Japan Surprises 2022
Ten possible twists and turns in the Year of the Tiger
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With the Year of the Tiger well underway, here is my annual list of Japan Surprises. These are not baseline scenarios or probability-ranked results of quantitative models but, rather, some of the things that keep me up at night thanks to that nagging suspicion that some events could change everything. And yes, there is plenty of room for positive surprises from Japan in 2022. Enjoy, send me your comments, and I wish you a prosperous and happy Year of the Tiger.
1. Kishida’s Dream Comes True: Wages Rise 3 Percent
After decades of wage restraint and unions lobbying for long-term job stability, rather than short-term pay hikes, Japan’s job market is now super tight. The war for talent is intensifying. Prime Minister Fumio Kishida is opportunistic and right to follow his predecessor’s top-down call for higher wages; and his chances of success are higher than Abe’s ever were. Still, aggregate wage growth of more than 1.5–2 percent would be a big surprise. An even bigger surprise would be if Japan’s wage and income growth actually feeds higher consumption rather than an even bigger pile of under-the-mattress savings.
Watch out for more companies following Hitachi’s lead this year. Japan’s top conglomerate recently announced they’ll switch to hiring and promoting based on professional skills, rather than generalist ability and seniority. A switch to performance-based compensation starting this year is now corporate policy. If, as I suspect, Hitachi’s break with deeply entrenched labor compensation practices catches on and spreads to other companies, then we may see change. Japan’s average wage may not move up as much as Kishida desires, but the variance inside companies and among industries is poised to rise significantly.
This, in my view, is the reason Japan’s consumer spending could surprise on the upside in the second half of 2022: skills-based compensation equals higher job satisfaction, equals greater confidence, equals higher spending. Kishida watches out for the low end, while companies begin to incentivize human aspirations. And yes, this is exactly how Japan’s productivity boom will come about. If I’m right, prepare for positive surprises not just this year, but throughout the 2020s.
2. From Tax Liability to Regional Investments: Furusato Nozei 2.0
Japan runs one of the most innovative and successful redistribution policies in the world, its hometown tax program, furusato nozei.
Designed to revitalize rural communities, the scheme lets taxpayers nationwide buy goods and services offered by approved vendors from small towns and villages, with your purchase offset against next year’s tax bill. Of course, there are limits on how much can be deducted, but there is no question that furusato nozei works extremely well. Local producers are competing and beefing up their marketing to attract more “free-money” customers they did not have before, while Japanese taxpayers enjoy self-directing their hard-earned money towards goods and services they actually want, rather than just giving it up to the anonymous government. Make no mistake, Japan’s furusato nozei has made paying taxes fun and satisfying.
A positive surprise would be if Japanese leaders learn from this success and create furusato nozei 2.0. The current scheme channels income tax liabilities into consumption. In other words, it redirects the flow economy. A next generation version should focus on channeling assets into investments by redirecting the stock economy.
How? Just as local private producers now compete for national taxpayers’ yen, let local public leaders, activists, and politicians propose soft and hard infrastructure projects that need investment funds to get started. Again, national taxpayers all over Japan would be invited to evaluate and select the projects they want to support. When they make their investments, the amount would be credited against future fixed-asset or inheritance tax liabilities.
The economic impact is win–win. First, opening up prospects for investment money will energize local activists and leaders to get creative and propose concrete local soft and hard infrastructure improvement projects. Second, the scheme offers concrete incentives for Mr. and Mrs. Watanabe to unfreeze some of their massive pile of personal assets. Anything that can be done to turn mattress money into investments will be good for Japan.
Even better, if taxpayers can self-direct their hard-earned assets to socially productive investment projects of their choice, they will create a legacy for themselves and a better future for Japan’s coming generations. Here is a project worthy of being called New Capitalism, because the current system encourages you to do nothing but wait until your assets disappear into the black hole of inheritance tax payments.
3. Entitlement Reform: Asset-based Means Testing
Cutting public benefits and entitlements is unpopular in any country; but it is popular to tax the rich and redistribute wealth—particularly in Japan. As pressure mounts to fix runaway deficits, creative and unorthodox policy proposals to do so by cutting entitlements are being discussed.
