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A Quiet Ex-Banker Shocks Markets With ‘Socialist’ Tilt in Japan
(Bloomberg Markets) -- When Fumio Kishida became Japan’s 100th prime minister, the low-key former banker was the ruling party’s most moderate—even boring—candidate. But in financial markets he delivered a shock.
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Kishida, who’s highlighted the problem of growing income disparities for years, panicked investors in October, during the week of his inauguration, with talk of redistributing wealth and raising wages and capital- gains taxes. “Kishida Shock” trended on Twitter. The Nikkei 225 Stock Average posted its longest losing streak in more than a decade. Although he backed away from the tax idea, Kishida continues to promote a “new form of capitalism” that he says will address inequality and climate change.
Read more: Japan’s Kishida Seeks Fresh Growth Via ‘New Capitalism’ Plan
The sudden leftward tilt opened up rare debate on the best direction for the world’s third-largest economy, which has been mired in slow growth for decades. Kishida, who has a habit of pulling out a notebook during speeches to refer to grievances and comments he’s heard from constituents, says voters feel left behind by former Prime Minister Shinzo Abe’s growth-focused policies, known as Abenomics. Kishida remains faithful to some aspects of Abenomics, such as the Bank of Japan’s 2% inflation target, but he’s pushed for an end to the US-style, markets-first policies.
“Disparities and poverty have expanded because of overreliance on markets,” Kishida said in his New Year’s speech. “Under a new form of capitalism, rather than leaving everything to the markets and competition, the important thing is for public- and private-sector entities to play roles together.”
So far, Kishida’s new capitalism remains a broad set of ideas in which the government plays a bigger role in creating incentives for the private sector to address social problems. Possible solutions include tax incentives to encourage companies to raise wages, invest in training a more diverse workforce, and spend more on research and development. The new capitalism also envisions more investment in startups as well as green and digital initiatives.
Kishida and his supporters say the fresh approach will be fairer and more inclusive than the free-market “neoliberalism” that’s dominated since the 1980s. If more people in society benefit from economic expansion, growth will be more sustainable, they say. The results will serve as a better model to counter the growing power of authoritarian states, they add.
Some see the approach as part of a global phenomenon, with other world leaders such as Joe Biden in the US and France’s Emmanuel Macron facing growing discontent. In Japan, as elsewhere, the pandemic has laid bare differences between those with steady incomes and those with low pay or unstable employment.
Opponents, particularly those in financial markets, have derided Kishida’s ideas as out-of-touch, socialist rhetoric. Only 3% of investors in a January Nikkei-CNBC survey said they supported him, a staggeringly low figure for the leader of the Liberal Democratic Party, considered the ally of Japanese business. In October, Hiroshi Mikitani, the billionaire founder of Rakuten Group Inc., summed up the attitude of many in this camp when he tweeted, “New capitalism = socialism.”
With a key national election coming up, Kishida made an effort to reassure these critics—and overseas investors—during a speech on May 5 in London’s financial district. He described himself as the only Japanese prime minister since World War II with experience working in the finance industry. He stressed his commitment to a “robust economy supported by the animal spirits of the private sector,” tax cuts, and incentives to encourage citizens to move savings into asset management “to stimulate the market.”
Kishida, who turns 65 in July, hasn’t accepted Bloomberg News’ repeated requests for an interview since he took office.
SINCE THE COLLAPSE of the financial and economic bubble in Japan in the early ’90s, its leaders have tried to stimulate investment by deregulating and privatizing more of the country’s business activities. Abe doubled down on this strategy when he returned to power in 2012, introducing a corporate governance code for listed companies and encouraging them to increase shareholder returns to attract more foreign capital.
Kishida, who doesn’t own any shares, speaks to the many who believe Abe’s policies benefited mainly those invested in stocks, still considered a rich person’s game in a country where only 14% of household wealth is invested in shares and mutual funds, compared with 51% in the US.
“Capitalism isn’t sustainable unless it is something that belongs to all stakeholders,” Kishida said in parliament earlier this year. He refers frequently to sampo-yoshi, a phrase used by Japanese merchants in feudal times to describe a transaction that benefits society, not only the buyer and seller.
Kishida found an early ally in Ken Shibusawa, a prominent businessman. He’s the fifth-generation grandson of industrialist Eiichi Shibusawa, who’s often called the father of Japanese capitalism for establishing the country’s first modern bank and who’s known for his philosophy that businesses should serve the public.
The younger Shibusawa had become disillusioned with the Wall Street mentality after two decades of trading for JPMorgan, Goldman Sachs, and Moore Capital Management. He says he took notice of Kishida, then leader of a moderate faction within the ruling conservative party, when he quoted Eiichi during a television appearance in 2020. Eiichi’s writing on ethical capitalism has influenced Kishida, he says.
Shibusawa, who’s since joined Kishida’s panel tasked with drafting new-capitalism proposals, says the prime minister was aiming for a system that “cares about the environment. It cares about society, it cares about the shareholders. It’s inclusive capitalism. What Kishida is trying to do is much more important than what Abenomics did.”
A CENTERPIECE OF Kishida’s plan is calling on companies to raise salaries, which have barely budged in almost three decades. Kishida had some success in the spring wage talks, with several large businesses agreeing to lift union members’ salaries by the most in seven years. The pay increases helped bolster his popularity, with 55% in a May poll by public broadcaster NHK backing the administration. But with monthly raises amounting to around $15 on average and the vast majority of workers not unionized, most economists say the wage gains will have a limited impact.
