Liu Rui: The Evolution of Kishida's "New Capitalism" Policy: Theory and Practice
In September 2021, while campaigning for the presidency of the Liberal Democratic Party (LDP), Fumio Kishida first proposed the concept of "New Capitalism." Since then, as the most important economic policy proposition of the Kishida government, "New Capitalism" has been continuously deepened and refined, moving from a skeletal framework to concrete measures. Its policy evolution and adjustments have attracted significant attention. How is the "New Capitalism" policy being advanced? What changes have occurred in its primary content? What policy characteristics have emerged? What is the background behind its introduction? What is its theoretical significance and policy innovation? What are its effects and prospects? This article will analyze these questions.
I. Overview of the "New Capitalism" Policy
(1) The General Framework of "New Capitalism" Policy
In October 2021, Kishida pointed out the impact of the COVID-19 pandemic on the Japanese economy in his policy speech. He argued that neoliberal policies had led to problems such as widening wealth disparity and suggested that "realizing New Capitalism can map out a new economic and social blueprint for Japan's future." Its core components are a "virtuous cycle of growth and distribution" and "pioneering a new type of society following the COVID-19 pandemic."
To advance the "New Capitalism" vision, the Japanese government established the "Headquarters for the Realization of New Capitalism" in October 2021, with the Prime Minister serving as its head. From October 2021 to the end of September 2023, this body held 22 meetings to formulate and drive the implementation plan for the Kishida government's "New Capitalism" vision.
Subsequently, the Japanese government convened meetings on the "Vision for a Digital Garden City Nation Realization," the "Digital Extraordinary Administrative Research Council," the "Council on Establishing a Social Security System for All Generations," and the "Economic Security Promotion Council." These collaborated with the "Meeting for the Realization of New Capitalism" to jointly promote the formulation and implementation of "New Capitalism" policies.
(2) The "New Capitalism" Vision with Growth and Distribution as the Main Thread
In November 2021, the Meeting for the Realization of New Capitalism reviewed and passed an emergency proposal titled "New Capitalism for Pioneering the Future and its Launch" (hereafter referred to as the "Emergency Proposal"). This document systematically expounded on "New Capitalism" policies from the two major directions of growth and distribution (see Table 1).
In December 2021, Kishida was re-elected as Prime Minister after dissolving the House of Representatives. In his speech to the Diet, he noted that Europe and the United States had already begun exploring new models of capitalism, citing visions such as the Biden administration’s "Build Back Better" and the Eurozone’s "Next Generation EU." He stated that Japan would balance both growth and distribution by introducing specific measures for "New Capitalism" to become a leader in addressing global and generational challenges.
(3) Integrating Distribution into the Growth Strategy
In June 2022, the Japanese government issued the "Basic Policy on Economic and Fiscal Management and Reform 2022," centered on the theme "Toward New Capitalism—Transforming Problem-Solving into a Driver of Economic Growth and Realizing Sustainable Development." It also passed the "Grand Design and Implementation Plan for New Capitalism" (2022). As the first economic policy blueprint since the Kishida Cabinet took office, these policies were more specific than the "Emergency Proposal" and placed greater emphasis on the "growth" element. Investment priorities focused on four major areas, with "distribution" being integrated into the field of "investment in human capital" (see Table 2).
In November 2022, the Meeting for the Realization of New Capitalism discussed and passed the "Five-Year Plan for Startup Development" and the "Doubling Asset-based Income Plan," placing weight on the investment sector. The "Five-Year Plan for Startup Development" proposed that investment in startups would increase tenfold over five years, reaching 10 trillion yen by 2027. In the future, Japan aims to have 100 unicorn companies (compared to only 10 in 2022) and 100,000 startups, positioning Japan as the largest startup hub in Asia and a top-tier global startup cluster. The "Doubling Asset-based Income Plan" set goals to double the number of investors, double the scale of investment, and double long-term asset management income, aiming to promote the shift from "savings to investment" and increase the financial asset income of residents.
