Kishida's failure to act on his ideas has left Japan flailing
Prime minister must drastically pick up the pace on reform
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
The only thing falling faster than Fumio Kishida's approval rating is his tolerance for taking risks to upgrade the world's third-biggest economy.
Thanks in part to the prime minister's timidity, Japan may soon slide to No. 4 behind Germany. The Japan Economic Research Institute projects that could happen this year should the yen slip back to 137 to the dollar from about 130 now or if Kishida fails to hasten growth, according to the Sankei Shimbun newspaper.
This is not Kishida's fault, specifically, any more than predecessor Naoto Kan was responsible for China surpassing Japan in gross domestic product on his watch in 2010. But Kishida's Liberal Democratic Party is now offering a case study on how Tokyo makes it easy for economic rivals to pull ahead.
Upon taking office in October 2021, Kishida displayed a keen understanding of what Japan has to do to regain its once-vaunted animal spirits. His "new capitalism" plan essentially sought to make up for lost reform opportunities over the previous decade.
Yet Kishida has betrayed no more urgency than his predecessors. What happened to his bold idea for using the $1.5 trillion Government Pension Investment Fund, the world's largest such cash pool, to finance a startup boom? Or talk of cutting bureaucracy so that Japan creates more economic energy from the ground up, not just from the twin towers of Toyota Motor and Sony?
The good news is that Japan Inc. finally seems ready to give workers a raise.
Uniqlo owner Fast Retailing is offering full-time employees raises of up to 40%. Other major companies like Nippon Life Insurance and Suntory Holdings are hiking wages in the neighborhood of the 4% national inflation rate. There is growing optimism that smaller enterprises might fatten paychecks, too.
Yet these are less responses to pleas from Kishida's LDP than to fast-tightening labor markets. As the population ages and shrinks, companies are anxious to retain and motivate staff.
More importantly, without bold policies to increase productivity and efficiency, these wage increases will exacerbate the worst inflation in over 40 years. If you think the Bank of Japan is struggling now, just imagine when its policymakers are blamed for the next recession after hitting the monetary brakes.
The real case study here is Tokyo operating on "Japan time" at a moment when China is speeding up economic time across Asia.
Sure, President Xi Jinping's economy is embroiled in chaos. His sudden pivot from zero-COVID to 100% reopening has economists trying to keep up. But if Xi's third five-year term as party leader delivers just some of the innovative big bang the Communist Party promises, the costs of Tokyo's slow-motion approach to reform will rise exponentially.
Kishida, for example, could have had his terrific GPIF plan up and running by now. The government is also telegraphing an end to restrictions on overseas investments by domestic venture-capital funds. The hope is that local entrepreneurs and financiers cultivate deeper relationships abroad and in turn boost Japan's firepower to create more technology unicorns.
Just one problem: Bureaucrats have until 2024 to submit a draft proposal to parliament. This could mean 23 months from now. Why not next month?
In the interim, Xi's team in Beijing will have greater scope and space to accelerate plans to dominate the future.
China faces daunting challenges: an explosion of COVID-19 cases; runaway debt; shaky property markets; a shrinking population; deciding if Alibaba Group founder Jack Ma and his ilk are economic friends or foes; and working with Kishida and U.S. President Joe Biden.
There is also the fallout from Xi's draconian COVID lockdowns and crackdown on internet platforms and other disrupters. Rebuilding trust in global market circles will take time and greater transparency than Xi prefers.
But Beijing often multitasks better than the party that has led Japan with only two brief interruptions since 1955.
Despite its troubles, Team Xi is endeavoring to create a Silicon Valley East of sorts in southern China. A major priority in linking Hong Kong, Macao and Shenzhen with eight other municipalities to nurture tech innovation is to dominate the electric vehicle market.
All this is bad news for, say, Toyota. Innovation does not happen in a straight line. China Inc. is sure to have as many setbacks as successes. But good luck to Toyota selling its hybrid vehicles a couple years from now.
Kishida may think that with approval ratings in the mid-20s, he has little latitude to act audaciously. To do so, though, would be to assume the same protect-the-status-quo crouch of every Japanese government these last 20 years, at the same time as China quickens the region's economic clock.
If Kishida hopes to reach the two-year mark in power, or even 18 months, he must lean the other way and put some big reform wins on the scoreboard. It would be a mistake for the LDP to look at companies finally raising wages as a "mission accomplished" signal. It is only half the battle, at best, as global inflation heats up.
Kishida must shake an economy losing status as we speak with strong moves to increase productivity, innovation and competitiveness. Unfortunately, time is simply not on Japan's side.