Introducing financial means testing is one option. This is where, for example, anyone with net financial assets greater than, say, ¥10 million and no mortgage debt is no longer eligible for the full public pension or national healthcare. Here is an elegant policy solution that cuts entitlements and taxes the rich.
Importantly, asset-based means testing would redistribute wealth from the older generation (which owns the vast majority of financial assets) to the younger generation (which pays the vast majority of taxes). Yes, it’s a radical rethinking of the intergenerational contract, but nobody should be surprised by the creativity of Japan’s new generation of policymakers and politicians. Specifically, asset-based means testing is a pragmatic redistribution policy that can easily lend credibility and appeal to the design of New Capitalism. It would be a positive surprise to see concrete proposals along these lines in 2022, possibly even before the July upper-house elections.
4. Corporate Japan Starts Buying Startups
With very few exceptions, Japan Inc. has never really grown through acquisitions. In-house research and development and a proud our-team-first-and-only mentality have dominated, while mergers and acquisitions (M&As) have primarily produced turf battles and legacy redundancies rather than positive synergies. Case in point: two decades after Japan’s bank mergers, the three megabanks are still fighting shadow wars to stubbornly defend the proud legacy procedures and systems of the original partners.
For most Japan M&As, 1+1 barely adds up to 1.5. However, there has recently been some positive change, with younger chief executive officers—Recruit Co. Ltd.’s Hisayuki Idekoba, Sompo Holdings Inc.’s Kengo Sakurada, and Suntory Holdings Ltd.’s Takeshi Niinami, for example—unafraid to turn the challenges of growing through acquisitions into a real transformational opportunity. So, the 2022 surprise will be Japanese CEOs stepping out of their comfort zones and embarking on a full-blown, growth-through-acquisition strategy in general, and buying startups in particular.
The numbers speak for themselves. As in the United States, there are plenty of innovative and potentially transformative startups in Japan. Unlike the United States, Japan has establishment players that don’t buy outside innovation. Almost 90 percent of startup exits in Japan are through initial public offerings.
Meanwhile, about 90 percent of US startup exits are through acquisition. This difference in corporate growth strategy and leadership culture goes a long way in explaining the reason Japan’s established companies are less dynamic and less globally competitive than their US establishment counterparts.
In my view, a lack of startup innovation power is not Japan’s problem. The real issue is the almost utter unwillingness or inability of established players to leverage outside creativity to realize synergetic, transformational growth strategies. In fact, any analysis of the startup ecosystem in Japan quickly reveals that established corporations appear to be more interested in stealing from, or killing off, creative challengers.
No doubt this happens in Silicon Valley, but there is ample evidence that Japan’s establishment leadership culture is well behind in seeing startups and outside ventures as a pathway to new growth or a catalyst for often long-overdue internal transformation. Japan Inc. going on a startup buying spree would be a very positive surprise for 2022.
5. Japan Corporate Governance Goes Global, Japanese on Wall Street Boards
Corporate governance reform is on everyone’s agenda. Even the top stewards of US capitalism, the Business Roundtable, is advocating for a shift in focus from shareholder value to multiple stakeholder interests.
Well, thank you, but isn’t this exactly the sort of leadership at which Japanese CEOs supposedly excel? Yet, cross-national corporate board representation has been basically a one-way street. There are now just over 60 non-Japanese serving on the boards of Japanese listed companies, but you can count on one hand the number of Japanese nationals serving on the boards of US listed companies. There’s Oki Matsumoto at Mastercard Inc., Jun Makihara at Philip Morris International Inc., and Hiromichi Mizuno at Tesla, Inc. Looking beyond the United States, Japan is represented on just one other major global board, that of the Renault Group, on which sits Yu Serizawa. A righting of this imbalance would be a real surprise.
Should Japan-style corporate governance go global? Certainly not in its convoluted, insider-obsessed, accountability-light, and generally opaque manifestation of the keiretsu and post-bubble era. Reform is very necessary and has gathered considerable momentum over the past decade. In my view, a good way to judge whether true progress on corporate governance reform has been made is by whether (or when) US companies begin to appoint Japanese to their boards. At the very least, it would prove that Japan’s leaders have become more global, more open-minded, and are now capable of demonstrating to global peers how Japan-style corporate stewardship can be very relevant when building a better, more sustainable, and inclusive world. Perhaps an even bigger surprise would be US tycoons actually listening to their advice.
