Name: Innovation Forum 2024: Is Japan ‘Back’
Uploaded: 2024-03-27
Duration: 21 min 8 s
Description: Jesper Koll, Board Director, Okinawa Institute For Science And Technology Tokiko Shimizu, Assistant Governor, Bank Of Japan Moderated By Clay Chandler, Fortune

Jesper Koll, Board Director, Okinawa Institute For Science And Technology Tokiko Shimizu, Assistant Governor,  Bank Of Japan Moderated By Clay Chandler, Fortune

Innovation Forum 2024: Is Japan ‘Back’

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So uh it's, it's really a thrill and honor to have both of you uh here and uh to go especially you. I know you've got a very uh whirlwind travel section. You've sort of stopped over to speak to us just on the way back from the Boao Forum. But let me just open with a basic question about what's going on right now with the Japanese economy. And what your assessment of how it's doing is as I say, they are, there do seem to be a lot of very mixed signals. So what's your? Thank you very much? Thank you gu and first of all, thank you for having me here today. It's very kind of you and the for Fortune mother Jane. So I'm, it's my great honor to be here to make my speech at this very innovative forum. And I'm a frequent traveler almost 20 times a year. Last month or the beginning of this month, I went to San Paulo to attend the G 20 meeting. And the second week I went to the Basel in Switzerland to attend the Governors Central Bank Governors meeting. And the third week, last week, I went to Italy to attend the G7 meeting. And yesterday I came from the boa and tomorrow I need to go back to Tokyo. So this is too, too busy, but I'm really enjoying what discussions going on in this, those forums. I found that there are two or AA always people discussing at the meeting. Plus A is Asia and the second day is A, I always talking about agent or A I. And I'd like to touch upon the first A in the first round of this panel. So Japan is one of the hotspots in Asia. I would say we went to Japan make, made a decision to change our monetary policy framework. Last week, it is, as we said the first time for the 18 years, it is very exciting and probably the the step itself is very small 10 best points. Probably no one noticed such a very small step, but it is very great step for the Japanese economy. I would say what happened or what. The reason why we decided to change our policy framework is the birth of cycle between the wage and the price is going on. Usually the 720 million colleagues using the visa cycle between the wage and price increase. But in Japan, we are waiting for that cycle with increase and the price increase. So last week, so the last week, I we've got a figure that spring with the negotiations between the labor and management got the figure plus 5.2% increase. That is amazing. The first time in the 20 or 30 years, I would say. So this is the main reason why we changed our monetary policy finally because we are more confident to achieve our price target 2% in the coming year. So then what our new policy framework is, if the we are simply targeting the overnight interest rates in the money market, we almost stop every other tool like purchasing ETF purchasing uh the those kinds of population that we will stop. And also we will continue to purchase the G GB for a while, almost to some same amount. That means we need to be very careful about what happens in the long time in the street. So that that will be our new framework of monetary policy. And I would like to touch upon what the going on for uh look forward. We still uh expect the price movement in coming years well, around 2%. That means we don't see any interest rate hike necessary. So that means we will keep the monetary situation very accommodated for a while. But at the same time, we are predicting that our global GDP growth will uh going around 1.5% for coming years, that's higher than our potential growth rate. So our main focus for the future must be how we can raise the potential growth rate. I will touch upon this theme in the second round. Thank you. Great. Thank you so much. That's really fascinating. And what I hear you saying there is that uh don't imagine that what Japan is doing is kind of chasing the Federal Reserve and boosting interest rates really rapidly to try to get handle on what looks like runaway inflation, that it's going to be a kind of long, slow, gradual, very stable approach to uh to monetary policy. Yeah, let me, let me turn to you, you and I have been talking about the Japanese economy for about three decades together now. Uh And I have learned so much from you. You have been a resident of Japan for all these many years. You've been through many of these cycles as we were joking in the green room um every six years as the Japanese economy seems to kind of stir the life suddenly you're popular and people are calling you and then, and then they're not again. Uh So we're definitely at a cycle where Japan is uh the hot property. Uh certainly in, in Asia, um lots of money that previously went to China is now sloshing into, into Japan. Uh This is a kind of an unusual moment but what's different about this rally from others that you've seen in the past. So what's different this time and it is different. And so I got the data of the best and the brightest in Japan, if you look at the elite bureaucrats, right the young men and women who join the Ministry of Finance. Me, I the Bank of Japan when they're in their early twenties after university. And you look at how many of these young men and women quit while they're in their twenties and thirties. And you see a flat line, nobody quits. But over the last four or five years, this line has shot up very dramatically. So you see that the elite, the