The Year Ahead 2024: Forecasts and Surprises

Ten twists and turns that could make for an interesting Year of the Dragon.

Forecasting is both an art and a science. Quantitative forecasts are based on probability models that cannot escape the assumption that the future will be a replay of the past. Qualitative predictions are based on a combination of experience and intuition. Like a beautiful Bach sonata, the former follows a predictable logic. Like an inspired jazz solo, the latter delivers a genuine surprise that you did not expect but cannot live without once you’ve heard it. The only certainty we have is that 2024 will bring both—existing trends evolving and genuine surprises.

I wish a happy, prosperous, and healthy New Year to you! And now here are my forecasts and possible surprises for 2024:

1. Japan’s inflation and growth outpace the United States.

We will see a full decoupling of the US–Japan business cycle in 2024 as America faces a sharp slowdown due to the 2023 US rate hikes cutting down both consumption and capital expenditure. In contrast, Japan’s economy will stay surprisingly strong, as neither the Bank of Japan nor the Ministry of Finance tighten.

2. Japan’s M&A boom goes global.

With the US recession creating opportunities to buy US companies and assets at significant discounts, Japan’s merger and acquisition activity will expand. Surprise: a major Japanese financial institution will buy a US bank, insurer, or payments company.

3. Japan’s MBO/LBO boom accelerates.

Spurred by pressure from shareholders and stock exchange, as well as low debt financing costs, management buyouts and leveraged buyouts will continue. Surprise: 2024 may be the first year when more companies go private and delist from the stock market than new startups going public and listing via IPOs.

4. Japanese CEOs step out of their comfort zone.

Rather than just relying on in-house R&D teams, Japanese CEOs will start to buy startups for future growth. One reason for US corporate dynamism is the aggressive use of “outside” innovation to supplement, improve, or disrupt “inside” businesses. Ninety percent of US startup exits are acquisitions, while in Japan, 90 percent are IPOs. Mark my words: Japan’s new generation of CEOs are taking risks and are not afraid to try and make 1 + 1 = 3 … or 4.

5. Japan’s corporate governance goes global.

So far, Japan’s corporate governance reform has been one-way, importing US “best practices” into Japanese boardrooms. A Japanese CEO appointed to a Wall Street firm’s board would be proof that Japanese governance has truly become world class. A positive surprise, yes. But if US multinationals are serious about multi-stakeholder governance, there is much to learn from Japan’s corporate leaders.

6. Japan launches its own Defense Advanced Research Project Agency.

Rising defense spending demands a fundamental rethinking of collaboration among universities, scientists, private enterprise, and public policy. Without fundamental change, the risk is that high defense spending will bring little or no positive benefit to Japan’s global competitiveness or domestic economy. The sooner Japan’s elite can agree on the rules and institutional governance for dual-use technologies and their scalable commercialization, the greater the certainty of both private and public spending on defense yielding positive multipliers.

7. Japan deregulates home-helper visas.

The combined problems of a growing labor shortage, a falling birthrate, and more Japanese women aspiring to professional careers cannot be solved without outside help for families. A very positive surprise would be if Japan followed the Hong Kong and Singapore model. There, professional couples can sponsor home helpers, with proper supervision and governance by local authorities. This is a pragmatic solution to reverse the declining birthrate and to reduce the runaway costs for public social and medical support for children and the elderly.

8. China synthetic biology moonshot delivers domestic food security.

China is the world’s largest importer of food. Dependence on the global food supply is the single biggest challenge for China’s leaders. Public and private investment in synthetic biology and the development of lab-grown and tech-assisted food is huge. The question is not if, but when, a supermassive scale-up solution will be announced by China’s biotech leaders. A science-based breakthrough on food-security for China—and thus the world—would supersize China’s credentials as the rightful global leader she aspires to become.

9. Elections shift alliances.

While all eyes are on the 2024 US presidential election in November, the vote in India in April or May could bring a big negative surprise. If Prime Minister Narendra Modi loses reelection, the impact could be far-reaching—not just for the Quad alliance comprising Japan, the United States, Australia, and India, but also the leadership of the emerging alliances around the Global South.

10. Germany wins Euro 2024.

Sunday, July 14, will bring the final of the UEFA European Football Championship. I am German, so naturally, I support Team Germany. But they have been playing shockingly poorly, and their performance has only gotten worse after they lost to Japan in the 2022 World Cup. So, the biggest positive surprise for me in 2024 would be Germany actually winning the Euro 2024 championship—especially since the final is played on the French national holiday, Bastille Day.

A Matter of Demographics

Connecting four megatrends that will shape Japan’s future.

