Hugh Whittaker

Building a New Economy: Japan’s Digital and Green Economic Transformations

2022/03/09

Research statement

Like many countries, Japan is currently undergoing a simultaneous digital and green transformation. It is commonly portrayed as a laggard in both, a view partly based on data, and partly an extension of the ‘lost decades’ narrative. Such a view is typically based on explicit or implicit comparative frames of reference, contrasting Japan with the US or Anglophone countries, whose structural or policy changes are accepted as ‘normal.’ These frames persist, even in the midst of a growing sense of crisis about the excesses of neoliberal capitalism in those referent countries. This research seeks to understand Japan’s digital and green transformation in its own terms, while at the same time drawing on a comparative and historical framework which situates Japan in a wider international political economy context.

Profound institutional changes are implied by the permeation of digital and green technologies, analogous in some respects to the industrial revolution, which fundamentally changed societies in the nineteenth and twentieth centuries. Such changes, attempted in a historically short time frame, will not be brought about simply by impersonal ‘market forces,’ but will be the result of purposive action by policy makers, entrepreneurs, and civil society groups. Thus the research is titled building – which implies builders – a new economy. Who are these builders, and what kind of economy are they attempting to build? What institutions are they trying to create, or transform; under what visions or ideologies? What do they seek to preserve?

Overlapping digital and green transformation, Japan’s political and business leaders have announced the objective of transforming Japanese capitalism – ‘new capitalism’ in the case of current Prime Minister Kishida, and ‘sustainable capitalism’ in the case of Keidanren (Japan Business Federation). Both are expressed in stakeholder terms, and imply ebbing support for neoliberalism, which is implicated in deepening inequality and social cleavage. At the same time, the Tokyo Stock Exchange is being restructured, corporate governance reform continues, and Tokyo seeks to relaunch its claim to being a major financial centre. The latent tensions between these two vectors of change cannot easily be reconciled, even under the banner of ESG (environment, social, governance). How are these tensions perceived, and addressed? Will institutional changes be coherent or piecemeal? What is the real core of the reform agenda?

Answering such questions requires an understanding of the past, as well as the present. Japan’s post-war economic ‘miracle’ was built on large-scale manufacturing, supported by ‘patient capital’ and lifetime employment, macroeconomic stability and a range of supportive government financial, industrial and social policies. Institutional compatibility or coherence at both macro and micro levels was a feature. The model came under strain in the 1980s, and as Japan plunged into its ‘lost decades’ in the 1990s, the systemic coherence was lost. This can be seen at the macro level, where household savings remained locked in the banking system, with the banks investing in government bonds, and government debt climbing ever higher. Corporations, meanwhile, sought profitability through cutting labour costs – with negative consequences for demand in the economy – and accumulated massive internal reserves, while the Bank of Japan purchased their shares, eventually becoming the largest holder of Japanese shares (ahead of the Government Pension Investment Fund) in 2021. The macro and micro aspects of the economy were disconnected.

What caused this disconnection, and can a new, coherent institutional configuration be constructed which achieves both digital and green objectives, as envisaged for example in Japan’s ‘Society 5.0’ vision, as well as ‘new capitalism’? From existing literature, a number of preliminary answers may be ventured. An optimistic scenario would be something like the following:

Scenario 1: Renewal
Japan lost its institutional and ideational coherence in the 1990s to be sure, but there is evidence of a concerted effort to construct a new coherence in the digital and green transformations, expressed at the macro level as ‘Society 5.0,’ which offers a very different vision of the future than the market-led transformations which have (hitherto) characterized the US, or state domination in the case of China. Digital and green/sustainability corporate transformation (DX, SX) and ‘new capitalism’ and corporate governance reform may be creatively reconciled, facilitating a new macro-micro coherence. Japan may not be at the forefront of change, but this is ultimately to its advantage as it steers a more balanced approach between market and state.

The research is particularly interested in the plausibility of this scenario. Sources of change come from younger bureaucrats in central ministries, from corporations redefining their business domains, and from new public-private networks which sprang up in the wake of the triple earthquake, tsunami and nuclear disaster of 2011. At the same time, a balanced assessment is likely incorporate elements of the following scenarios:

Scenario 2: Maturity
Japan’s postwar institutional coherence was the result of particular circumstances; social levelling from war and postwar reforms, growth opportunities coalescing around manufacturing, achievable through US-sponsored technology transfer, market access and security umbrella, and a drive for a better future. As Japan matured interests diverged, productionist national(ist) regulations had to be adjusted towards consumer and international interests, and wealth grew the financial sector. Maturity brings diversity and social division, and institutional and ideational coherence through digital and green transformation will be elusive.

