Japan is ushering in a new form of capitalism to revive its economy

Japanese Prime Minister Kishida Fumio has set out his mission to achieve "the great transformation of liberal democratic society", putting people and planet first in his economic policies.

In a special address to The Davos Agenda 2022, he said his three priorities for the country were overcoming COVID-19, reviving the Japanese economy through a "new form of capitalism" - and taking a "realistic approach to Japan’s foreign policy while aspiring to the ideal".

History has proven that state capitalism without checks and balances carries risks at home and abroad, he added, listing challenges including climate change, widening income gaps, rural-urban disparities and social tensions.

Leaders of governments, industries and labour must work together to "generate massive momentum to create a tide of history for a global paradigm shift in policies".

Japan will use its presidency of the G7 next year to demonstrate how capitalism can evolve, said Prime Minister Kishida, who took office in October 2021.

Instead of leaving everything to the market and competition, the prime minister said Japan would focus on public and private sector collaboration on reforms to achieve "economic and social transformation".

Kishida would also launch new mechanisms to "inspire investment and change the way of sharing added values", he said, which would be integrated into both growth and distribution strategies.

“There has been an overreliance on competition and self-regulation to constrain the excesses of market forces,” he added. “This must change."

However, he reiterated that current policies are not sufficient to ensure that growth is sustainable and inclusive.

Japan has committed to a 46% reduction in emissions by 2030 and carbon neutrality by 2050.

Kishida admitted the journey to achieving these goals is "extraordinarily challenging" - and there are vulnerabilities on the supply side. Japan does not have international grid connections and public distrust of nuclear power remains strong following the Fukushima accident.

To overcome vulnerabilities, public and private sectors would work together to transform and innovate toward a "carbon neutral society on both demand and supply sides".

Investment in green technology would be doubled and Kishida will work on next-generation grids, and labour market reforms, as well as introducing a carbon pricing system and supporting the Asian emissions trading market.

The transition to clean energy would mean "boldly adopting policies that have been difficult in the past".

Another important pillar for Japan’s transformation is digitization. The COVID-19 pandemic had shown people how far Japan lagged behind, while also proving digital technology is "indispensable in solving social problems" including the depopulation of rural areas and an ageing population.

Key to this is investment in infrastructure - the government will invest in submarine cables and optical fibre networks. It will promote next-generation networks using optical communication technology that is 100 times faster in speed and reduces electricity consumption to one-tenth, he said.

Investment in people would be crucial to achieve a carbon-neutral society and digitization, Kishida asserted.

For years, Japanese companies have tried to curb cost and supply cheaper products than competitors, but investment in people has been regarded as a cost and wage levels have stagnated, he said.

"As we move forward, we must build a virtuous cycle where investment in people leads to a continuous increase in company value and attracts further investment in human capital."

Kishida also laid out plans for skills programmes and promoting women executives, as well as creating a disclosure system to encourage investment in human capital.

“Investment in people is often regarded as a cost, but it is a source of medium- to long-term corporate value,” he said.

Watch the full special address and learn more about The Davos Agenda 2022.