Yes, Warren Buffett had already started buying Japanese companies two years earlier, but it was in 2023 that the global mainstream followed. The combination of cheap yen, geostrategic realities, and a newfound can-do attitude among domestic leaders has put Japan back in play as a global contender. Leaders in finance, industry, and innovation around the world are now pressed by their boards to develop concrete Japan strategies. Yokoso! Welcome back! What took you so long?

This Time Is Different

Before we get too carried away by the current Japan hype, let me outline some key forces that, in my view, will work to create sustainable Japan opportunities over the next decades, for both global and domestic companies. Here are the four Japan megatrends you and your corporate strategy must seek to exploit.

1. Demographics Forces Industrial Consolidation

Japan has about 3.6 million companies, 2.5 million of which are owned and run by founders who will be over 70 years old next year. Of these, 1.6 million do not have a successor, a son or daughter interested in taking over.

This demographic reality has unleashed a growing tsunami of mergers and acquisitions (M&As). Businesses that were never for sale are now up for grabs. Your chances of partnering with or buying a Japanese company have never been better. The M&A wave will get bigger. Roll-ups and industrial consolidation will create unprecedented opportunities for global players to raise their market share and profit from increased economies of scale.

2. Freeing Up Household Wealth

Japanese households have accumulated some $30 trillion of wealth. About $20 trillion of this is in financial assets. The remaining $10 trillion is stashed away as tansu yokin, the famous mattress money.

Again, demographics is key to unlocking real structural change. About $12 trillion of these household financial assets are owned by people aged over 70.

This means $5 or 6 trillion—or 1.3 to 1.5 times Japan’s current gross domestic product—will become unfrozen over the next decade. Even after inheritance tax, this implies a significant boost to the purchasing power of Japan’s younger generation.

Make no mistake: the legacy of the legendarily high savings rate of Japan’s baby boomers will significantly boost next-generation purchasing power. Most economic forecasts completely ignore this wealth transfer effect, thus underestimating the potential growth in domestic demand.

3. From Seniority-based to Merit-based Pay

The war for talent is intensifying and will only get worse. Japan’s young generation feels its power, and the tables have turned. Graduates are no longer begging for jobs. Companies are begging increasingly scarce graduates to join. And retention of employees is becoming tough. According to several studies, as many as one in five University of Tokyo graduates now quit their initial employer within the first five years.

Importantly, employees don’t just want higher pay. They also seek greater responsibility and impact. If you joined a top Keidanren company in the 1960s, it took on average 13 years for you to become the general manager. Today it takes 24 years.

Companies which inspire and empower their employees will pull away from those that insist on the old ways. Labor mobility will surge, and companies that offer genuine and transparent career planning and merit-based compensation are poised to move ahead. Here, global companies still have a lead, but as local Japanese companies adapt, the war for talent—and thus the need for increasingly creative leadership—will intensify. The net result? Productivity will surge, and so will employee incomes—yet another reason why standard economic forecasts are too pessimistic on domestic demand.

4. Open-Door Japan

Japan will become an immigration powerhouse. Before the pandemic, the country was on track to accept about 150,000 new non-Japanese employees per year. This more than doubled to almost 350,000 in the first half of 2023. There are now approximately 3.2 million non-Japanese residents of Japan, up from barely half a million 30 years ago. Visa and permanent-residency requirements continue to ease. Most importantly, the biggest obstacle to employing non-Japanese talent—seniority-based rather than merit-based compensation—is beginning to change. All said, it is now perfectly reasonable to expect that about 10 percent of employees will be non-Japanese by 2030. That’s more than double the current rate of just below four percent.

Common Theme

Underlying these four Japan megatrends is demographics. Far from being a negative—fewer people must equal lower consumption—Japan’s demographics will turn out to be a catalyst for positive change.

• Industries will consolidate, thus allowing greater efficiencies and economies of scale.
• The mattress-money wealth of Japanese households will be freed and reenter economic circulation.
• Increasingly scarce labor will be empowered and gain purchasing power.
• And global talent will build careers and make their fortunes here in Japan.

Importantly, all these forces represent real structural change that will remain in place for the foreseeable future.

Predictable. Reliable. Full of opportunity.

Welcome back, Japan.

In Praise of the Salaryman CEO

Japanese corporate leaders are much better than their reputation.

They are not really part of the global Davos jet set. They don’t fly around the world in their private jets. Many still proudly print the office fax number on their business cards. And in the age of the short quip, they lack a strong (or any) presence on social media. They even very much prefer to stay silent in investor-relations or press meetings.

