ECONOMY

COVID-19 Accelerating the Pace of Change

Increased utilization of IT and digital technologies is among the trends accelerating in Japan as a result of the COVID-19 outbreak, writes Kojima Akira.

A display of hanko seals in Akihabara “Electric Town,” Tokyo. Japanese government and business leaders have agreed to significantly reduce paperwork and the use of hanko as a stay-at-home measure in response to the coronavirus pandemic. HANS-HEINRICH MULLER VIA FLICKR, CC BY-ND 2.0

Amid the persistently expanding peril of the COVID-19 coronavirus, the post-corona economy, society and international relations have also been actively discussed. The post-corona world will not return to the pre-corona status quo. However, we should probably regard this not as the beginning of a transition to a totally new world, breaking ties with the pre-corona world, but the acceleration of megatrends that had already begun before the coronavirus outbreak. This is particularly the case for Japan. 

One of the topics eagerly discussed during this epidemic has been the modification of an excessive corporate dependency on industries in China, which has become the workshop of the world. This would entail reviewing the supply chains of companies and industries that have developed through excessive reliance on China. In fact, more than a few companies are trying to move their production bases from China to their home countries. The Trump administration in the United States is encouraging US companies to return from China to the United States, to resurrect the US manufacturing industry.  

However, even if the US companies withdraw from China, their new bases would not be in the United States. For Japan, there is the fact that the country’s supply chains had previously collapsed due to earthquakes, floods and the nuclear power plant accident. Given the concerns about the possibility of major earthquakes in the future, it seems that the choice of simply withdrawing from China and returning to Japan will not be made. Of course, some companies will make this choice, but returning to the company’s home country is not the only solution to their problems. It is also possible to move to reduce dependency on China and develop supply chains in Association of Southeast Asian Nations (ASEAN) member states. 

However, what will be important in the years ahead is not overseas development with the aim of simply reducing costs, but the securing of global value chains (GVCs) that will innovate while acquiring new technologies and knowledge. If that is the case, the overseas development of companies and industries also has to put Europe and the United States, which are developed nations, in perspective. Even in developed nations, total labor cost is becoming not much higher than emerging countries, even though productivity is rising due to the utilization of IT technology and the unit labor cost is high. 

Therefore, the future strategy of companies will not be a simple departure from China and the rebuilding of supply chains in pursuit of lower costs. It appears it must be more diversified, with the goal of establishing GVCs. 

Utilization of IT

The utilization of IT technology is becoming decisively important against the backdrop of the coronavirus. However, IT and digital technology were important even before the pandemic. Japan’s strength is manufacturing based on master craftsmanship, but this has stood in the way, and Japan has fallen behind other countries in the utilization of IT and digital technologies by companies, industry, society and the government. 

In Switzerland, the International Institute for Management Development (IMD) World Digital Competitiveness Ranking placed Japan 23rd among the 63 ranked countries and regions. Even in Asia, Japan falls behind South Korea, Taiwan and China. Other countries are taking action to make full use of IT in their measures to combat COVID-19, converting this pandemic into an opportunity. Competition over IT and digital technologies that existed before the pandemic has further intensified. 

It is not only companies. The Japanese government is also behind other countries in digitalization. Although e-government is part of the Abe administration’s growth strategies, the delay in the utilization of IT and digital technologies by the government is an impediment to digitalization in the private sector. According to the OECD, people using government services over the internet make up only a small percentage in Japan, ranked at the bottom of member countries. The average for the OECD countries is about 60%, with about 90% of people in Northern European countries doing administrative procedures over the internet. 

A shocking thing happened in Japan in connection with the measures to address the coronavirus. The Abe administration decided on a special cash payment of 100,000 yen per person as a part of the supplementary budget brought together as a symbol of the administration’s efforts, and it has not yet been paid, even in June. While it was possible to apply online, many municipal governments stopped handling digital applications because of defects in the system in their administrative offices. In contrast, the US state of Oklahoma, where coronavirus infections sharply increased in April, and where the reception desk was about to collapse because of all of the applications for unemployment insurance that had come flooding in, the number of applications handled in a week increased as much as thirtyfold after they began handling applications using AI in their call center operations in cooperation with Google LLC. It is said that the work, which would have usually taken two years, was completed only in a few days. 

On a side note, funds have flowed into IT-related companies in the stock market, and the total market capitalization of the five GAFAM companies, which includes Microsoft, Apple and Facebook, has reached 5,300 billion dollars and exceeded the total market capitalization of all the companies listed on the First Section of the Tokyo Stock Market in Japan. At the end of 2016, the market capitalization of the companies listed on the First Section of the Tokyo Stock Market was more than five times greater than GAFAM. This suggests that the trend toward IT, which had begun before the pandemic, accelerated during it. 

GDP: The Global Debt Problem

As a measure to address problems during the pandemic, governments and central banks around the world are conducting unprecedented fiscal expansion and monetary easing. As a result, the government deficit has ballooned, and the outstanding government debt has swollen to a level higher than during World War II or the Great Depression in Japan and the United States. Private debt has also increased to an unprecedented level amid this monetary easing. For some, GDP has taken on a new meaning, the “global debt problem.” In this field, too, fiscal expansion, debt swelling and monetary easing policy that is said to be of a different dimension were introduced by the Abe administration nearly eight years ago. They have been further enhanced during the pandemic. Here again, COVID-19 has not changed the direction of policy, but has accelerated it in the same direction. 

The 2025 Crises: Aging Population, Aging IT Infrastructure

In Japan, there is the issue of the 2025 crisis, a crisis trigged by the elderly 8.8 million people of the post-World War II baby boomer generation being over 75 years old, which is considered “late-stage elderly” by the medical system, in 2025, putting added pressure on the pension system. Japan has to find a path toward a solution for the government’s serious fiscal problems by then. However, this problem will also be accelerated and amplified by the pandemic. 

The population problem is not simply aging. More serious is the falling birthrate and the declining population which will advance with the increasing ratio of the elderly. While the number of live births during the baby boomer generation was 2.7 million per year, it fell below 900,000 in 2019. As there were 1.38 million deaths, the total population, of course, declined. A natural attrition of the total population was recorded for the thirteenth consecutive year, and the working age population, the people aged 15 to 64 that supports the economy and finance as the main players in the labor market also decreased steadily, resulting in its fall from 59.7% of the total population in 2018 to 59.5%, the record lowest percentage. 

There is another 2025 crisis. The “Report on Digital Transformation (DX): Overcoming of ‘2025 Digital Cliff’ Involving IT Systems and Full-Fledged Development of Efforts for DX” compiled by the Ministry of Economy, Trade and Industry (METI) in September 2019 says that Japanese companies will be forced to take measures to address their aging IT infrastructure in 2025, coinciding with the engineers who are responsible for maintenance reaching retirement age. This situation was not brought about by the pandemic, but preceded it. However, the pandemic has made the response to this crisis more pressing because of the acceleration of digitalization during the pandemic. 

The post-corona world is not the beginning of a new change but the acceleration of previously existing changes, particularly for Japan. 

KOJIMA Akira is a member of the Board of Trustees and professor of the National Graduate Institute for Policy Studies

Note: This article first appeared in the July/August 2020 issue of the Japan Journal 

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