A Critique of Kishida’s “New Capitalism”

Two Basic Concepts

The February 2022 issue of Bungei Shunjū carried an article by Prime Minister Kishida Fumio titled “Watashi ga mezasu ‘atarashii shihonshugi’ no gurando dezain” (The Grand Design of the “New Capitalism” That I Aim For). Below, I consider Kishida’s vision of a new form of capitalism as set forth in the article.

Underlying the prime minister’s vision are two basic concepts. One is the idea of turning away from neoliberalism. As he puts it, “Neoliberalism is the idea that everything will be fine if you leave it all up to the market and competition. This way of thinking has become the global mainstream since the 1980s, and has served as the driving force of the global economy, but it has also become conspicuous for its adverse effects, such as the growth of disparities and poverty and the aggravation of the problem of climate change.” With an eye to these problems, Kishida declares, “I advocate a new form of capitalism, one that incorporates mechanisms to correct the external diseconomies caused by market failures in terms of both growth and distribution strategies. The aim is to maximize the benefits that capitalism brings.”

The second basic concept is the emphasis on distributional issues. Kishida points out that while it is true that without growth there is no distribution, it is also true that without distribution there is no growth. Achieving growth requires innovation and increased productivity on the supply side, but at the same time it is essential to increase people’s disposable incomes and expand consumption.

A Shortage of Novelty

The prime minister sets forth a number of policies in line with these basic concepts, including promotion of human investment, higher wages, encouragement of start-ups, strengthening of the supply chain to ensure stable supplies of strategic goods, and regional revitalization through deployment of digital technology. He also cites the environmental goals of achieving a 40% cut in greenhouse gas emissions by fiscal 2030 and carbon neutrality by fiscal 2050.

All of these policies enjoy wide support, but none of them is particularly novel, and they are not so groundbreaking as to warrant being called a new form of capitalism. What is noteworthy is not their novelty, but their difference from the economic policies pursued under Prime Minister Abe Shinzō from the end of 2012 through 2020. The key features of “Abenomics,” as this policy set was dubbed, were priority on economic growth and leadership by the Prime Minister’s Office. The grandly promoted “three arrows” of Abenomics consisted of bold monetary easing, flexible fiscal spending, and a growth strategy to stimulate private investment, all of which were aimed at expanding the economy. And the Prime Minister’s Office called the shots, with Abe himself exercising strong leadership on many issues.

Kishida Brings a Sense of Change

In contrast, the Kishida team has placed emphasis on distribution alongside economic growth, and in its policy management it has focused on the exercise of “listening ability”—an approach of doing its best to achieve consensus with those around it. These conspicuous differences from Abenomics lend credence to the view that Kishida’s assumption of the premiership represents something analogous to a change of government, even though Abe and Kishida belong to the same Liberal Democratic Party. The LDP is a big tent; its members’ policy stances range from rightist to left of center. Abe and Suga Yoshihide, his short-lived successor as prime minister (2020–21), belong to the party’s right wing, while Kishida is toward its left. So when Kishida was inaugurated, it felt as if there had been a change of government from a conservative ruling party to a progressive opposition force. This sense of change appealed to voters, allowing the ruling LDP to win big in the lower house election that was held just after Kishida came to power—with the actual opposition parties seeing their positions snatched by the Kishida-led LDP.

My Reservations about Kishida’s Design

Now that Kishida has built a solid political foundation for his premiership, we will see him and his team fleshing out their policies for the implementation of his “new capitalism.” As they do so, I believe they should consider the following four points.

The first concerns the call for a turn away from neoliberalism. Since this is a slogan for popular consumption, one might say that we need not fuss over the details. However,as an economist, I would like to point out that there is something theoretically questionable about Kishida’s rhetoric on this topic.