6. US Supply-Side Push Brings Good Deflation to the United States, World
Just as 2020 forced us all to become fast-study experts in virology, 2021 triggered a rush to understand inflation. By early 2022, the consensus was overwhelmingly that, yes, inflation is real and is structural, not transient.
The Federal Reserve is well behind the curve and will have to step on the brakes much harder and longer than we all thought likely just three months ago. The contrarian in me is thus on high alert. A real 2022 surprise would be a full-blown US supply-side recovery, pushing down prices and delivering good deflation to, first, the United States and then the world.
Possible? Absolutely. Just look at the sharp, and now increasingly structural, acceleration of US business formation, running at more than two times the pre-pandemic norm. It could well be that 2022 brings that magic combination of new enterprise meeting new super ambitious labor. It’s high time to point out that, for every three Americans who are part of the Great Resignation, there are four signing on for new (and higher-paying) jobs. All said, the real 2022 big surprise would be that, thank you, the American Dream is alive and well.
7. Bitcoin Accepted for Tax Payments
When asked to explain the difference between the US dollar and cryptocurrency, I often quip that the dollar is backed by approximately $4 trillion in tax liabilities. If these are not settled, the US government comes with guns and handcuffs to take away your freedom. Against this, bitcoin is backed by absolutely nothing. Unlike the governments of China, Japan, or European nations, the US government has remained remarkably tolerant of the open attack on the state’s currency monopoly led by crypto tycoons and evangelists. The American spirit of innovation before regulation and challenging authority appears to be alive and well. A real surprise would be if US lawmakers took the next step and moved from tolerance to acceptance. A new era of global finance will start on the day the US Internal Revenue Service agrees to accept bitcoin or other cryptocurrencies to settle tax liabilities. Until then, have fun trading crypto, but don’t ever forget to have enough of a real-dollar-liquidity cushion at least to pay your taxes.
8. China Synthetic Biology Moonshot for Domestic Food Security
China is the world’s largest importer of food, and this dependence on global food sources is perhaps the biggest tactical and strategic challenge leaders of the most populous nation face. So, it comes as no surprise that China has created massive incentives for its top scientists to speed up progress in synthetic biology in general, and the development of lab-grown and high tech-assisted food in particular. The question is not if, but when a super-massive solution will be announced by the country’s biotech leaders. The sooner it comes, the more of a surprise it will be. Just as the United States has become a net exporter of energy over the past decade, China moving towards food self-sufficiency will fundamentally change more than just trade patterns and economic dependencies. A science-based breakthrough on food security for China, and thus the world, would supersize the country’s credentials as the rightful global leader it aspires to be.
9. United We Stand: Global Covid Policy Commission
The pandemic has been with us for more than two years, yet it feels very much as though we’re nowhere close to agreeing on the optimal public policy response. Rebuilding public trust in both science and policymaking is poised to be one of the biggest post-Covid challenges. Surely, we should be able to do better than the every-strongman-for-himself response we have gotten almost everywhere. A huge positive surprise in 2022 would be the setting up of an independent global Covid policy commission, mandated to analyze—without fear or favor—all the policy measures taken around the world, including hard lockdowns, soft lockdowns, border closures, and quarantine regimes. The goal would be to acknowledge common ground for what has and has not worked.
In my view, the sooner global leaders pull together and demonstrate that they actually want to learn from the various responses to the pandemic, the better the chances that mankind in general, and public life in particular, will emerge stronger and more resilient from the calamity.
10. Germany Beats Brazil to Become Soccer World Champion
On December 18, the FIFA Soccer World Cup final will take place in Qatar. While it is still uncertain if Japan will qualify, Germany was the first team to do so. Team Deutschland not making it to the World Cup final would be not just a surprise, but a real shock. After all, I am German and, every four years, when the World Cup is held, I cannot help but unashamedly reveal a massive bias. May the best team win in 2022, the Year of the Tiger!
