Three strikes and you're out. Japanese Prime Minister Shinzo Abe's courtship of Donald Trump appears to be unraveling. Photo: Reuters / Thomas Peter

For years now, much has been expected of the “third arrow” of Japanese Prime Minister Shinzo Abe’s economic policies, known as “Abenomics.” Following the first two arrows of monetary easing and fiscal stimulus, the third arrow’s objective of delivering structural reform to the Japanese economy has proven elusive due to resistance from a myriad of vested interests and the inherent difficulty of change.

A note of encouragement to policymakers: Take heart! While structural change is vital and will take time, you have other tools at your disposal for rebooting Japan’s economy.

What tools, you may ask? Look no further than start-ups, immigration and AI.

Start-ups

There’s good news to share. Start-up companies have become part of corporate Japan’s greater habitat, with large companies regularly seeking to partner with them and start-ups increasingly doing business with one another. While these partnerships typically relate to smaller projects, this is a marked change from as early as two decades ago when start-ups struggled to obtain trust, financing and respect from Japan’s larger companies.

This sea change can partly be attributed to Prime Minister Abe’s promotion of start-ups as well as to the end of the promise of lifetime employment in Japanese society. Now, start-ups are blossoming at the grassroots level due to a new openness towards helping entrepreneurial bodies get off the ground with traditional bank loans and support from Japan’s growing venture capital community.

Start-up companies are making their mark with their innovation and entrepreneurial approach to business, providing a needed change in thinking – however gradual the pace – to corporate Japan. Japan’s business establishment seems to have turned a corner and is now embracing the various benefits of the new start-up culture. This trend, if it continues, just may help boost Japan’s competitiveness.

Immigration

A structural challenge facing Japan’s economy is its demographic crisis. In 2017, Japan’s population shrunk by 227,000, marking seven straight years of decline.

To put things in perspective, over the past 20 years, Japan’s working-age population has shrunk by more than 11 million, and the overall population of 126.70 million is projected to fall below 100 million in 2053 and to 88.08 million by 2065. This means Japan has the world’s most geriatric population, with over 25% of its citizens aged 65 years or older. As the population ages, there are less working-age people to support the tax base needed for the social welfare system.

To help address its shortage of workers, Japan will need to make further changes to its immigration policy, in particular its policies on foreign workers

To help address its shortage of workers, Japan will need to make further changes to its immigration policy, in particular its policies on foreign workers. Over the past five years, the government has eased restrictions on unskilled workers to mitigate labor shortages in nursing, shipbuilding, construction and agriculture. These timely measures have been a good start, leading to a near doubling of the number of foreign workers in Japan from 2012 to 2017.

Encouraging as these figures are, further changes to the foreign worker and immigration laws will be necessary in the coming years to confront the challenges stemming from the graying population and meet its associated challenges.

Artificial intelligence

The challenges posed by Japan’s demographic decline will need to be tackled on many fronts, and artificial intelligence (AI) holds promise for supporting the country’s shrinking working base. While AI is often viewed as a threat to jobs in the West, it will increasingly be accepted as a source of needed help to workers in Japan.

AI’s involvement will provide Japan with needed data-driven assistance in numerous sectors– agriculture, environmental protection, sales & marketing, healthcare, transportation, education, finance, computing and engineering, law, and housing, to name a few.

The new capabilities that AI brings hold promise for freeing Japan’s increasingly scarce labor pool from non-essential tasks, allowing workers to focus on key sectors that require traditional human involvement. It can also help women and senior citizens remain in the workforce beyond current norms.

AI’s potential for helping Japan meet the challenges associated with its declining workforce and for boosting productivity demands the attention of the country’s best and brightest for harnessing these new technologies in effective and ethical ways. The appropriate application of AI in Japanese society will be an important test for Japanese policymakers in the coming years, requiring a new level of planning and collaboration between government, civic, commercial and educational bodies.

Going Forward

Unquestionably, rebooting Japan’s economy must involve Prime Minister Abe’s wide-ranging third arrow of structural reform, some of which involves additional changes to labor laws, deregulation of key industries, women’s empowerment in the workforce, childcare availability, public debt reduction, tax policy, and overhauling outdated corporate governance practices, among other areas.

Yet, structural change to the economy can and should be augmented by implementing additional measures, i.e., supporting the country’s growing start-up culture, immigration reform and AI. There is every reason to believe that with sustained effort in these areas Japan will put itself on course towards revitalization even as its population continues to age and contract.

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