(4) The Continuous Adjustment and Refinement of "New Capitalism"
Building on the aforementioned policies passed by the realization meetings, the Japanese government issued the "Revised Grand Design and Implementation Plan for New Capitalism" in June 2023 and passed the "Basic Policy on Economic and Fiscal Management and Reform 2023." Its theme was "Accelerating New Capitalism—Expanding Investment for the Future and Achieving Structural Wage Growth." The Japanese government sought to accelerate the "New Capitalism" process through five aspects: first, promoting a "three-in-one" labor market reform to achieve structural wage increases, strengthening "investment in human capital," and forming a solid middle class; second, expanding investment and carrying out economic and social reforms; third, strengthening policies regarding the declining birthrate and childcare; fourth, building an inclusive society; and fifth, revitalizing local economies and enhancing the vitality of small and medium-sized enterprises (SMEs). From this progression, it is evident that the Kishida government has continuously deepened and refined "New Capitalism," with its adjustments showing three characteristics:
First, an emphasis on distribution. Differing from "Abenomics" [1] and the growth-heavy strategy of the Yoshihide Suga government, the Kishida government aims for a virtuous cycle of growth and distribution, making distribution a policy highlight from the start of its tenure. Although the "distributional" tone has since softened, elements related to distribution—such as "investment in human capital," "achieving structural wage increases," and "equal pay for equal work"—have been incorporated into the growth strategy.
Second, a superposition of policy functions that deviates from the original goals of "New Capitalism." While aiming to raise potential economic growth rates, the Kishida government has treated national security as a fundamental condition for realizing "New Capitalism." Under the pretext of stabilizing supply chains, it has followed the United States in continuously strengthening an economic security strategy [2] aimed at guarding against and suppressing Chinese high-tech products. This move not only violates the laws of a market economy but also affects Japan’s own economic development, running counter to the growth strategy goals of "New Capitalism."
Third, the expansion of the space for public-private cooperation. Under the "New Capitalism" framework, Japan is, on one hand, further leveraging the role of the government to stimulate autonomous private investment through leading public investment, while focusing on improving the institutional environment through tax and regulatory reforms. On the other hand, given its severe fiscal situation, Japan is attempting to enhance the utility of private funds in fields like scientific and technological innovation, digital transformation (DX), and green transformation (GX), constructing a new mode of public-private cooperation.
II. The Background of the "New Capitalism" Policy Launch
(1) Long-term Economic Stagnation
Since 2019, Japan’s Gross Domestic Product (GDP) has declined for two consecutive years, with the 4.1% drop in fiscal year 2020 marking a post-war record low. However, beyond the specific short-term factor of the COVID-19 pandemic, structural problems in Japanese society have long constrained its economic development. Following the collapse of the bubble economy in the 1990s, the Japanese economy remained in a state of long-term stagnation. From 1991 to 2022, the average real GDP growth was only 0.8%, far lower than the 9.1% seen between 1956–1973 and the 4.2% between 1974–1990. The Japanese economy has been labeled with the "Lost 30 Years" [3].
The reasons for this include: First, a shrinking population, specifically a significant reduction in the working-age population against the backdrop of a declining birthrate and an aging society. According to statistics from the Ministry of Internal Affairs and Communications, as of October 1, 2022, Japan’s total population was 125 million, a year-on-year decrease of 556,000, continuing a twelve-year downward trend. Among them, the number of people under 15 hit a record low, while the proportion of those over 65 reached a record high of 29%. The working-age population (15–64) peaked in 1992 at 69.8% and has decreased ever since; for two consecutive years starting in 2021, it accounted for less than 60% of the total population, the lowest on record. In the long term, the total population is expected to drop to 87 million by 2070, with the over-65 demographic reaching 38.7% and the 15–64 demographic falling to 52.1%. The rapid decline in population—especially the working-age population—has profoundly impacted the demand-supply structure, fiscal policy, and long-term economic growth.
Second, a low potential economic growth rate. Since the 1990s, Japan’s potential growth rate has plummeted, reaching only 0.4% in 2022 compared to 3.7% in 1990. The contribution of labor and capital inputs has significantly decreased. Meanwhile, due to slow technological progress, the contribution rate of Japan's Total Factor Productivity (TFP) has lacked upward momentum, hovering around only 0.5% in recent years.
Third, long-term deflation and declining real income. The Japanese government issued "deflation declarations" in March 2001 and November 2009. Under the strong stimulus of "Abenomics," although the government has stated since August 2013 that the "economy is no longer in a state of deflation," it has yet to fully escape its shadow. Long-term deflation has not only kept the economy running at a low level but also led to stagnant wages and insufficient investment. Since the mid-1990s, wage growth for Japanese employees has been stagnant or even shrinking. A survey by the National Tax Agency showed that the average annual income of an employee who worked for more than a year in 2021 was 4.43 million yen, a decrease of 220,000 yen compared to 1998. Globally, Japan's average wage level has long been at a low point among major developed countries. According to OECD statistics, Japan's hourly wage in USD in 2021 was $24.6, only 58% and 65% of those in the U.S. and UK, respectively.
