CEO Policy Recommendations for Developed Economy Nations
Building Tomorrow’s Manufacturing Dynasty
Although Japan is one of the largest economies in the world and is recognized internationally for its advanced research and development capabilities, its best practices in manufacturing and its leadership in key sectors such as electronics and automotive, there are several challenges that loom that could signal a potential drop in its overall competitiveness as a manufacturing destination.
For instance, Japan’s ageing, shrinking population could adversely impact overall production of the Japanese workforce – which is critical to world-class competitive manufacturing. Other challenges include high taxes, high post-Fukushima energy costs, limited access to natural resources, and currency appreciation of the Japanese yen.
Still, recent government policy decisions suggest Japan is taking action to maintain its proud manufacturing dynasty and accelerate growth in new advanced manufacturing sectors. In 2010, the government approved an economic growth strategy (updated and re-released in July 2012), formally called the “Rebirth Strategy for Japan”, which lays out economic goals for 2020. This strategy takes advantage of Japan’s strengths in manufacturing and technology, targeting the development of US$ 1.3 trillion of new industries and 4.7 million jobs by 2020.23 The government designated four key priority areas: innovative energy and environmental products, technologies and practices; the medical sector, including development of leading pharmaceuticals and medical equipment; agriculture; and small and medium-sized enterprises.24
During the conversations with executives, many said that the “Rebirth Strategy” identifies the right topics to improve Japan’s competitiveness but said they had not yet witnessed action and implementation. High expectations for economic recovery after the earthquake and tsunami are not yet realized and progress seems slow.
Executives’ main concerns and recommendations reflect the major recommendations of the Keidanren (the Japanese Business Federation), whose membership comprises Japan’s top companies and industry associations, and particularly the Keidanren’s growth strategy 2011. This strategy outlines “economic measures aimed at achieving sustained economic growth exceeding 3% in nominal terms and 2% in real terms to go beyond disaster restoration and ensure prosperity for its citizens”.25
To achieve these objectives, the Keidanren’s 2011 growth strategy outlines five policy areas that focus on improving Japan’s international competitiveness and enhance its attractiveness as a manufacturing destination. They are:
- Fundamentally revising energy and environmental policies
- Taking measures to combat deflation and stabilize exchange rates
- Reducing the burden on companies, including corporate tax and social security premium
- Participating in the Trans-Pacific Partnership and promoting other high-level economic partnerships
- Developing employment policies based on a diverse labour market
During the one-on-one interviews and the Forum private session in Tokyo in April 2012, executives brought up the policy changes cited by the Keidanren and offered some additional recommendations and other areas of focus that would work further to improve Japan’s competitiveness.
Ensure Japan has the long-term ability to provide cost effective, stable and clean sources of energy
Echoing one of the Keidanren’s core recommendations, executives said that Japan has to fundamentally revise its energy and environmental policies. Many acknowledged Japan’s traditional approach to energy and its focus on preventing climate change, but in the wake of the natural disasters, the policy focus needs to shift to providing stable and economically affordable energy – with a particular focus on electricity stability to prevent power outages detrimental to both people and businesses. Executives wanted to see Japan’s energy supply depend on multiple, disparate sources to hedge against the risk of electric outages. They also called for regional collaboration to design a new grid system able to manage many sources of power.
Executives also said that in the process, Japan’s strong research and development capabilities may also result in innovation and technological breakthroughs that could make Japan a world leader in new energy technologies.
With respect to nuclear energy, many executives cautioned policy-makers from making broad, sweeping policy changes that could negatively impact Japan’s near-term competitiveness. Executives again urged policy-makers to develop a fully comprehensive energy plan for the country, including a specific approach to nuclear power and considering implications to the workforce currently employed in the sector, as well as the potential innovative breakthroughs that additional research into nuclear energy could deliver. In developing the approach, executives recommended that policy-makers look at all relevant and accurate data, current innovations and proposals in work in national laboratories, and consider all stakeholders, including consumers and manufacturers.