young, the next generation of Japan is now taking risk and then it gets better. Where do these young men and women go? No, they do not go to Mitsubishi Corporation. No, they do not go to JP Morgan. Two thirds of them go to start ups. And that tells you that something is different. We had over the last 30 years, a lot of issues that needed to be worked out in the Japanese economy and of course, people were very risk averse. Now people are actually taking risks and the fact that the labor market is actually showing liquidity, you can show show last year that of the leading companies in Japan of the Fortune 500 companies that all of them had more mid career hires than uh graduate intakes. And again, that tells you that the tables have turned, the labor market has now become a buyer market from the individual's perspective. And as this most important asset of the economy, which is labor, that's the key part of capital as that actually becomes more liquid and moves, you know, from low performance to high performance. That's where the excitement comes from. Let me do another thing. The generational change in Japan is enormous over the last year and a half. When you look at the new, the age of the new CEO S that have been appointed by the leading companies in Japan, by listed companies. The age of the CEO has dropped from 69 to 57 which is again creating a mobility. And it is also freeing Japan from this post bubble deflation legacy that they were stuck in. And the result, record metabolism, record amount of M and a activity, record amount of MBO management buyouts, record amount of IP O activity. And most importantly, and this is your point about the potential growth rate. You actually see domestic capital formation, domestic business investment actually at a historic height. So you've got corporate Japan reinvesting in Japan. Yes, you've got TS MC building, you know, a chip factory in record time down in Kyushu. But on top of that, you've got leading companies like Furukawa Electric like Shiso actually building new factories in Japan. With that. Wow, that's fascinating. It's right on our topic of, of innovation. Um You know, I mentioned at the top of our program, uh Joseph Schumpeter and one of the things that makes suppe interesting is that Schumpeter kind of stepped outside the traditional debate between cannes and uh uh you know, monetarism in terms of the sort of things that he looked at to measure the dynamism of an economy and this thing about metabolism, it's a really fascinating point. Um, you know, the, the Bank of Japan looks at monetary policy, it looks at wage pressure, you know, this sort of thing, it looks at, I'm sure demographics. Um I'd love you to comment a little bit about what you see ahead in terms of structural problems for Japan. But also maybe if you could say something about whether uh central bank regulators are also conscious of these uh metabolism factors, these kind of uh less tangible metrics. That, that yes, thank you very much. So, I'd like to start with the what A I and Japan. So because Japan is a country facing the very severe aging population and the number of people are gradually not gradually radically declaring. So if we concur those severe challenges, we need to have large number of robots in the future, I would say I, I'd like to introduce my close friends in my back. So I'm troubling with him all this. So that's why. So because Japanese people love robots compared to the Western people, I would say. So I think that what the labor markets are now we observing in the labor market is female and senior elder people are happily joining the labor market participating in the labor market. It is very different from what happens in the United States and Europe. So no, are they retiring? So that means many robots could support elderly, healthier life and also the females can get support from those robots, cleaning the rooms, carrying the Children. So those kinds of a services will be the most permissive area in Japan. So because we are facing the very severe shortage of labor sources that that might be the one of the reasons why we enjoy that with these days. But at the same time, we could have some large opportunity in Japan. Although the A I business itself is mainly uh profit to the US companies at this current stage. But I would say that in Japan, there are many, many huge opportunities for those new technologies in Japan. And probably this must be the uh labor for the increasing our potential growth. That's really interesting. So Ezra, I want to ask you about specifically about this point about A I and uh Japan. We're going to hear later tonight from Kai Fu Lee who's famous for advancing this thesis in his book A I superpower that the world is kind of headed to this, this era in which you have two giant producers of uh of A I the US and China because they have access to vast pools of data and that data is the new oil uh of the of the future. So Japan is a is a medium sized market 130 million people. It's a different language than English or Chinese. I know you're not an A I expert but how does that impact its ability to generate innovative A I? And how do you see that playing out in terms of productivity? Uh I mean, it should be, I mean, this is all very exciting. There's technological progress 20 years ago, it was the internet and now it's like, you know, it's a new version of the internet and the Japanese are very, very good at adopting this because as was pointed out, you know, the Japanese don't have a problem with technology and you know, now more to the point, um you know, is the reality that Japan is actually becoming an immigration superpower, which is, I mean, look at the reality, just look at the data, you know, now there is 3.2 million non Japanese living in Japan, of which 2.4 million are actually working. When I showed up in Japan. In the mid 19 eighties, there were barely 500,000 last year, 300 on a base of 3 million. 