(2) Entry into a "Gap Society"
In November 1988, the Asahi Shimbun published an editorial that first brought the "gap society" (格差社会, kakusa shakai) [4] into the public eye. Scholars like Toshiaki Tachibanaki and Masahiro Yamada have since conducted systematic and in-depth research on this. Japan's gap society is mainly reflected in five areas:
First, the widening income gap. The Ministry of Health, Labour and Welfare (MHLW) conducts a "Survey on Income Redistribution" every three years. The 2021 results showed Japan’s Gini coefficient reached 0.57, just slightly lower than the 2014 figure of 0.5704, marking the second-highest level in history.
Second, income inequality. MHLW results show that income levels are significantly affected by factors such as gender, company size, and employment type. In 2022, Japanese women's wages were only 75.7% of men's; wages in medium and small enterprises were only 87% and 81.7% of those in large enterprises, respectively; and the average annual income of non-regular employees was only two-thirds that of regular employees.
Third, the increase in the impoverished population. Since the start of the 21st century, the "100 million all-middle class" [5] social structure that Japan was once proud of has gradually disintegrated. In 2021, 15.4% of the population lived below the poverty line (annual income of 1.27 million yen), meaning one out of every 6.5 people was in poverty. The relative poverty rate for single-parent households reached as high as 44.5%.
Fourth, the continuous shrinking of the middle class. From 1985 to 2000, the proportion of the middle class in Japan's total population fell from 63.9% to 57.9%. Although it has remained somewhat stable since, it was only 58.1% in 2018, lower than the OECD average.
Fifth, the widening gap between urban and regional areas. Against the backdrop of a declining birthrate and aging population, regional economic circles face problems such as labor shortages, sluggish consumption, and shrinking economies compared to the three major metropolitan areas of Tokyo, Osaka, and Nagoya. In 2019, regional populations decreased by 2.5% while the Tokyo metropolitan area increased by 2.2%, highlighting the trend of "unipolar concentration" in Tokyo.
(3) Insufficient Drive for Corporate Innovation
Compared to tangible assets such as capital and equipment, Japan lacks investment in intangible assets like information assets, innovative assets, and economic competitiveness. For example, Japan’s R&D expenditure of 19.7 trillion yen in fiscal year 2021 was far lower than the U.S. (82.5 trillion yen) and China (48.5 trillion yen).
The number of "unicorn" companies (startups valued at over $1 billion) is an important indicator for gauging the development of startups and industrial metabolism. As of the end of March 2023, there were 1,206 unicorn companies worldwide. The U.S. ranked first with 654, followed by China and India with 169 and 70 respectively, while Japan had only 6. This reflects a significant international gap in the fields of technological and service innovation.
Japan is also in a lagging position in the process of digital transformation. According to a survey by the International Institute for Management Development (IMD) in Lausanne, Switzerland, Japan fell to its lowest-ever rank of 29th in the 2022 World Digital Competitiveness Ranking, far below the United States, South Korea, and China. As a key pillar of Kishida’s "New Capitalism" policy, the Japanese government has launched policy measures such as the "Digital Garden City Nation Vision" [6], WEB 3.0, and support for startup enterprises to enhance the overall level of digital transformation across society.
(4) The Weakening of Consumption and Investment
For a long time, household consumption and corporate capital investment, which support Japan's internal demand, have been sluggish; the willingness to transform household savings and corporate retained earnings into investment remains weak. As of the end of June 2023, Japanese household financial assets reached a record high of 2,115 trillion yen. Among these, cash and deposits accounted for as much as 52.8%, while stocks and other assets accounted for only 12.7%. Within disposable income, Japanese property income accounted for only 8.3%, less than half that of the UK or US. In terms of incremental growth over a ten-year period, household financial assets in the US and UK increased by 2 times and 1.5 times respectively, while Japan’s increased by only 0.4 times.
Improving the utilization rate of household savings and corporate reserves helps provide a solid financial foundation for corporate operations, wage increases, and the expansion of internal demand. However, the gains of Japanese enterprises mostly remain stagnant as internal reserves, while investment in wages and equipment has decreased. Compared to the year 2000, the ordinary income of large Japanese enterprises increased by 91.1% and internal reserves increased by 175% by 2020, while wages and equipment investment fell by 0.4% and 5.3% respectively.
