Post-Covid Economic Recovery in Japan: How will Kishida Redefine Economic Policy and Reform?

Economic Recovery in Japan

By Dr Naohiro Yashiro

Japan’s economy has suffered significantly as a result of COVID-19, despite the small number of severe patients and deaths by OECD standards. The economy after COVID-19 needs structural reform, rather than demanding stimulative measures. The issue of whether Kishida could change his political stance radically after the Upper House election in July is critical.

The COVID-19 crisis has significantly revealed the structural problems Japan has faced for decades. This is mainly because of the policy of constraining economic activities to prevent infection through the closure of restaurants or other face-to-face services. The mortality rate due to COVID-19 was minimal in Japan by OECD standards . Nevertheless, the IMF’s projected recovery of GDP growth in 2021 and 2022 is 1.6 per cent and 3.3 per cent, much less than that of 5.6 per cent and 4 per cent, respectively, in the United States.

This was necessary in order to prevent overflow of emergency hospital beds. However, Japan is notorious for having too many hospital beds in proportion to the population, as indicated by the OECD health database. The gap suggests an inefficient allocation of healthcare resources and a lack of strong political leadership to overcome the issue, even in the context of an emergency. The government focuses on minimising the number of patients, and the recent ban on the entry of international students studying in Japan, unlike other countries, is an example. On the other hand, Kishida recently withdrew the bill to force medical doctors to meet the increasing demand for treatment of patients. This is to prevent the negative political impact by the vested-interest supporters of the LDP on the Upper House election, scheduled for this July.

Kishida’s demand-oriented economic policy

Kishida’s economic policy is basically along the same lines. Japan has been suffering from long-running economic stagnation since the mid-1990s. The GDP on a dollar basis has hardly increased, unlike the United States and China (see chart). Under the current miserable situation, Kishida’s prescription is simply stimulating demand through fiscal expansion with the accommodative monetary policy of the Bank of Japan.


Kishida is urging further fiscal expansion, amounting to 30 trillion yen, to overcome the COVID-19 recession, but household savings have been accumulating, waiting for the end of the pandemic. Under this new type of recession, the government is stimulating fiscal policy measures, and warning about a pandemic is like simultaneously stepping on the accelerator and braking.

The more critical factor restraining Japan’s economic growth is not the demand side, indicated by the low unemployment rate of 2.4 percent in 2020, close to the full-employment level right before the COVID-19 recession. An important question is why Japanese wages have not increased, despite the tightening labour market situation.

One explanation is the lack of a productivity increase in the Japanese economy, particularly in the agriculture and service sectors. But tackling these sectors induces significant political frictions. Thus, successive LDP prime ministers have called for structural reform. But Kishida is the first prime minister not to use the word “reform” in his opening speech in the Diet.

Positive effects of COVID-19

COVID-19 has brought about several positive effects on Japan’s society. The first is the expansion of teleworking to prevent infection. Many people find that they can do most of their work more efficiently at home than in large, crowded offices. They can also save time on the long commute in overcrowded trains, and spend more time with their families.

Nevertheless, many Japanese companies consider teleworking an emergency recourse under COVID-19, not a productivity-enhancing measure. Japanese companies set a high priority on on-the-job training and teamwork, which require a working style of having the employees simultaneously in the same place. The traditional labour law also requires the supervisor to monitor the employee’s working time, even teleworkers. The white-collar exemption rule is quite limited in practice, and additional payment for overtime hours worked becomes mandatory at midnight and during holidays. The strict implementation of the labour law needs to be revised but is at the core of regulatory reform, mainly due to the resistance of the labour unions.

The second positive effect of COVID is widespread online lectures at universities and schools, and online medicine in clinics, methods which used to be considered inferior to face-to-face practices. There is a possibility that these online practices are also considered to be for emergency use only by the traditional group, and that they may well fade away once COVID-19 is gone.

Finally, the problem of insufficient digital administration practices becomes obvious without a scheme like the US Earned Income Tax Credit to those on lower incomes An individual identification card system similar to the US social security number exists in Japan but is not widely used, due to various objections. Japan’s minimum-income maintenance scheme is based on reporting, and the process of income transfer to those on low incomes takes a long time.

The COVID-19 crisis is an excellent opportunity to introduce the digital economy to Japan, but Kishida seems uninterested in reforming the traditional schemes once COVID-19 is over.


Kishida’s New Capitalism and Japan’s economy after COVID-19

Kishida has developed an idea he calls a “new kind of capitalism”, which provides the theoretical framework for his policy. Though its content is still unclear, this New Capitalism should incorporate digital transformation. However, what is critical is not the latest technology alone, but implementing it in the current economy and society. The accumulation of individual databases conflicts with the protection of privacy, and strong political leadership is necessary to overcome the objections. It should be more complicated than the broader usage of the official individual identification number already implemented.

Kishida is likely to focus on populist issues, depending on expansionary fiscal measures, which few disagree with, but not on structural reforms that may meet with solid objections.

Kishida is likely to emphasise income distribution rather than profit-seeking in his New Capitalism, based on his criticism of neoliberalism. But this is not a good strategy, given that Japanese companies suffer from low profits compared with their Western counterparts. This is mainly due to the variety of regulations placed on Japanese firms, including the mandatory employment of the elderly up to age 65, which was recently extended to 70 as a moral obligation for the time being.

There is scepticism about Kishida’s policy of raising wages through the means of corporate tax reform that favours those firms who increase wages. This is mainly because 70 per cent of Japanese firms are in deficit and have no advantage from such measures. Also, companies’ social security contributions would increase with a higher wage, without any compensation. After all, many firms do not raise wages without equivalent productivity increases.

In conclusion, Kishida is likely to focus on populist issues, depending on expansionary fiscal measures, which few disagree with, but not on structural reforms that may meet with solid objections.

In short, despite being the LDP leader, Kishida’s economic policy stance resembles that of the leftist opposition parties, though it is an excellent strategy for winning elections. The orthodox, market-based policy goals to raise the productivity of Japanese industries are the following.

First, the potential capability of agriculture is not as weak as many believe. Japan has a warm climate, plenty of water resources, and diligent farmers. The primary factor in its poor international competitiveness in the production of rice, the principal crop in Japan, is the government-induced cartel that raises prices by reducing production through subsidies to the farmers. Without this cartel, Japan could export 40 per cent of its rice production abroad, improving productivity, and helping to address the world food shortage.

The second goal is to change the labour policy protecting rigid employment practices. Long-term employment security and seniority-based wages used to work effectively in the past, but are vulnerable to a rapidly ageing population . The government should keep a neutral stance toward the changing labour market, rather than forcing firms to protect older workers.

The third goal is to create significant silver markets in Japan, rather than the traditional welfare state. The increasing number of elderly people is a gloomy prospect for the government, but it implies a vast potential market for the private sector. It is only possible with regulatory reform of the health and nursing care industries.

Currently, many people are dissatisfied with Kishida’s shift to a more left-leaning economic policy stance. An increasing number of seats went to the conservative opposition Japan Innovation Party, occupying the third most-powerful position in the recent Lower House election. If the party makes further advances in the coming Upper House election, it may represent a slight hope for the future of the Japanese economy after COVID-19.

About the Author

Dr Naohiro Yashiro

Dr Naohiro Yashiro is Vice President of the Showa Women’s University, Tokyo, Japan. Prior to joining SWU, he was President of the Japan Centre for Economic Research. He is co-editor of “The Economic Effects of Ageing in the United States and Japan”.


The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.