Macro Pragmatism, Micro Optimism

Why Japan is open for business despite the turmoil and uncertainty sweeping the world.

Jeff Bezos is certainly one of the true innovation and leadership geniuses of our generation. The Amazon founder is fond of reminding his teams that the key question for business strategy is not to try to predict what will change, but instead to focus on what is not going to change in the next 10 years. This approach, he says, allows you to organize your activities and invest energy confidently. You know it will pay off in the long term.

In this view, Japan is poised to emerge a winner as changes sweep the global economic and financial architecture. Yes, tariffs, exchange rate volatility, and rising risks of a global economic slowdown will make a dent in the country’s business cycle, but the multiyear structural up cycle remains firmly in place.

Why? Because the forces that started it several years ago have not changed—and won’t.

Let us start with politics and policymaking. This is where Japan is a true global standout. The guiding principle is pro-growth pragmatism, not politicians promising nostalgic greatness nor technocrats insisting on fiscal or monetary austerity.

To wit, tax relief to boost the purchasing power of the people is now in the cards, as is income support for companies hit hard by tariffs. Moreover, the Bank of Japan was quick to postpone further rate increases.

The policymaking elite is a model of pro-growth pragmatism and expert coordination among the various ministries and agencies—a government that acts calmly and administrates effectively. This will not change. Even if the current prime minister falls after the July elections, the elite technocrats’ rule will continue. This is stability you can count on.

Against this backdrop of trust-boosting, professional and, yes, unspectacular government policymaking, Japan’s private sector has been marked by a growing energy, a sense of urgency and actions not seen since the bubble years of the late 1980s.

Then, however, it was arrogant exuberance. Now it is brute necessity. Companies are running out of their most important asset: human capital. The growing scarcity of labor—both skilled and unskilled—is forcing a radical break with proud traditions:

• Pay-for-performance instead of seniority-based compensation
• Professional empowerment for women and non-Japanese
• Promotion of part-time and contract workers to full-time status
• Allowing team members a second job
• Strategic encouragement of intrapreneurship

Scarcity is the mother of innovation, and corporate leaders are razor-focused on retention, motivation, and upskilling their employees. In my view, this force is the primary reason to be bullish on Japan—next-generation employees and corporate leaders are being groomed and incentivized in new ways, which in turn is poised to raise productivity. Again, this is a deep trend that will stay with us and shape Japan’s future in predictable ways.

Importantly, the growing labor shortage will also accelerate the diffusion and real-world use of technology. Chances are high, in my view, that Japan will evolve toward many best-in-class case studies where artificial intelligence (AI) does not just mean artificial
intelligence, but real-world examples of augmented intelligence (i.e., human employees collaborating with AI to create not just next-level global best practices and processes but, more importantly, the new gold standard for best customer experience and satisfaction). AI omotenashi, here we come!

The certainty of these trends is already becoming manifest in Japan’s corporate metabolism. For three years running, we’re seeing merger and acquisition activity as well as domestic business investment reach record levels and management buyouts on the rise. For almost 30 years, corporate leaders have been obsessed with building fortress balance sheets by paying down debt and hoarding cash. They are now investing in the future of their businesses and raising capital efficiency.

Just as employees are starting to be paid for performance, chief financial officers are evolving to the next level. Until now, the company finance department was primarily a de facto bursary, dispensing money. Now, they are beginning to actually evaluate the company’s investment return profile against capital costs performance. Given the national policy goal of doubling asset income, as promoted in unison by the Financial Services Agency, the Ministry of Finance, the Ministry of Economy, Trade and Industry and, of course, the Tokyo Stock Exchange, this is, again, a “certain” trend that is unlikely to change over the coming decades.

To be sure, the net result of these certain Japan trends is poised to result in significant industrial restructuring. The gap between winners and losers will grow. In five to 10 years, Japan is bound to have true national champions, more de facto oligopolies, and far fewer zombie companies. If so, the net result should be higher pricing power for the winners, which in turn means inflation will become much more entrenched than perhaps currently anticipated.

For US companies, the high likelihood of “macro pragmatism” and “micro optimism” should offer steadfast growth in Japan opportunities. The metabolism and liquidity of both human and corporate capital is rising, so actual access to the Japanese market will keep getting better. Focus on what will stay the same: Japan is open for business.