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Coronavirus crisis may accelerate Japan’s structural reform

Summary:
Prime Minister Shinzo Abe has for years employed fiscal and monetary stimulus tools to revive Japan's stagnant economy. But the so-called "third arrow" in his quiver, achieving structural reforms, has been less than successful beyond bringing more women into the workforce. Now, the COVID-19 health crisis may give Japan a chance to expand structural reform by using digital transformation, which could give a boost to economic growth over the long term while incurring some costs in the short run. Social distancing to combat the COVID-19 crisis is changing behavior in Japanese society, as everywhere. The Japanese government is using fiscal stimulus not only to disseminate liquidity support to households and businesses but also to reinforce the shift toward digital healthcare services, digital

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Prime Minister Shinzo Abe has for years employed fiscal and monetary stimulus tools to revive Japan's stagnant economy. But the so-called "third arrow" in his quiver, achieving structural reforms, has been less than successful beyond bringing more women into the workforce. Now, the COVID-19 health crisis may give Japan a chance to expand structural reform by using digital transformation, which could give a boost to economic growth over the long term while incurring some costs in the short run.

Social distancing to combat the COVID-19 crisis is changing behavior in Japanese society, as everywhere. The Japanese government is using fiscal stimulus not only to disseminate liquidity support to households and businesses but also to reinforce the shift toward digital healthcare services, digital government ID and payment methods, and telework, which seem likely to reallocate economic activity and employment as the economy reopens under the banner of what Japan calls "Society 5.0."1

Examples of this part of "Abenomics" include the push to deploy optical fiber networks nationwide—at a cost of ¥53 billion ($496 million) in the latest stimulus budget—and the development of digital medical care services to relieve the labor shortage in the nursing and caregiving industry on which Japan's aging population depends. A 2019 survey shows 79 percent of companies in the nursing and caregiving industry are understaffed. Because of the COVID-19 crisis, the government recently lifted the restrictions on online medical services, while the Ministry for Economy, Trade and Industry (METI) launched a free remote health consultation program.

The health crisis has also stepped up the development of "Digital Government," another digital transformation building block, by increasing the demand for "My Number" ID cards, a newly reformed digital personal identification system used for social security administration, taxation, and disaster response. This system is designed to digitalize, streamline, and unify administrative procedures to improve government efficiency. Until last year, only 14 percent of citizens held these ID cards. People seeking the government's ¥100,000 virus relief cash handout were required to use their ID number in order to apply online, or else use the longer mail application process. Yet the government's inefficiency in handling the surge in demand has accumulated a long queue for new applicants and caused frustration over the cash handout, prompting the officials to take further steps to facilitate the system.

Japan has resisted the trend to cashless payments adopted in other advanced countries but had set a goal of 40 percent of transactions to be digital by 2025, hoping to improve business operation efficiency and to stimulate household consumption through ecommerce retail. A 2019 sales tax hike was accompanied by a "cash back" reward program for shoppers who made purchases with smartphone apps. Cash is still king in Japan, but the Japanese are increasingly turning away from it because of sanitary concerns.

The other part of Abenomics's "third arrow" is labor market reform. Japan had been promoting telework and flexible work schedules years before the pandemic, but the impact of these reforms has been limited beyond bringing more women into the workforce. In 2018, only 8.5 percent of Japanese workers used a telework system, compared to 16 percent in the United States.2 Under its virus relief package, Japan doubled the subsidy amount available for telework, and the share of workers teleworking has increased to 35 percent nationwide, with the rate in Tokyo reaching 56 percent, based on the Cabinet Office's (CAO) latest COVID-19 Survey. Ninety percent of Tokyo respondents who have tried telework hope to continue. The utilization could exceed 45 percent in education; finance, insurance, and real estate ; and wholesale sectors.

These trends may enhance work-life balance in Japan, where long working hours and commuting times—the third highest among countries in the Organization for Economic Cooperation and Development—have been the norm. The recent Cabinet survey shows that higher telework utilization was associated with reduced working hours during the COVID-19 lockdown. Though telework by itself is not the solution to low labor productivity, it would nevertheless topple some of Japan's inefficient workplace practices such as overvaluing physical presence and the "hanko" system, the requirement that paperwork be stamped with personal seals in red ink. In late April, Abe instructed cabinet ministries to draft new laws to overhaul the inconvenient hanko tradition to promote telecommuting. Telework that enables a flexible work style is also likely to empower women by bringing more of them into the workforce, as half of the rise in female employment since 2013 is through part-time or other nonregular positions. Additionally, remote work is encouraging males to share more of the household duties, according to the Cabinet survey.

In the COVID-19 response package, the government is also encouraging digitalization at the workplace by expanding the subsidies for new equipment to small and medium enterprises, to help them take advantage of IT solutions and ecommerce. Support for smart farming technologies may also mitigate the serious labor shortage in the agriculture sector.

But as Richard Baldwin has noted in his book The Globotics Upheaval, every structural transformation brings some costs. Japan's impending digital transformation is likely to improve productivity and alleviate severe labor shortages in nursing, construction, and agriculture. But some jobs will be permanently lost in the process, forcing workers to shift from shrinking to growing industries. In the time of COVID-19, the "pain" is controlled by Japan's employment protection schemes in the stimulus package, which is designed to preserve employment in firms subject to temporary shock because of physical distancing or the permanent shock resulting from digitalization. In spite of the virus shock, Japan's number of bankruptcies this May was 55.6 percent lower than last year. Yet when the economy stabilizes, some sectors will shrink and others will expand, requiring government intervention to provide protection while facilitating the prospective sectoral reallocation, as proposed by Blanchard, Philippon, and Pisani-Ferry.

Notes

1. The "Society 5.0" plan refers to the development of a "super-smart society" built upon big data, advanced technology, and "industrialization 4.0." See more on the Abenomics website.

2. Japan's Internal Affairs Ministry's survey found that only 8.5 percent of the workers actually used a telework system in 2018, a 2 percentage point improvement from 2017. As a comparison, in 2018, 16 percent of US workforce worked remotely (US Bureau of Labor Statistics).

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