As I noted at the start of this article, Kishida introduces neoliberalism as “the idea that everything will be fine if you leave it all up to the market and competition.” The fact is that, no matter how highly economists may view what the market can do, they do not believe that it can take care of everything. No one denies that there are many areas where market failure occurs, making government intervention and institutional regulation necessary. Advocates of the version of neoliberalism that the prime minister describes simply do not exist.

In addition, the prime minister’s thinking as cited above appears to be somewhat confused with regard to the positioning of market failures and distributional issues. In theoretical terms, environmental and other problems that make it difficult for the price mechanism to function are clearly market failures. Distributional problems, however, are not market failures. We can use the workings of the market to maximize the efficiency of economic activities, but how the fruits of these activities are distributed is beyond the scope of the market function. The neoliberal view is that the market function should be deployed fully to maximize production and income, which should then be redistributed as required on the basis of political decisions.

The Impact of COVID-19

The second point for reconsideration is Kishida’s thinking about income distribution. The prime minister declares that a new form of capitalism is needed because the neoliberal approach has caused inequality and poverty. When one seeks to improve economic efficiency through market competition, even if the economy grows, the resulting benefits can end up being skewed toward a certain segment of the population, thereby causing disparities and poverty. In Europe and the United States, we see the widening of disparities in income distribution, shrinkage of the middle class, and the polarization of wealth. But we need to check the data to determine whether these problems are actually occurring in Japan.

Looking at the data, we find that the Gini coefficient, a representative indicator of income inequality, does not indicate widening disparity in Japan. Nor does an international comparison show Japan to be a country with particularly great inequality. It is true, however, that since 2020 the COVID-19 pandemic has been bringing new forms of disparity and poverty to Japan. It should be noted that the economic and social impact of the pandemic has been heavy on single mothers, particularly through the reduction of part-time job openings and other nonregular employment opportunities for women and the temporary closings of daycare centers. If the government intends to prioritize distribution measures, it should do its best to identify seriously affected groups like this and make them the prime targets for redistribution.

Repeating the Mistakes of Previous Administrations

My third point concerns the need to correct the mistakes made under Abenomics. For example, the Abe and Suga administrations decided on massive economic stimulus packages and compiled supplementary budgets for implementation of these measures to soften the impact of the pandemic. But the measures in question seem not to have been properly vetted. Instead, the government started by considering how big the benefits needed to be in order to have political appeal.

Typical of this was the implementation of cash transfers to the general public. In the spring of 2020, the government made uniform payments of ¥100,000 to all citizens. But income data subsequently revealed that these stipends had failed to increase consumption; all they did was produce a substantial increase in household savings.

The Kishida administration has taken the same sort of approach to cash benefits. It carried out another ¥100,000 payment, albeit on a somewhat smaller scale (limited to at families raising children). Since it has since been confirmed that households increased their savings substantially again in 2021, it seems highly likely that much of this additional cash will simply end up in people’s saving accounts.

Top Priority: Correcting Generational Disparities

Fourth, it should be noted that many of the challenges facing the Japanese economy are not addressed by the new form of capitalism that Prime Minister Kishida is advocating. The greatest of these challenges is probably the fiscal imbalance. Japan’s budget deficit has long been the biggest among advanced nations, and it has increased further due to the massive fiscal outlays undertaken to cope with the pandemic. Furthermore, Japan’s population of seniors is growing, and this growth will automatically cause increases in social security costs, including pensions, medical care, and long-term care. Meanwhile, since there has been virtually no discussion of means to increase revenues, the budget deficit will continue to mount, building up the debt to be borne by future generations. The greatest disparity facing Japan’s economy and society is the gap between current and future generations, and the greatest distributional problem will be how to correct the burden that is disproportionately placed on the working-age population. We need to ensure that the veil of “new capitalism” does not obscure these important issues.

(Originally published in Japanese. Banner photo: Prime Minister Kishida Fumio, second from right, addresses a meeting of the government’s council on realization of a new form of capitalism, March 8, 2022. © Jiji.)