The prime minister has also sought to channel money to those most in need. His latest emergency economic package, unveiled in April, includes handouts of 50,000 yen ($389) per child for low-income households. Critics say Kishida’s emphasis on redistribution contains a deep strand of anticapitalism.
“Unless he comes up with policies that are going to first drive domestic demand, before talking about distribution, his policies will look leftist or communist,” says Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo. “Before any distribution there needs to be a growth strategy.”
The prime minister has described corporate profits as being “lost” to shareholders in the form of dividends, and he’s urged companies to spend the money on higher wages instead. Kishida has also found inspiration in George Hara, a businessman and author of the 2017 book Public Interest Capitalism, which describes “the mistaken idea that companies belong to shareholders.”
Investors have been particularly upset by Kishida’s suggestions of higher taxes on capital gains and hints that he might discourage share buybacks. He’s talked about ending the requirement that publicly listed companies report earnings quarterly so management can focus on long-term growth rather than on investors’ short-term demands. Kishida’s advisers have since watered down or repudiated all these ideas. A draft version of Kishida’s “grand design” for new capitalism, released in late May, didn’t include policies that had previously roiled markets and instead called for boosting household assets and tax-free plans. The government promises further clarity after the summer election.Watch: Japan’s Kishida Seeks Fresh Growth Via ‘New Capitalism’ (Video)
Deputy Chief Cabinet Secretary Seiji Kihara, a close adviser to the prime minister, promised not to increase the capital-gains tax anytime soon, Nikkei reported in April. That eased concerns, but then Chief Cabinet Secretary Hirokazu Matsuno said in May that the debate on taxes would continue.
KISHIDA’S APPROACH TO financial markets contrasts sharply with that of Abe’s first months in office, when Abe channeled the “greed is good” spirit of corporate raider Gordon Gekko, from the 1987 film Wall Street. In a speech at the New York Stock Exchange, he urged investors to “buy my Abenomics.”
Critics warn that Kishida could reverse the country’s recent progress on corporate governance. Investors and business executives point out that Japanese companies’ shareholder payouts are hardly excessive when compared with those in the US and that short-term thinking is rarely a feature of Japan’s corporate boards.
Kishida’s ideas include making massive investments in tech, boosting Japan’s falling competitiveness in sectors like semiconductors, and lifting economic security in the face of geopolitical threats. In his May 5 speech he promised “strong incentives” to encourage companies to increase research and development “in accordance with the national strategy.”
Ideological opponents say these policies could lead to excessive intervention by the government in a misguided attempt to resurrect the alliances between state and private industry that aimed to spur growth in autos and home electronics, for example, after World War II. That led to so-called zombie companies dependent on easy credit and government subsidies after the burst of the asset-inflated bubble economy.
“I’ve absolutely no idea what new capitalism is trying to do,” says Taketsugu Agari, a former trader who’s now an individual investor and market commentator. “From the perspective of people in the stock market, they want Kishida gone as soon as possible.”
The war in Ukraine and Federal Reserve rate increases have buffeted global markets this year. The benchmark Nikkei 225 remains below the 31-year high it reached in September, right before Kishida succeeded Prime Minister Yoshihide Suga, edging out maverick reformer Taro Kono and right-wing firebrand Sanae Takaichi.
“Markets are asking, ‘Does he really understand capitalism?’ ” says Lully Miura, a political scientist and commentator at the Yamaneko Research Institute. “By trying to differentiate himself from Abe and Suga, he sounds like he’s saying that earning above a certain amount is a bad thing.”
Kihara, the deputy chief cabinet secretary, has pushed back at such criticism. “Kishida is extremely knowledgeable about finance,” he said in an interview in March. “He sees the markets as very important.”
Any policy is doomed to failure if it doesn’t address Japan’s impending population implosion and bolster the small and midsize businesses that provide most of the jobs, says David Atkinson, a former banking analyst who was an economic adviser to Suga. “New capitalism is not based on a thorough statistical analysis of the Japanese economy, why it hasn’t grown for 30 years, where the bottlenecks are, or what needs to be done about it,” he says.
Japan’s working-age population is set to fall precipitously in the coming years, while the costs of caring for an aging population continue to rise. Economists’ projections show South Korea and Taiwan overtaking Japan in nominal per capita gross domestic product this decade.
Kishida says his policies will foster a more diverse and productive workforce to “produce maximum value with a shrinking pool of workers.”
In his speech on May 5, Kishida said, “Since I entered politics in 1993, I have worked on industrial policy, science and technology policy, and policies for small and medium-sized enterprises. Indeed, one could say my life’s work has been to revitalize the Japanese economy.”
Kishida supporter Shibusawa says it’s no coincidence that his famous ancestor is back in the spotlight. A serial drama on Eiichi’s life, shown on Japan’s public broadcaster last year, achieved an impressive 20% viewership rating. Starting in 2024 his face will be featured on the 10,000 yen note, the largest denomination.
“We need to answer to the shifting dynamics of the world, the global economy, environment, and society,” Shibusawa says. “What the prime minister is trying to do is very noble, and it’s very important at this juncture. It’s very, very timely.” —With Isabel Reynolds
Reidy is a senior markets editor, and Takeo covers economics. Both are in Tokyo.
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