(5) Changes in the International Political and Economic Environment
In recent years, the global political and economic landscape has undergone drastic shifts. After Donald Trump took office as President of the United States in 2017, he pursued "America First" policy propositions, encouraged trade protectionism and populism, and provoked and continuously escalated trade frictions with China. Since the Biden administration took office in 2021, the US has continued to view China as a strategic rival in the name of national security. Under the overlapping influences of the COVID-19 pandemic and the Ukraine crisis, the US has united with allies such as Japan and Europe to continuously upgrade its suppression of China. Against this backdrop, Japan has actively joined the US-led alliance to contain China's trade, technology, and supply chains, elevating economic security to a national strategy and viewing it as a growth strategy to promote the development of "New Capitalism."
Furthermore, facing global common issues such as climate change and sustainable development, the Kishida government has adhered to the Green Transformation (GX) and Digital Transformation (DX) strategies proposed by the Suga Yoshihide government, taking the green economy and digital economy as the two major engines of economic growth and incorporating them into the "New Capitalism" policy framework. In July 2022, the Prime Minister's Official Residence established the "Green Transformation Implementation Council" to oversee the implementation process of green transformation, striving to achieve Japan's goals of a 46% reduction in greenhouse gas emissions by 2030 and carbon neutrality by 2050.
III. Review of the Theoretical Foundations of the "New Capitalism" Policy
(1) Reflection on the Contradictions and Defects of Neoliberal Policies
Kishida pointed out that the "New Capitalism" concept originated first from correcting the defects of neoliberalism. Some members of the public attributed the two oil crises of the 1970s and the predicament of "stagflation" in the capitalist world to the failure of Keynesianism, believing that excessive government intervention damaged economic efficiency. In the 1980s, under the influence of neoliberalism, then-US President Ronald Reagan and British Prime Minister Margaret Thatcher implemented tax-cut policies while vigorously promoting liberalization reforms. During the same period, Japan also implemented privatization reforms in fields such as the Telegraph and Telephone Public Corporation and the National Railways. On one hand, under the process of economic globalization, neoliberalism led advanced capitalist countries and some global economies into a period of growth; on the other hand, the long-term global proliferation of neoliberalism brought about issues such as widening wealth gaps, social polarization, the rise of populism, the threat of climate change, and market failure.
In recent years, many countries have begun to reflect on and critique neoliberalism, making adjustments at the policy level. For example, scholars such as Thomas Piketty, Michael Jacobs, Mariana Mazzucato, and Joseph Stiglitz have analyzed and attacked neoliberalism from the perspectives of the wealth gap, the role of government, and institutional reform. Simultaneously, global waves of digitalization, informatization, and the restructuring of industrial and supply chains have emerged. Economies such as Europe, the US, and Japan have begun to abandon laissez-faire economic propositions, paying more attention to industrial policy adjustments and promoting cooperation between the government and the private sector. After Joe Biden took office as US President in January 2021, he successively introduced four major acts and proposed "Bidenomics," hoping to re-strengthen the role of the government and enhance social welfare through the reorganization of industrial policy. US Treasury Secretary Janet Louis Yellen provided a systematic theoretical explanation for this, proposing the concept of "modern supply-side economics." She argued that compared to traditional supply-side economics—which emphasizes deregulation and tax cuts—the Biden administration’s modern supply-side economics focuses more on investment in key areas such as human capital, public infrastructure, and R&D within a sustainable environment to promote economic growth and solve the problem of the wealth gap. Echoing this, the Kishida government pointed out that after undergoing three transformations, capitalism is once again at a crossroads of reform. It needs to solve problems through "New Capitalism" and achieve the sustained happiness of the people within a virtuous cycle of growth and distribution.
(2) Stakeholder Capitalism Theory
In the 1970s, compared to neoliberalism—which advocates for the maximization of shareholder interests and market fundamentalism—stakeholder capitalism, which emphasizes the long-term development of enterprises and society, began to receive attention. In 1971, Klaus Schwab, founder of the World Economic Forum, proposed that besides shareholder capitalism and state capitalism, more importance should be attached to a third model of capitalism: stakeholder capitalism. Enterprises should not only care about the short-term interests of shareholders but also attend to the needs of all stakeholders and the whole of society to create long-term value. The four main stakeholders—government, civil society, enterprises, and international organizations—should play a vital role.
Although this concept has faced certain doubts and criticisms, in recent years, an increasing number of transformation results have emerged, centered on US enterprises. To address issues such as income disparity, social fragmentation, and climate change, rethinking corporate social responsibility within the capitalist system has become a consensus among some figures in the West. In August 2019, the United States Business Round Table announced it would adjust the long-standing management paradigm of "shareholder primacy" followed by US enterprises, a move echoed by the executives of nearly 200 companies. In January 2020, the World Economic Forum annual meeting in Davos set the re-elaboration of the new stakeholder concept as its theme and released a report in September 2020. Following Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) principles, the report identified universal indicators for measuring stakeholder capitalism consisting of 21 core items and 34 expanded items, covering the four major pillars of Principles of Governance, Planet, People, and Prosperity. Since January 2021, 61 multinational enterprises have incorporated stakeholder capitalism indicators into their corporate reports; among them, seven were Japanese enterprises, including Mitsubishi Corporation and Mitsubishi UFJ Financial Group.
