 2021, there has been intense debate on which form of capitalism is best suited to unlock the value of Japanese companies and sustain economic growth.

Much of the focus has been on Kishida’s philosophy of so-called new capitalism, under which shareholder primacy is tempered in favour of pursuing a more equitable distribution of wealth and investment in people, innovation and green and digital technologies.

“We need to exit from three decades of deflation [and] a cost-cut economy and ensure a pathway for an economy that will grow through investments in the future, so that wage increases will become normal,” Kishida told a news conference in June. “We must not let this opportunity go.”

Japan has started to experience inflation — like countries elsewhere — because of the global energy crisis triggered by the war in Ukraine. Consumer prices, excluding fresh food and energy, climbed more than 4 per cent in May.

Wages rose an average 3.66 per cent in this year’s spring wage negotiations, according to the Japanese Trade Union Confederation, with even small and medium-sized businesses, which employ at least 70 per cent of Japanese workers, offering the biggest salary increases in decades.

The Bank of Japan, however, has maintained its ultra-loose monetary policy, arguing that it remains uncertain whether wage increases will continue into next year as inflation softens.

For Keidanren, a key tenet of its sustainable capitalism strategy is “restoring a substantial middle class” by 2030, supported by wage growth.

Median household income in Japan has dropped to ¥3.74mn ($26,000) in 2019 from ¥5.05mn in 1994, according to the cabinet office, with the sharpest decline among 35- to 54-year-olds due to stagnant wages.

“The wage rises this year need to translate into an increase in consumption, especially among the younger generation,” says Kubota. “The critical question is whether a virtuous cycle can be created for wages to increase, even under mild inflation of 1 to 2 per cent.”

Some economists and investors say structural wage pressures are already building as Japan’s working-age population shrinks. There is little scope to increase the employment of female and elderly workers due to already high levels of participation in the labour market, while the number of foreign workers remains limited.

And, in Japan, where chief executives have historically preferred to talk in terms of stakeholder capitalism, there has not been the kind of resistance seen in some parts of the US to more environmentally and socially responsible models of capitalism.

Nevertheless, companies face a delicate balancing act with Japan’s stock markets returning to highs not seen in 33 years based on growing hopes of tougher governance standards and a maximising of shareholder returns.

Major reforms to improve corporate governance were implemented during the administration of former prime minister Shinzo Abe, triggering some pushback among Keidanren members against setting formal rules to increase the number of non-executive and female directors on company boards.

“We were moving towards a US-style capitalism and it led to an increase in share prices but there were areas where we went too far,” Kubota suggests. He stresses, however, that a shift to stakeholder capitalism is aligned with companies’ broader goal of increasing their valuations.

“It will still be a positive message to investors looking to hold Japanese stocks if managements can raise corporate value over the medium to longer term,” he says.