Develop monetary policies that help to stabilize exchange rates and address inflation
Executives participating in the discussions again consistently cited the challenges created by exchange rate fluctuations and deflation for Japan’s overall competitiveness and said policy-makers must intervene to help stabilize exchange rates and stop deflation.
Executives regularly commented on the negative impact on businesses and employment as a result of the yen’s strength, witnessing the supply chain and operations challenges facing their business managers because they cannot control the appreciation. Some executives suggested that the combination of the appreciating yen, the aftermath of the natural disasters and attractive opportunities in other markets are already redirecting investment outside of Japan. Executives broadly believed the Bank of Japan needs to do more to ease monetary policy and that the government needs to intervene in foreign exchange markets.
Furthermore, executives understood that much is dependent on economic conditions both domestically and internationally, and said the key to addressing the strong yen and deflation are policy measures that increase domestic demand, such as deregulation and increased participation in international economic partnerships.
Institute policies that lower tax burdens on corporations
Executives overwhelmingly noted Japan’s high corporate tax rates, among the highest in the world, as a significant concern impacting the country’s international competitiveness. Many also commented on the negative economic impact on the horizon as a result of increased social security benefits to Japan’s large ageing population.
To address these concerns, executives supported corporate tax rate reductions recommended in the Keidanren’s 2011 growth strategy, including a 5% reduction in effective corporate tax rates in the immediate term and a rapid cut of corporate tax rates to 30% to align with other major countries – with another near-term reduction to 25% to match other Asian countries.
Executives also said the government needs to lead the way in developing a globally competitive tax system that allows Japan to attract foreign investment that helps to create employment and expands personal incomes. Many noted that a system that allows for overseas profits to be returned to Japan would also improve Japan’s competitiveness.
On the topic of social security, executives believed that the government needs a plan to identify new sources of funding and to allow the treasury to cover a larger share of social security costs.
Increase participation in the Trans-Pacific Partnership and encourage other economic partnerships
Executives broadly said that free-trade agreements and other economic partnerships are crucial to Japan’s long-term economic competiveness. They stressed that Japan’s competitive advantage is in high value-add products that require significant craftsmanship, time and technology, and that free trade is fundamental to selling these products globally. Executives looked again for policy-maker leadership in opening overseas markets and reducing tariff and non-tariff barriers.
In general, executives called for swift and decisive action to move ahead with trade negotiations that are currently planned or in progress. For example, executives said the proposed Free-Trade Area of the Asia Pacific would eventually form, and as a result the government should, as soon as possible, begin negotiations to participate in the Trans-Pacific Partnership. Executives cited other specific examples, including the Japan-China-Korea Free-Trade agreement, the ASEAN+6 agreement, and discussions with the European Union. Each of these consumer markets is highly attractive to the executives interviewed, most of whom are anticipating growing demand in China and South-East Asia.
In addition, executives said the government should discontinue the practice of giving subsidies to less successful industries, as the practice is seen as neither helpful nor sustainable. Instead, executives said the government should reinforce strong industries that have high export potential for their products to overseas markets. Executives wanted to see policy-makers making clear and comprehensive policy that identifies sectors with promising manufacturing capabilities in Japan and provides the support those sectors need to flourish and grow. Examples included high-quality and safe food and agriculture; pharmaceuticals; and infrastructure development beyond selling equipment, instead providing overall system management and operations leadership to emerging markets in particular.
Develop employment policies and frameworks that take into account today’s diverse labour market
Historically, the Japanese employment system has a history of “long-term employment and in-house labour-management relations.”26 However, in response to today’s highly competitive, global, diverse workforce and marketplace, executives broadly pushed for more progressive labour policies. They said that to operate effectively, businesses and policy-makers alike must address the new workforce dynamics – a priority on work-life balance and corporate responsibility; imperatives to move towards greater workplace and work hour diversity; and the falling birth rate and ageing population in Japan.