As an important representative of the Japanese economic circles, the Japan Business Federation (Keidanren) takes "Sustainable Capitalism" as its policy proposal, hoping to achieve SDGs through Society 5.0. Keidanren points out that the Kishida government’s "New Capitalism" is in the same vein as its own "Sustainable Capitalism," both pointing toward goals such as narrowing the wealth gap, improving welfare levels, raising economic growth levels, and the rational distribution of value. Compared with Western countries' focus on environmental and fairness issues, although Kishida’s "New Capitalism" concept mentions stakeholders, its emphasis lies in promoting wage increases in large enterprises. The 2022 Japanese tax reform plan proposed the "Declaration of Diversified Stakeholders," incorporating diversified stakeholders into management considerations from the perspective of promoting pay raises in large enterprises.
(3) "Public Interest" Capitalism Theory
Stakeholder capitalism is a reflection on shareholder capitalism, and the principle of shareholder interest priority primarily represents the mainstream management philosophy of Europe and the United States. From the perspective of corporate social responsibility, the management philosophy of Japanese enterprises shares commonalities with stakeholder capitalism theory, reflecting both traditional Japanese management thought and the theoretical connotations of "public interest" capitalism that reflect the characteristics of the era.
Unlike the American shareholder-first management model, Japan has always maintained a spiritual culture and tradition that values stakeholders. From the "Three-Way Satisfaction" (Sanpō-yoshi) [7] management philosophy of Omi merchants in the Edo period—"good for the buyer, good for the seller, and good for society"—to the "Shibusawa-ism" (Gapponshugi) and "unity of morality and economy" advocated by the "father of Japanese capitalism" Eiichi Shibusawa, and the "democratization of stock ownership" thought of the "god of Japanese management" Konosuke Matsushita, the traditional Japanese management model has helped form a modern corporate social responsibility with altruistic culture as its backdrop.
Japanese entrepreneur George Hara, who served as a special advisor to the Abe Cabinet, proposed the theory of "'Public Interest' Capitalism" (Kōeki Shihonshugi) on this basis, providing theoretical support for Kishida’s "New Capitalism" concept. The theory of "public interest" capitalism posits that an enterprise, as a "public instrument" (kōki) [8] of society, is composed of stakeholders such as employees, customers, shareholders, suppliers, the surrounding community, and even the earth as a whole. Enterprise managers should reasonably distribute gains for the public interest to promote the development of the capitalist real economy. "Public interest" capitalism includes three major elements: fair distribution, medium-to-long-term goals, and pioneering and innovative entrepreneurship. Kishida pointed out that to solve the impact of neoliberalism on Japanese enterprises and the economy/society following the Koizumi government’s structural reforms, one should consider "distribution" and "sustainability" and develop "New Capitalism," which could also be called "public interest" capitalism.
In summary, Kishida’s "New Capitalism" does not imply the negation or end of capitalism. The so-called "newness" refers to the fact that, compared with the neoliberal economic stimulus policies pursued by the Koizumi, Abe, and Suga cabinets, the Kishida government emphasizes distribution to stakeholders and focuses on investment in people, which is mainly reflected in three aspects. First, it emphasizes the joint role of the market and government, as well as the public and private sectors. "New Capitalism" merges some ideas of Keynesian economics with the policy practices of the New Supply-Side school. On one hand, in economic policy, "New Capitalism" continues to value the capitalist market mechanism and give play to market vitality; on the other hand, the "newness" reflects a correction of neoliberalism to a certain extent, assigning more social expectations to government functions based on rethinking the roles of the public and private sectors to address market failures.
Second, it focuses on primary income distribution. The "distribution" emphasized by "New Capitalism" requires enterprises to increase employee wages. Through tax reform, the Kishida government implemented preferential policies for corporate tax reductions for large and medium-sized enterprises on the premise of a 3% wage increase. As the most important measure in "investment in people," "New Capitalism" emphasizes that wage increases are a forward-looking investment to increase the future gains of the enterprise. Simultaneously, the Kishida government has also launched measures to encourage laborers' skill learning, capacity development, retraining, and re-employment, hoping to improve labor productivity and alleviate problems such as labor market mismatch.