360,000 actually to Japan on a visa, visas have been deregulated very dramatically, right? It took me when I showed up 10 years to um you know, get a permanent residency. Now, if you show up, you can get it within 3.5 years, now you're not allowed to fall foul on the law. So if you had a parking ticket you're back in the queue. The Japanese are very meticulous and, you know, take those things extremely seriously. But again, the reality is that yes, we want to talk about technology, but look at what is actually happening on the ground seven and I 7-Eleven, you know, the greatest convenience store company in the universe. Sorry, Mr Lawson. Um, you know, 7-Eleven last year sold its first franchise to a non Japanese, a woman from Myanmar who up in Japan on a mambu show on a government scholarship, you know, 11 years ago and you go to seven and I they're putting this whole program together that indeed they are targeting that by the year 2030 which is around the corner, they will have half of their employees non Japanse. That's incredible the speed with which actually the internationalization. And this is where for Asia, the great opportunity actually comes in because honing your skills, learning about how to run a business from someone like seven. And I in one of the most, you know, seriously competitive consumer markets in the world, which is what Japan is, right? If you can make it there, you can make it anywhere. And I think Japan as a hub to actually train up human skills, human capital for the rest of Asia. That's going to be a very, very important theme over the next decade going forward. A I sure, but A I is something that happens everywhere in the world. Every nation, every economy has to come to grips with this new technology. What is specific about Japan is the reality that yes, Kai Koku, yes, the country is actually opening up. Um you know, historically, there have been kind of two forces of resistance against embracing technological change and immigration on technology. One of the concerns has always been that and this is something that, you know, was, was recognizable to Schumpeter, that there's any inequality that comes along with technological innovation. I mean, some people are winners and some people are losers in the Japanese have not been very keen about that. But this is where Japan is in this demographic sweet spot because sorry, one in four in Japan is already over 70 years old. I love being in Japan because everybody else gets after you. It it's wonderful. So you you've got the hump is done and yes, the baby boom generation, you know, how do you pardon me? Die gracefully is of course an issue, right? But I mean to system in Japan is perfectly functional, right? So now you've got a clean slate of a younger generation that actually starts out almost like it was during the major restoration when Japan started from a clean slate. This young generation now is leaving the Ministry of Finance to join a start up is not going to Mitsubishi Corporation, but it is setting up a new company. So that's where I think, you know, this fear of Oh my God, technology is going to create greater, you know, gap between rich and poor, right? In Japan, ironically, because of the demographics very, very mitigated. And would you say the same for immigration? The point on immigration that people are more open minded to it now? Because they recognize that, hey, if you have a choice of not having your diapers changed or having your diapers changed, you're going to go for the diapers change. The Japanese are incredibly pragmatic. Let me ask you, we have a choice. It's really fascinating. So you mentioned that the economy looks like it's growing above, you know, its potential. Um What is its its potential and how much longer do you think it can continue to grow above potential? So for two or three decades, our potential growth rate is uh hovering around 0.5% or something that is slightly positive but not over the 1%. But if we can concur the challenge is aging populations, some metabolism kind of things, probably we can reach about 1% or more than that. I don't say we can equally strong with the US or something. This is the key point. I mean, this is not a high gross economy, I'm more bullish than you not than the Bank of Japan, which is supposed to be conservative. I think the potential growth rate is about one and a quarter percent. You know, when I say that in front of economists they always throw me out of the room, but look at the amount of investment and at the amount of labor mobilization, including immigration that actually is going on, right? But the key issue, right? Um you know, from sort of a Japan perspective over the next couple of years, in my personal opinion, I actually think that the risk that the Bank of Japan is behind the curve. Right? That indeed, yes, you're cautious. Yes. After 30 years of feeding on the trough of zero interest rates, you want to be careful. It's like putting somebody out of the emergency ward. But the reality of the structural tightness in the labor market right is probably raising in my opinion, the risk of a wage price spiral and that's actually why the yen continues to be very weak because, you know, real interest rates, right, actually continue right to move against the Japanese Yen, right? Because inflation is running way faster and potential inflation is running way faster than is anticipated. Wow, it will be amazing to watch and see how all this come to Tokyo. It's the greatest place on earth. Thank you both so much for sharing your insights.