The global economy in 2020 suffered unprecedented upheaval from the COVID-19 pandemic. Meanwhile, the second Abe administration, the longest in Japan's constitutional history, came to a close and US chose a new president to take office in January 2021. Markets worldwide will likely remain unsettled due to a number of agitating factors, including uncertainty over the direction of the US-China struggle for supremacy. Takahide Kiuchi, Executive Economist of Nomura Research Institute, Ltd. (NRI), examines the situation in Japan.
This interview appeared in AL-IN vol. 58, December 2020, a magazine for Japanese institutional investors.

What did the Abe administration accomplish and what issues it did it leave unresolved?

Abe’s administration can be credited with lowering the unemployment rate, orchestrating a correction in the strong yen, and presiding over an increase in stock prices.  I would say, however, that each of these circumstances benefited from the historically long recovery in the global economy.  The biggest issue for Japan’s economy is a decrease in the potential growth rate.  With that in mind, I appreciate the administration’s plans to achieve structural reform through deregulation by participating in TPP (Trans-Pacific Partnership Agreement) and with sustained growth in demand from inbound tourism.

On the other hand, Suga will inherit the Abe administration’s greatest failure – it’s inability to halt the drop in labor productivity and potential growth rates.  Real wages are determined by labor productivity when wages or labor share remain the same.  Lowering productivity doesn’t increase wages, and static wages do not foster people’s expectations for a better living.  Abenomics tended to favor easing monetary policy and increasing public spending, both economic stimulus measures that do nothing to improve growth rates.  Similarly, the growth strategy under Abenomics resulted in one-shot deals that produced no economic benefits.  Increasing economic efficiency and improving productivity, which Abe failed to achieve, will be the greatest challenges for the Suga administration.

IJ: What will you be looking for from the Suga administration?

Prime Minister Suga has not revealed a “grand design: for his economic policy.  His calls to reduce cell phone rates, digitalize government administrative functions, and reorganize regional financial institutions are isolated issues.  We have yet to hear what economic effects he expects to achieve by these and other measures.  

I see three challenges Suga will face while trying to boost Japan’s potential growth rate: 1) broad-based digitalization; 2) correcting the economic concentration in Tokyo; and 3) improving productivity among small and medium-sized enterprises (SME).

To be meaningful, digitalization must include not only government operations, but also everyday life.  In everyday life, going cashless is key.  According to US research, using cash lowers GDP by 1.2%.  Japan, with its high cash settlement rate, should take advantage of the coronavirus disaster to promote cashless transactions.  The Central Bank Digital Currency (CBDC) can play a major role there, since Japanese have a high level of confidence in public institutions.

Geographic concentration of economic activity has been proved to enhance economic efficiency.  According to the OECD, productivity rises as a population concentrates around urban areas, but plateaus at 7 million people.  I reviewed the data regarding Tokyo myself, and found that Tokyo’s productivity peaked in 2008 and has declined ever since.  Tokyo is dragging down the productivity rate nationwide.  The fear of density and a shift to remote work under Covid-19 have produced a population outflow from Tokyo since last summer.  As a result, dispersion of economic engines and opportunities will be important.  I would suggest locating attractive colleges and universities in outlying areas.  Young people, especially women, who attend college in Tokyo, tend to find jobs and stay there after graduation.  As digitalization advances, we can create attractive colleges and universities in locales beyond Tokyo.

SME productivity lags in Japan.  Wholesale and retail businesses, which have suffered grievously from the Covid-19 crisis, are extremely unproductive.  Japan’s wholesale and retail productivity rates are about half of that in the US, and restaurant and hotel productivity rates are about one-fourth.  Just closing the gap with the U.S. by a quarter would increase Japan’s productivity by 8%.  The Japanese government provided “sustaining benefits” to all SMEs hit by Covid-19; however, the virus has changed everyday life such that some industries will never recover.  The government should shift its rescue policy to help businesses that lost customers to reinvent themselves and help their employees find other jobs.  At the same time, a different policy is needed for SMEs that close for reasons other than declining demand.  Data shows that SME productivity decreases as business closures increase.  SMEs with higher productivity rates still close because they can’t find successors, and so on.  If a policy were set up to help them continue in business by collaborating with regional financial institutions, it would improve productivity more than simply reducing the number of SMEs by restructuring.

IJ: What do you see for Japanese monetary policy and the yen in 2021?

Since the Bank of Japan (BOJ) is concerned about the side effects of monetary easing, I don’t think they will ease monetary policy further unless the yen rises to a level of $1=JPY80’s.  In the past, BOJ considered more negative interest rates when the dollar fell below JPY100.  In response to Covid-19, the Bank of England has decided to extend its bond buying program, and the European Central Bank and US Fed may ease their monetary policies.  In such circumstances, the yen tends to strengthen since Japan may not move.  Additionally, BOJ has been reducing its purchases of JGB, and seems to have begun a de facto normalization.


The US will soon inaugurate a new administration under President Joe Biden.  How does that affect Japan, especially with regard to the US-China relationship?


There are no prospects for improved US-China relations, even with a Biden administration.  Biden did announce he will reverse the additional tariffs on Chinese imports, which is good news for the Japanese economy.  My concern, however, is the possibility that the US and China will deepen their confrontation over human rights issues in Hong Kong and that financial sanctions may be imposed against China.  Since a significant number of Chinese imports and exports are denominated in dollars, trade will halt.  China is aware of the risk, of course, and is aggressively courting emerging countries with which to form economic and currency blocs.  The digital renminbi initiative is part of this effort.  The escalating confrontation between the US and China will divide the world into a group of developed countries led by the US and a group of emerging countries led by China.  If that happens, it will do major damage to Japan, as 50% of its exports go to emerging countries.


Thank you very much.

About Nomura Research Institute:

Takahide Kiuchi

Executive Economist
Financial Technology Solution Division
Nomura Research Institute (NRI)

After joining NRI in 1987, Kiuchi was assigned to the Economic Research Department and the Japan Economic Research Office in Tokyo, where he worked as an economist for a number of years.  In 1990, he joined NRI in Frankfurt, and in 1996, he joined NRI in New York, where he was in charge of economic analysis of Europe and the United States.  He was appointed by the Cabinet in 2012 as a member of the Policy Board, the highest decision-making body of the Bank of Japan, where he was responsible for monetary policy and other operations for five years.  He has been in his current position since July 2017.