Third, it focuses on sustainable development. Within the concept of "public interest" capitalism, "New Capitalism" policy redefines corporate value to maximize the common interests of stakeholders on the one hand, while focusing on solving negative externalities such as environmental and social problems to create new markets on the other. Facing global issues such as climate change, the government and enterprises form a synergy to promote SDGs and ESG practices. It can be said that "public interest" capitalism is the Japanese-style corporate cultural foundation that "New Capitalism" proposes and hopes will resonate with Japanese society.
IV. Effectiveness and Difficulties of the "New Capitalism" Policy
(1) Preliminary Results
Regarding the achievements of the "New Capitalism" policy after nearly two years of implementation, what Kishida speaks of most enthusiastically is the fact that following the 2023 "Spring Labor Offensive" [9], wages achieved their first major surge in 30 years, and GDP rose significantly in the second quarter of 2023. However, behind these two glittering data points, the economic reality does not reflect the "accelerating virtuous cycle of growth and distribution, including wages and investment" described by Kishida.
1. Nominal wages rose, but real income declined Kishida pointed out that the effects of the "New Capitalism" policy were first manifested in the rise of nominal wages. Results from the 2023 Spring Labor Offensive showed that salary levels, including base pay and bonuses, rose sharply, reaching a 30-year high. Regarding the minimum wage, Japan's national weighted average minimum wage in 2023 was 1,004 yen per hour; its 43-yen increase was the highest since records began in 1978, achieving the policy goal of a 1,000-yen minimum wage set under the "New Capitalism" framework.
On the surface, the reason the labor negotiations achieved such results seems to be the tax incentives implemented by the Japanese government for companies that raise wages; however, the substantive cause was the continuous surge in Japanese prices. Since the outbreak of the Ukraine crisis, the prices of bulk commodities such as crude oil on the international market have risen, and Japanese prices have climbed accordingly. In August 2023, the core Consumer Price Index (CPI), excluding fresh food, rose by 3.1% year-on-year, maintaining a growth trend for 27 consecutive months. Because prices rose too quickly, per capita real wages (adjusted for inflation) decreased by 2.5% year-on-year in July 2023, representing 16 consecutive months of negative growth. Affected by this, in August 2023, real household consumption expenditure for households of two or more people shrank by 2.5% year-on-year, decreasing for six consecutive months. Therefore, although enterprises significantly raised wages for the first time in 30 years, it did not increase the real income of employees, nor did it manage to drive a sustained recovery in personal consumption.
2. Economic growth accelerated, but internal demand weakened From the perspective of economic growth rate, Japan's GDP in the second quarter of 2023 grew by 1.2% quarter-on-quarter, or 4.8% on an annualized basis, maintaining an upward trend for three consecutive quarters. Within this, the contribution of external demand was 7.1% on an annualized basis, while internal demand fell to -2.4%. Corporate capital investment decreased by 1% quarter-on-quarter, and personal consumption decreased by 0.6%. This is a far cry from the virtuous cycle of expanding investment/consumption and economic growth proposed by the "New Capitalism" policy.
In fact, against the backdrop of corporate tax cuts and the recent depreciation of the yen and increase in external demand, Japanese corporate earnings have continued to grow. According to statistics from the Ministry of Finance of Japan, in 2022, the ordinary income of all Japanese industries increased by 13.5% year-on-year to 95.3 trillion yen, the highest value since historical records began in 1960. Yet, at the same time, undistributed profits—namely internal corporate reserves—also hit record highs, reaching 554.8 trillion yen in 2022, an increase of nearly 70% compared to 2013 at the start of "Abenomics." The massive amount of internal reserve funds has caused corporate decision-making to trend toward conservatism; in 2022, corporate capital investment increased by only 4.4%. In the second quarter of 2023, while the ordinary income of all Japanese industries increased by 11.6% year-on-year (the highest quarterly increase), capital investment, though up 4.5% year-on-year, actually decreased by 1.2% quarter-on-quarter.
