Can Japan Reinvent Itself?

Asia Society Northern California partnered with the Federal Reserve Bank of San Francisco on June 15 to host the co-authors of McKinsey Global Institute’s recent report entitled The Future of Japan: Reigniting Productivity and Growth. Moderated by SF Fed’s own Sean Creehan, Tasuku Kuwabara, Partner at McKinsey & Company, and Michael Chui, Partner at McKinsey Global Institute, joined forces to pose provocative answers to Japan’s productivity malaise and its demographic challenges.

Overall productivity growth in Japan has sagged below 2 percent for the last two decades. Even in its advanced manufacturing sector, traditionally a bastion of strength for Japan, its labor productivity lags that of the U.S. and Germany by one-third. Of even greater cause for concern, Japan’s working-age population is rapidly shrinking and already hit the “tipping point” in 2013: a quarter of its population had reached 65 years of age; and by 2040, this age cohort is predicted to comprise over one-third of Japan’s population. Despite Abenomic’s reinvigoration of Japan’s economy, the nation’s two “lost decades” still dog the country’s competitiveness. Many in the international community wonders whether the future of Japan is doomed for long-term stagnation.

In light of its enormous demographic challenges, speakers emphasized that Japan must primarily rely on labor productivity to generate economic growth. Japan’s private sector can play a catalyzing role to renew its industrial competitiveness and to realize the nation’s growth potential. At its current pace, Japan’s annual GDP is slated to grow at 1.3 percent through 2025. But if Japan is able to double its rate of productivity, it could enjoy GDP growth of 3 percent per annum. By adopting international best practices, incorporating next-generation technologies, and restructuring its industries to insure greater competitiveness, Japan will be able to face its labor shortage and, in fact, outpace the international community in revenue growth and efficiency. The private sector, in other words, can be the “fourth arrow” in the quiver of Abenomics to ensure Japan’s renewal.