Priorities for the Japanese Economy in 2018 (January 2018)

Issues Concerning Japan’s Economic Policy

KOBAYASHI Keiichiro Faculty Fellow, RIETI

The Japanese economy has been faring well with current indicators continuing to show robust performance. In this article, I would like to discuss two medium- to long-term issues we should consider in order to achieve higher growth.

Strategic shareholdings and corporate governance reform

The first issue is how to facilitate corporate governance reform. One of the notable economic policy initiatives under the government of Prime Minister Shinzo Abe is the reform of corporate governance. It is characteristic in that not only are the governance structure of companies as stand-alone entities subject to reform but also the entire flow of funds from institutional investors to investee companies (investment chains). Although the Stewardship Code and the Corporate Governance Code, which respectively set out guidelines for the conduct of institutional investors and companies, were introduced in succession, it appears that Japanese companies have made little progress in changing their behavior. For instance, even when they declare compliance with the Corporate Governance Code, their commitment is no more than a mere formality in many cases. Also, when financial institutions consider adopting the Stewardship Code, their typical interpretation of the code is that the scope of its application is limited to funds in customers' accounts and hence the funds of their shareholders are outside its coverage. Given the original intent of the code, this interpretation is extremely narrow, and it is natural to consider that the scope of application extends to shareholders' equity.

Some people point to the persistent practice of cross shareholding among companies, which still accounts for a significant percentage of shares in effective terms, as one factor behind the slow progress in governance reform. The widely held perception is that the percentage of cross-held shares has been on a decline since the burst of the economic bubble and dropped significantly in recent years. Also, a media report has it that the ratio of cross shareholdings among listed companies has fallen to as low as 10%. However, some studies have shown that the ratio of stable shareholders remains as high as 34% when based on voting rights. According to one estimate, the ratio exceeds 50% in many companies. When the ratio of stable shareholders is high, it weakens institutional investors' ability to urge investee companies to improve business management by exerting influence via investment chains. This causes stagnation in governance reform.

However, with conflicting numbers reported by various sources, it remains unclear which of them represents the true picture of cross shareholdings. To begin with, no accurate data are available. Currently, companies are not required to disclose why their shareholders hold the shares, i.e., whether it is for investment or non-investment (strategic) purposes. Thus, there exist no statistics showing the purpose of holding shares. However, it is unlikely that company staff responsible for organizing shareholders' meetings have no knowledge of their shareholders' intent. Compilers of statistics (e.g., government ministries, stock exchanges) should be able to prepare such statistics without much trouble, simply by requiring companies to disclose their shareholders' purposes. It is necessary to start from obtaining an accurate picture of the state of affairs and then objectively analyze the facts gathered.

Management of assets owned by elderly people as a matter of economic policy

The second issue concerns financial gerontology. This refers to a policy area that seeks to address the question of how to ensure proper management of assets owned by elderly people with dementia or other problems in making decisions to support their livelihoods, while at the same time maintaining the vitality of the Japanese economy as a whole. Elderly people aged 65 and over, totaling some 30 million at present, own more than half of the 1.8 quadrillion yen worth financial assets held by Japanese households. Approximately five million of them are suffering dementia. The number is expected to rise to seven million in 2030, meaning that well more than 100 trillion yen worth of assets will be owned by those with senile dementia. At present, most of those assets are held in cash. Reportedly, significant amounts of assets are left dormant—rather than invested in equity securities—because self-imposed industry regulations prohibit securities firms from recommending elderly customers to make new investments. The guardianship system for adults, which was established under the jurisdiction of the Ministry of Justice exclusively for the purpose of ensuring the proper management of property owned by elderly people with dementia, reportedly allows investments only in the form of principal-protected cash equivalent assets such as bank deposits because family courts tend to operate the system conservatively. It might be too much to ask family courts, which have no economic expertise, to have a mindset to increase returns by taking appropriate risks. However, guardians would be doing no good for their wards as well as for Japan unless they take some risks in balance with returns. Performing the task of guardians, which is to manage property, needs sufficient economic knowledge and a way of thinking. It was probably wrong to have designed the system originally in a way to leave the entire task to the legal community. Also, it is often pointed out that guardians often lack coordination with caregivers and welfare specialists in undertaking their activities despite the fact that their task is to look after elderly people with dementia. It takes a broad spectrum of cooperation encompassing not only the legal, financial, and economic communities but also professionals specialized in elderly welfare to ensure the proper management of property owned by elderly people. However, a system for such cross-sectoral cooperation is hardly in place.

With support services provided in a segmented manner, there exist no single mechanism on which elderly people can rely for livelihood support. This might be the root cause for stagnant consumption in Japan, making those in the working generation worry about their future and tighten their purse strings.

The Japanese economy is showing strong performance, and we must not miss this opportunity to launch efforts to address those medium- to long-term issues and dispel worries about the future. These are the strategies truly needed for Japan's growth.

December 27, 2017

December 27, 2017

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