But if you’re looking for extraordinary resilience and all-around competence to get the job done, Japan’s salaryman CEOs and their teams actually have a very impressive track record.

In fact, the data strongly suggests Japanese salaryman CEOs have absolutely nothing to be ashamed of in comparison with the superstar CEOs of Wall Street.

Decades of Growth

Since 1995, Japanese listed companies have seen their top-line sales basically stagnate, up a mere 1.1 times in 2022 from their 1995 level. But there was a whopping 11-fold surge in profits over the same period.

Anyone who has ever invested in or run a business knows how impossibly difficult it is to grow profits without the tailwinds of rising top-line sales. For one year, maybe. But for 30 years? Clearly, Japanese salaryman CEOs must have done something right.

Meanwhile, since 1995, superstar CEOs in the United States delivered a 6-fold increase in profits, generated by a tailwind of top-line sales rising 3 times. Of course, the Wall Street superstar CEOs deserve to be proud of having delivered such profits over the past 27 years. But compared with the 11-fold surge produced by Japan’s salaryman CEOs, the US superstar performance looks rather unimpressive—particularly since the salaryman CEOs got no tailwinds from rising sales. No wonder Warren Buffet is impressed by Japan’s Wall Street counterparts.

Pay for Performance

Interestingly, the impressive performance of Japanese salaryman CEOs has been reflected in their compensation. Since 1990, pay for the top CEOs has almost tripled. So, there is pay for performance in Japan for CEOs—profits up 11 times, compensation up a more modest 3 times, but still in sync with performance.

Meanwhile, in the United States, the link between corporate performance and CEO compensation is much tighter. CEO compensation has mirrored the rise in profits, both basically marking a 6-fold jump since 1990.

The biggest difference between the salaryman CEO and the superstar CEO is, of course, the absolute gap in compensation for the chief executive position relative to average employee pay. In Japan, this is now just about 12 times on average, with the top 50 CEOs making 50 times.

On Wall Street, it’s a different world altogether; the average annual salary of a CEO now is just under 400 times that of their average employee.

Put another way, a Wall Street CEO earns in one day what one of their employees earns in a year. But in Japan, it takes the 50 highest-paid CEOs about a week, and the average CEO a month to bring in what their staffers make in one year.

Don’t get me wrong. This piece is not about whether US-style or Japanese-style corporate leadership is better. It is about highlighting some of the actual performance indicators and, most importantly, demonstrating that Japanese corporate leaders did in fact deliver what had been asked of them. They focused on profits, profits, profits.

Future Focus

So why was this tremendous achievement by salaryman CEOs not reflected in higher share prices? Unfortunately, the answer is very simple: salaryman CEOs did not invest in their businesses. Since 1995, the capital expenditure (capex) of listed companies in Japan has declined by more than 10 percent. In contrast, capex for US listed companies has surged by more than 150 percent over the same period.

Also, Wall Street CEOs raised their employees’ compensation by about 90 percent since 1995, while Japan’s salaryman CEOs actually managed to decrease employee compensation almost 25 percent over the same time frame.

“Since 1995, Japanese listed companies have seen their top-line sales basically stagnate, up a mere 1.1 times in 2022 from their 1995 level. But there was a whopping 11-fold surge in profits over the same period.”

Make no mistake: share prices reflect potential returns on future corporate performance, and dreaming about future performance is basically impossible without corporate leaders investing in both human and productive capital.

The good news is that there’s absolutely no reason that salaryman CEOs cannot become great investors in their companies. In my view, because there has been a change in three parameters—human capital, technology access, and economic security—a capex and investment super-cycle is on the horizon in Japan.

A labor shortage and war for talent are forcing a complete rethink of human-capital deployment. One result is rising wages, but more important will be the growing focus on pay for performance and a shift towards genuine career development, i.e., a break with the lazy pay-for-seniority culture.

As workers grow increasingly scarce, machines and artificial intelligence will be deployed more broadly.

Ironically, the previous reluctance of salaryman CEOs to invest in better IT may turn into a classic backwardness advantage. If you’ve never embraced cloud computing, you now can go straight from hanko to blockchain. Japan’s DX protocol has a good chance of becoming best in class in the same way shinkansen bullet train technology set the global standard for high-speed railways.

National economic security and changing geopolitical realities will force new investment in supply chains and production facilities, as well as research and development centers.

Japan should be proud of its salaryman CEOs. For the past 30 years, the focus has been on growing profits by cutting excess costs (and debt), which has delivered in impressive ways. Now, the goals have been reset. You must invest and accelerate the growth of your business. Like Warren Buffet, I have no doubt they can deliver.