A major reason why high corporate earnings have not effectively translated into capital investment is that earnings primarily stem from the depreciation of the yen rather than technological innovation. Since 2022, the yen has continued to depreciate sharply; on October 21, 2022, it broke past the lowest value since 1992, a depreciation of more than 30% compared to the beginning of 2022. The Bank of Japan’s "Tankan" survey [10] shows that due to the yen's depreciation, the business sentiment index for large Japanese manufacturing enterprises has improved for two consecutive quarters, particularly in the export-oriented automobile industry. Simultaneously, the weak yen attracted a large number of foreign tourists, and the earnings of non-manufacturing enterprises rose for six consecutive months. Although the "New Capitalism" policy seeks to raise wage levels and increase consumption from the distribution side—thereby stimulating economic growth and expanding investment—the export-dependent structure of the Japanese economy has not changed. According to estimates by the Daiwa Institute of Research, if the yen depreciates by 10%, real GDP will be boosted by 0.1%. Because large export-oriented enterprises have not effectively used their earnings to raise workers' wages and expand capital investment, the depreciation of the yen has instead pushed up prices, harming the earnings of internal demand-oriented small and medium-sized enterprises and personal incomes.
(2) Policy Difficulties Although Kishida’s "New Capitalism" policy identified five major measures to stimulate economic growth momentum—namely, relying on scientific and technological innovation to cultivate high-value-added industries, revitalizing local economies through the "Vision for a Digital Garden City Nation" [11], increasing Green Transformation (GX) investment to achieve carbon neutrality goals, maintaining technological advantages through economic security policies, and enhancing economic strategic autonomy—and sketched a beautiful vision of a virtuous cycle of growth and distribution, this policy faces intractable policy dilemmas.
1. Grim fiscal conditions make fiscal reconstruction goals difficult to achieve The Japanese government seeks to improve the long-term sluggish economic situation through large-scale public spending. The scale of Japan's 2023 budget reached 114.4 trillion yen, a record high. Regarding fiscal revenue, as the pandemic situation improved, the operating conditions of Japanese enterprises recovered, and tax revenues represented by corporate taxes increased. However, due to the massive scale of expenditures, Japan still needs to rely on the issuance of government bonds to cover the deficit. In 2023, Japan issued 35.6 trillion yen in new government bonds, with a bond dependency ratio as high as 31.1%. Meanwhile, although the Kishida government proposed a concept of parallel economic growth and fiscal reconstruction—stating in its "Basic Policy" [12] that it would proceed according to existing fiscal reconstruction targets—it simultaneously proposed that it would "verify" these targets in 2024. This indicates the Kishida government’s lack of confidence in fiscal reconstruction.
In 2018, the Abe government clarified the fiscal reconstruction goal: namely, to achieve a primary balance surplus for the government by 2025 and to ensure a steady decline in the ratio of debt balance to GDP. However, the primary balance in Japan’s 2023 budget was -10.8 trillion yen, and figures such as the outstanding balance of national debt and the scale of debt as a proportion of GDP continue to break new highs, making the fiscal reconstruction goal difficult to complete.
In January 2023, the Japanese government released its projections for medium-to-long-term economic and fiscal outlooks, pointing out that even under a "growth-achieving scenario" (i.e., real GDP growth of 2% and nominal GDP growth of 3%), the primary balance in 2025 will still be -1.5 trillion yen, only turning to a 2.5 trillion yen surplus in 2026. Although the Japanese government aims for fiscal reconstruction, in reality, its fiscal expenditures continue to increase, and the risk of fiscal deterioration is intensifying.
2. Massive funding gaps in policies The implementation of "New Capitalism" requires large-scale fiscal support. As the highlights of "New Capitalism," the "Three Brothers of Fiscal Expenditure"—defense spending, measures against the declining birthrate, and Green Transformation (GX) investment—are in a state of expansion. Among them, defense spending will increase by 43 trillion yen from 2023 to 2027; investment in measures against the declining birthrate will exceed 3 trillion yen annually starting in 2024; and Green Transformation investment will reach a cumulative expenditure of 20 trillion yen over the 10 years beginning in 2023. These three expenditures have been included in the "initial budget" as rigid spending to be completed over multiple years; by 2027, their combined expenditure will be as high as 10 trillion yen, equivalent to the current combined total of public works (6 trillion yen) and culture, education, and science (5.4 trillion yen).
Currently, only Green Transformation investment has clarified its funding sources through relevant legislation. In February 2023, the Japanese government published the "Basic Policy for the Realization of GX," planning to invest 150 trillion yen in the field of Green Transformation through public-private partnership over the next 10 years, specifically including three investment methods. First is the issuance of 20 trillion yen in "GX Transition Bonds," with the annual issuance limit decided by the Diet. Second is the establishment of a carbon pricing system, with a greenhouse gas emissions trading market to officially open in 2026, an "additional tax" on fossil fuel importing enterprises based on CO2 emissions starting in 2028, and carbon allowance auctions starting in 2033. Third is the adoption of new financing methods, such as "blended finance" that incorporates private capital into social and environmental issues. This public-private partnership model provides a solution for breaking through the fiscal impasse.
