Fumio Kishida maps out a ‘new capitalism’ for corporate Japan

Last Thursday, when a colleague and I were interviewing Japan’s prime minister and asked him to identify some defining strengths of the world’s third-biggest economy, he could have just waggled his watch.

The Seiko Astron is expensive, sophisticated and exquisite to those whose wrists demand horological bling. But it is also, in the form worn by Fumio Kishida, the modern descendant of the world’s first commercial quartz wristwatch. Seiko’s 1969 landmark of miniaturisation and workmanship was pioneered by a Japanese company just as the economy was starting to become synonymous with industrial brilliance.

Yet instead of leveraging this accessory or picking from a long list of other possible gems, Kishida meandered non-committally around vitality in the private sector and innovative scientific development. It was the answer of someone with a general election to win at the end of the month.

Until then, we are likely to hear more about an even-handed “new capitalism”, pledges of “warm-hearted” reform and a general rejection of neoliberalism that will be hazy on the precise details. Stuff, in other words, calculated to play well with a downbeat electorate.

None of these comforting generalities should distract, though, from some potentially very important specifics that may be brewing in the background, notably on the issue of corporate governance reform and whether it should henceforth be applied on a two-track system for large and small companies. In a 2020 book, Kishida argued that it should, and he repeated that sentiment to the Financial Times last week.

“It’s not realistic to apply the same rules. Corporate governance is important for small- and medium-sized enterprises, but they can’t do it in the same way as big companies,” he said.

Critically, he raised the entwinement of many small and medium-sized companies with local associations and other businesses. Such companies, he implied, needed greater freedom to govern themselves in ways that may not make the kind of hard economic sense demanded by governance-focused investors. It is the positioning of a man who wants to make his name as a friend of Japan’s enormous, pandemic-hit small business sector.

Still, any move to adjust a flagship Abenomics reform such as corporate governance would be significant. Kishida’s first couple of weeks in power, after winning the leadership election of the ruling Liberal Democratic party and taking over from Yoshihide Suga last month, have largely been a projection of stability.

He is affable, a decent communicator and was a solid foreign minister for five years when Abe was at the helm. In many ways, he appears the political equivalent of the “salaryman CEO” that populates swaths of corporate Japan. These leaders have ascended company hierarchies by avoiding risk. They lead with a reluctance to undertake anything too transformational, even when the situation demands they talk a good game on change.

But in 2015, when Japan introduced its first corporate governance code, the world of the salaryman CEO was plunged into upheaval. The code’s introduction (and subsequent revision) gave shareholders licence to assert themselves more effectively. While there has been foot-dragging and box-ticking, companies have come under mounting pressure to be more transparent. They have been asked to translate more of their materials into English, to have more diverse boards with more independent directors and to place greater emphasis on shareholder-friendly metrics such as return on equity.

Share buybacks have soared. Investors have won pivotal victories over managements. Companies that had, for decades, justified their relative shareholder unfriendliness by citing a broad concern for stakeholders (such as customers, communities and employees) have felt less able to do so. Kishida’s “new capitalism” rhetoric may wind some of that back.

Larger listed companies have, in the main, led Japan’s governance improvements and been rewarded. Their medium-sized and smaller counterparts have often balked at the burden of compliance and, in many cases, remain steadfast governance black spots. Kishida’s instinct seems to be that this second group should be treated more leniently, leaving a substantial part of listed corporate Japan theoretically less vulnerable to the cruelties of “old capitalism” and freer to thrive in his version.

Caution would be wise. The corporate governance code may still have its limitations and inequities. But an attempt to free parts of the market from its strictures, however well-intentioned, could end up unravelling one of the few parts of the Abenomics “third arrow” of structural reform that really worked.

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