Overall, executives pushed for a more flexible set of labour standards. They noted specific concern with current practices that pay subsidies to companies to retain workers when unemployment is high, believing that this lessens competitiveness in Japan. Many executives called for a policy environment that facilitates diverse employment arrangements that can react to changing corporate activity.
Finally, participants in the discussions said the government should encourage greater workplace diversity and provide more support for families with young children, to encourage increased work-life balance.
Promote vocational training and development of outstanding innovators
Overall, the executives interviewed believe that Japan faces challenges related to developing skilled talent, particularly given the ageing workforce and what is perceived as inadequate university training to prepare students for manufacturing jobs. Currently, the entrance exam for university is very difficult in Japan, but executives are concerned that students do not learn job-oriented skills during their four years of university and often require “re-education” when they enter the workforce.
Executives said policy-makers should create a “blueprint for talent” that outlines the skills and the workforce Japan would need to sustain its manufacturing competitiveness and meet future growth targets. Executives noted that any such blueprint of future talents should be reflected in the national education curriculum and be supported with stable funding.
Those participating in the discussions also called for the creation of policy focused on developing globally competitive “outstanding talents and innovators” for Japanese manufacturers. This workforce should include individuals who are not only technologically innovative and have the technical savvy to deliver a high-quality product efficiently and on time, but are also capable of operating in a global context with a diverse workforce and have excellent communication and leadership skills. Specifically, executives cited the need for workers who can speak more than one language and are willing to work internationally. Collaboration between schools, government and industry was cited as key to creating innovative, global thinkers. For many interviewed, it is not sufficient to have a small number of employees that are innovative and think about innovation in purely technical terms; the entire employee population must be empowered to innovate and think about the broad range of innovations, from highly advanced to more humble developments in product, process, working style and values.
Takahisa Miyauchi, Executive Vice-President and Group CEO, Chemicals, Mitsubishi Corporation, Japan
Overall, executives said diverse career education is necessary during the secondary and higher education periods, and vocational training is essential throughout one’s career.
Finally, executives expressed concern that young people do not have sufficient opportunities to develop leadership and management skills, due in part to the educational system and in part to the delayed retirement of the ageing working population. This may ultimately inhibit development of the workforce of the future. Executives believed that policy-makers and business leaders should collaborate to provide youth with leadership experiences as well as a sense of confidence that the country is heading in the right direction and that the manufacturing sector offers exciting employment opportunities.
Strengthen policies supporting long-term investment in science and technology
Those involved in the policy discussions were concerned that Japan is falling behind other nations in its R&D, science and high-tech capabilities. They said that Japanese manufacturers must maintain their leadership in higher value-add products, not move towards commodities and low-end assemblies, due to Japan’s historical core strengths, existing investments in facilities for time-intensive products, and relatively high cost of labour. Executives were seeking government support to help respond to the pressure to accelerate innovations and sustain this competitive advantage, particularly in sectors where Japan already has a strong base.
While Japan currently has a high investment to GDP ratio, most of the funding comes from the private sector. Acknowledging that the government has agreed to increase R&D funding to 1% of GDP (around 27 trillion yen), executives in the discussions advocated for effective use of that investment as part of a comprehensive investment strategy. They said even greater increases in overall government R&D spending and a change in the way the budget is allocated would be critical for Japan to retain its competitive edge. Currently in Japan, most of the R&D budget is allocated by the Ministry of Education. Executives said they prefer a model in which more of the R&D innovation budget is administered by an organization that is closer to industry.
Executives would also like to see more Japanese-style venture businesses that could take R&D risks and work aggressively to develop and commercialize new products. The Innovation Network Corporation of Japan was cited as an example of a public-private partnership that funds and provides managerial support to new, promising innovations and technologies.
Finally, many executives called for long-term certainty of lower taxes associated with R&D investment, not simply short-term tax incentives.
Since the regime change at the end of December 2012, the new Abe administration has been active in promoting concrete measures concerning the economic policy intended for Japan’s revitalization. Amid growing expectations of citizens and industry regarding the new government, close attention should be paid to the implementation of the policy.