Funding for the defense budget remains unresolved. Under the Kishida government’s economic security policy, Japan formulated a budget arrangement to double defense spending—that is, to double the defense budget from the current 4 trillion yen by 2027. In 2024, Japan's defense budget reached 7.74 trillion yen, a historic high that sparked debate across society and even within the Liberal Democratic Party (LDP). To obtain funding sources, a new idea was proposed within the ruling party: selling the shares of Nippon Telegraph and Telephone (NTT) held by the government, currently valued at approximately 5 trillion yen. However, due to its wide-ranging implications and complicated procedures, this proposal is still in the discussion stage.
There is also a huge gap in investment for measures against the declining birthrate. Although 1 trillion yen in fiscal funds can be secured through measures such as increasing insurance premiums, a gap of more than 2 trillion yen remains; therefore, it is unknown whether the measures against the declining birthrate can be effectively implemented.
In summary, as the rigid pillars of Kishida’s "New Capitalism" policy, the scale of the "Three Brothers of Fiscal Expenditure" continues to expand, but the funds cannot be implemented as scheduled, leading to questions about the government's policy execution capability. If the government continues to issue national bonds, it may not only worsen the already severe fiscal environment and increase the intergenerational burden but also reduce the potential economic growth rate, running counter to the growth claims of "New Capitalism."
3. Excessive "securitization" of the economy may hinder economic growth In the name of economic security, Japan actively participates in and strengthens the US-led "Indo-Pacific Strategy" and caters to the US strategic intention to suppress China in fields such as trade, technology, and supply chains. In April 2020, Japan's Ministry of Economy, Trade and Industry (METI) launched the "Supply Chain Reform Plan," encouraging manufacturing enterprises highly dependent on specific countries for products and components to return to their home country or transfer overseas production bases to Southeast Asia and other regions. The Japanese Diet also passed a supplementary budget to allocate 243.5 billion yen to support supply chain adjustments. In addition, the Kishida government established a new Minister for Economic Security. In May 2022, the Japanese Diet passed the "Economic Security Promotion Act." In May 2023, METI announced the revised "Foreign Exchange and Foreign Trade Act," which listed 23 categories of advanced semiconductor manufacturing equipment across six types as targets for export control restrictions, forming a technological blockade circle against China alongside the US and other Western countries. Although at the G7 summit held in May 2023, Japan, the US, and other countries adjusted "decoupling" from China to "de-risking," this did not change the essence of politicizing and over-securitizing economic issues.
While Japanese enterprises have adjusted their strategies in China through actions such as "returning home," "local production for local consumption," and diversifying production bases due to the Japanese government's emphasis on geopolitical risks, under the predicament of population decline and shrinking domestic demand, overemphasizing economic security not only damages economic and trade exchanges between China and Japan and destroys the economic environment but also brings negative impacts to the operations of Japanese enterprises themselves. In June 2023, a survey report on enterprises in China published by the Japanese Chamber of Commerce and Industry in China showed that 33.4% of Japanese-funded enterprises planned to expand their business scale in China, 60.3% chose to maintain the status quo, and only 6.3% chose to downsize their business in China or transfer it to a third country. This reflects the expectations of Japanese-funded enterprises in China for strengthening economic cooperation and building a mutually beneficial and win-win economic environment.
Overall, since taking office, Kishida has used the slogan of "New Capitalism"—the realization of a virtuous cycle of growth and distribution—to attempt to promote solutions for certain structural problems existing within the process of Japan's economic development. However, viewed from the perspective of practical effects, Kishida’s "New Capitalism" policies still represent a continuation of the primary methods of "Abenomics" [13]. Remining confined within Japan's traditional neoliberal policy framework, these measures place their emphasis on responding to short-term realistic problems and have failed to truly delve into or resolve medium-to-long-term issues. On September 13, 2023, the Kishida Cabinet underwent another reorganization, signaling that it will continue to launch new economic countermeasures within the "New Capitalism" framework, including responding to rising prices, sustaining wage increases, promoting investment, addressing the problem of population decline, and ensuring national security. In the face of Japan's grim fiscal situation and labor shortages, how can growth strategies be strengthened and real wage levels raised? How can the potential economic growth rate be improved? How can the social security system be perfected and reformed? These questions are both the strategic priorities and policy difficulties of concern to the Japanese government, and they also test the Kishida administration's capacity to govern.
(Author Profile: Liu Rui, Institute of Japanese Studies, Chinese Academy of Social Sciences) Web Editor: Tongxin Source: Foreign Theoretical Trends [14], Issue 6, 2023