Swift actions were the approach Prime Minister Fumio Kishida took after assuming the leadership role on 4 October 2021. From calling a snap election to the size of the economic stimulus package, his decisions seemed like a race against time. So far, they have exceeded market expectations.

“The time to repair the roof is when the sun is shining,” said the prime minister before unveiling the ¥55.7 trillion (US$490 billion) stimulus package¹ to boost Japan’s pandemic-battered economy. The package consists of aid for hospitals and struggling businesses; and investments to execute the government's growth strategy.

While the economic stimulus may pack a punch in the near term, paving the way for a rebound in consumer spending also requires the easing of coronavirus restrictions and high vaccination coverage. Japan’s full vaccination rate of 79%² is currently among the highest in the world.

Bold proposals may have a lasting impact

Near-term developments are important given the market uncertainties, and so is the long-term impact of some of the prime minister’s bolder proposals.

Bringing Japan onto a path of sustainable economic growth will require more than stimulus packages. Initiatives such as the clean energy strategy and the digital garden city state concept could potentially have a lasting impact on the nation’s economy and its financial markets.

In June, the Kishida administration is expected to provide more details on its clean energy strategy. It is currently working towards reducing Japan’s carbon emissions by 46% by 2030 (from 2013 levels) and achieving carbon neutrality
by 2050.

According to the Nikkei, one of its plans would include an estimated ¥2 trillion (US$17 billion) worth of investments in developing a HVDC (high-voltage direct current) electricity transmission network across Japan over the next 10 years.

The electricity transmission network could enable offshore wind power plants to transmit their electricity to large cities efficiently over long distances. Although there has been no official government announcement, it is widely believed the development of the electricity transmission network will be carried out over the next 10 years involving investments from the private sector. Companies such as Hitachi, which is a pioneer in HVDC technology, could potentially benefit from a project of this scale.

Into the digital future

The prime minister’s vision of developing Japan into a digital garden city state involves advancing the rollout of 5G infrastructure and implementing technologies such as teleworking, drone delivery and automated driving.

At the heart of these changes is digital transformation or DX³, which is interlinked with some of the administration’s policy priorities. It is also seen as a continuation of his predecessor Yoshihide Suga’s digital reform agenda.

“We will improve our digital infrastructure, including 5G, semiconductors, and data centres. We will work to enable everyone to enjoy the benefits of digital transformation, without leaving anyone behind,” said Prime Minister Kishida on advancing the country’s implementation of DX.

Digitalisation and health care innovation are some of today’s long-term secular trends. Digitalisation trends, in particular, have accelerated as activity in
e-commerce, on-demand video streaming and cloud-based services increased during the period of coronavirus restrictions.

In Japan, digital investments remain low compared to other developed economies such as the US, France and the UK. In fact, digital investments in Japan have been flat for decades, based on data compiled by the OECD.⁴

The country could, however, potentially bridge this gap. This is because the demand for digital services and infrastructure is rising on the back of changing consumer behaviour and a growing need for more data storage and robust IT systems.

As Japan’s economy continues to digitalise, companies with a digital advantage have the potential to stay ahead of the competition. One example of a company positioned in the fast-growth digital consulting market is BayCurrent Consulting. The firm saw strong demand for its services when the Japanese government made digitisation a key economic focus in order to catch up with global peers.

Playing a bigger role in the world of tomorrow

Outside of Japan, there are important issues to keep in perspective. These include the technology disputes between the US and China concerning 5G and the ramping up of semiconductor capacity to meet the demands of an increasingly connected world. These are areas where Japanese companies could play an important role, as many of their products and services are crucial to the digital transformation we are witnessing in the world today.

Japan has also been an important source of foreign direct investment. According to data provided by UNCTAD, Japan was the largest overseas investor in 2018 and 2019. However, its outward foreign direct investment flows dropped significantly to US$116 billion in 2020, bringing it down to second place, after China.⁵

Looking ahead, we should expect to see increased focus from the government on economic security and foreign policy. The appointment of a new economic security minister could help accelerate legislation this year to promote supply chain resilience and strengthen government oversight over strategic activities and technologies. Over the course of the pandemic, the Japanese government has set aside funds to attract foreign companies in strategic sectors to relocate their supply chains.

As an example, in November Taiwan Semiconductor Manufacturing Company announced plans to build a fabrication plant with Sony in Kumamoto, Japan. The company estimated the initial capital expenditure at around US$7 billion with support from the Japanese government.

Bringing in the world’s largest contract chipmaker to boost Japan’s semiconductor ecosystem marks a strong start for the Kishida administration. It would not want a repeat of supply chain disruptions that heavily impacted its manufacturing industry during the pandemic.

At present, the government is focused on containing the spread of the Omicron variant and accelerating booster shot schedules. It adopted the strictest border rules among the G7 nations. While much is still unknown about Omicron, its arrival does suggest that COVID-19 will be with us for a while longer.

As for Prime Minister Kishida, overseeing a meaningful improvement in the Japanese economy would position him well to clear the upper house election hurdle in July 2022 and offer him three years in which to govern free of elections. Success on these fronts would strengthen the leader’s power base and give him sufficient time to implement more redistributive policies. That is the potential inflection point to watch for.

 

1. Japan’s stimulus package consists of cash handouts to low-income households, aid to struggling businesses and subsidies for domestic travel. Including funds from the private sector, the overall package will likely amount to ¥78.9 trillion. Source: JapanGov

2. As at 2 February 2022. Source: Our World in Data

3. Japan’s Ministry of Economy, Trade and Industry defines the term “DX” as digital transformation, for example of products, services, processes, business models or culture, that results in dramatic changes in business environments. Companies can take advantage of data and digital technologies to establish competitive advantage.

4. Sources: McKinsey & Company “Using digital transformation to thrive in Japan’s new normal: An urgent imperative”, OECD statistics

5. UNCTAD: United Nations Conference on Trade and Development