Scenario 3: Conversion and imitation
As well as ‘maturity,’ external pressure in the 1980s and temptation in the 1990s and 2000s led Japan to dismantle its postwar model in favour of neoliberal policies, which were partially adopted. Financialization accelerated the divergence, resulting in institutional dissonance, a rupture of the postwar social compromise and a precipitous rise in inequality (cf. Lechevalier, 2014; Dore, 2009). While digital and green transformation offer an opportunity to forge a new institutional configuration, once the neoliberal cat is released, it is difficult to put it back in a bag called ‘new capitalism.’ Continued institutional borrowing and inconsistency is likely in this scenario.

Scenario 4: Decline
This is the most pessimistic scenario. In the words of Glosserman (2019), Japan has peaked; the question is its rate of decline. Politically and institutionally, vested interests impede change at every turn. Moreover, Japan excelled at manufacturing, but with diminishing returns, and it has struggled to grasp the power of software and digital technologies. Most of all, the country is experiencing accelerated demographic transition of ageing and population decline which sap its resources and vitality. Digital, green and new capitalism won’t change this. Japan has settled into a downward trajectory, and expectations have been adjusted downwards.

Conceptual framework

The conceptual framework draws on Whittaker et.al. (2020), especially the organizing constructs of state-market and organization-technology (Figure 1). These broadly correspond to a macro- and micro-level of analysis respectively. The upper dyad shows states and ‘markets’ (encompassing corporations and finance) – a combination familiar to political economy – which mutually interact. The mutual interaction can be supportive or conflictual, and signals a co-evolutionary process. Modern nation states and capitalism emerged together in this process.
 

Figure 1 State-market and organization-technology dyads
Source: Whittaker et.al., 2020

The lower dyad depicts a mutual relationship between organization and technology which is also co-evolutionary; major new technologies give rise to new forms of organization, and vice versa. There are also interactions between the dyadic pairs, indicated by the vertical arrows. Broadly speaking, the lower dyad represents the ‘engine’ of economic growth, and the upper dyad the regulatory mechanisms, which direct resource allocation, and influence incentives, regulation and distribution.

Importantly, though not shown in the figure, the dyads of dominant power(s) form the basis of an international geopolitical and economic system, which has a strong influence on institutional development in countries incorporated into the system. The influence depends on the timing of that integration; institutions formed during the process of integration, which often coincides with high growth, subsequently become resistant to change; Britain failed to fully utilize the emerging technologies and organizational forms of the late nineteenth century, Japan has struggled to adapt to those of the late twentieth century.

The evolutionary dynamic draws on Polanyi’s (1944) double movement for states and markets, and Bodrožić and Adler’s (2017) revolutionizing and balancing dialectic for organization and technology. In a variation of Hall and Soskice’s (2001) claim that certain varieties of capitalism or economic coordination favour certain types of innovation, it may be that Japan does not excel at Schumpeterian ‘creative destruction’ – the ‘revolutionizing’ phase of Figure 1, but functions better in a ‘balancing’ phase, which we might be entering now with regards digital technologies and platform organization (cf. Lechevalier, 2019).

This framework extends an institutionalist perspective to encompass the state, and technology. It overlaps with Régulation perspectives, and is similarly interested in complementarity of institutions. As Boyer (2005) points out, any variety of capitalism, or country, will exhibit a variety of economic coordinating mechanisms, which are not necessarily tightly coupled, and which change over time. Through trial and error, initially disconnected institutional forms may attain a (temporary) coherence. Is there evidence of this happening in Japan? Alternatively, is there evidence of a revival of state influence through industrial policy as a key coordinating mechanism, in other words institutional complementarity through a new turn in state-market relations?

The rationale for conducting the research at EHESS in Paris derives from this overlap with French Régulation scholarship, and empirically from the opportunity to understand French and EU approaches to digital and green transformation to create a non-binary comparative understanding of Japan’s economic transformation. The research seeks to combine macroand micro-level empirical data based on extensive interviews in 2021 and 2022, as well as published materials. The approach and some of the ideas have been presented in preliminary form in Whittaker (2021). The anticipated output will be a book.

References