Macro pragmatism, micro optimism

For Japan, global uncertainty is a feature - domestic resilience is the operating system

Jeff Bezos is certainly one of the true innovation and leadership geniuses of our generation. The Amazon founder is fond of reminding his teams that the key question for business strategy is not to try to predict what will change, but instead to focus on what is not going to change in the next 10 years. This approach, he says, allows you to organize your activities and invest energy confidently. You know it will pay off in the long term.

Starting from this perspective, Japan is poised to emerge a winner now that change is everywhere; that previously unthinkable policy actions are disrupting the global economic-, financial- and socio-political architecture. Yes, U.S. tariffs, exchange rate volatility, domestic inflation and rising risks of a global economic slowdown will make a dent in Japan’s 2025/26 business cycle; but the multiyear generational structural up cycle remains firmly in place.

Bamboo — a symbol for both strength and flexibility, aspiration and resilience, foresight and remembrance — here in Arashiyama, Kyoto

Why? Because the forces that started that generational up-cycle several years ago have not changed—and won’t in the foreseeable future. Japan has evolved from high-growth powerhouse in the 1960s to 1980s to deflationary stagnation and restructuring in the 1990s and early 2000s towards a new phase now firmly entrenched since at least 2020: competitive resilience. For today’s Japan, global uncertainty is a feature, domestic resilience is the operating system.

Calm, coordinated government action…

Let us start with politics and policymaking. Here Japan is a true global standout. The guiding principle is pro-growth pragmatism, not politicians promising nostalgic greatness or technocrats insisting on fiscal or monetary austerity. Also there is no techno-entrepreneurial new-money elite claiming technology will cure all problems. Yes, Japan’s elite is marked by pragmatism, level-headedness, as well as an increasingly forthright confidence stemming from a healthy mix of of curious openness for new ideas combined with stubborn insistence on respecting traditional values. Japan is proud of its heritage, yet focused on creating real-world prosperity by optimizing her national assets and endowment.

To wit, the threat of U.S. tariffs was met head-on immediately by the government declaring a national emergency, which in turn mobilized METI to open hot-lines and help centers around the country so that companies hurt by U.S. tariffs could apply for public support. For a true civil servant, the difference between a hostile tariff and a tsunami is technical, not fundamental — the purpose of the government is to help and support corporate victims: within barely one months, the cabinet had authorized spending just shy of Y 1 trillion of government reserves to potential tariff victims (that equivalent to just shy of 1% of Japan’s current annual government budget).

Moreover, the Bank of Japan was quick to first postpone further rate increases, and, in coordination with the Ministry of Finance, the bond issuance schedule is now adjusted to calm supply-demand fears that have been pushing up long-duration government bond yields.

The policymaking elite is a model of pro-growth pragmatism. Dogmatic politics does not get in the way and — in sharp contrast to America and Europe — the coordination between the various ministries and agencies is the envy of the world. This is a policy elite that prides itself on coordinated action and despises dogmatic grandstanding and vainglory tweet battles.

Make no mistake - Japan has a government that acts calmly and administrates effectively. This will not change. Even if the current prime minister falls after the July elections, the elite technocrats’ rule will continue. This is national stability you can count on.

…energetic & focused private sector metabolism

Against this backdrop of trust-boosting, professional and, yes, unspectacular government policymaking, Japan’s private sector has been marked by a growing energy, a sense of urgency and actions not seen since the bubble years of the late 1980s.

Then, however, Japan’s corporate metabolism was high on arrogant exuberance. Now it is boosted by brute necessity. Companies are running out of their most important asset: human capital. The growing scarcity of labor—both skilled and unskilled—is forcing a radical break with proud traditions:

• Pay-for-performance is replacing seniority-based compensation

• Professional empowerment and career paths for women and non-Japanese

• Promotion of part-time and contract workers to full-time status

• Allowing team members a second job

• Strategic encouragement of intrapreneurship

Scarcity is the mother of innovation, and corporate leaders are razor-focused on retention, motivation, and upskilling their employees.

In my view, this force is the primary reason to be bullish on Japan—next-generation employees and corporate leaders are being groomed and incentivized in new ways, which in turn is poised to raise productivity. Again, this is a deep trend that will stay with us and shape Japan’s future in predictable ways.

Importantly, the growing labor shortage will also accelerate the diffusion and real-world use of technology. Chances are high, in my view, that Japan will evolve toward many best-in-class case studies where artificial intelligence (AI) does not just mean artificial intelligence, but delivers real-world examples of augmented intelligence (i.e., human employees collaborating with AI to create not just next-level global best practices and processes but, more importantly, the new gold standard for best customer experience and satisfaction). AI omotenashi, here we come!

The certainty of these trends is already becoming manifest in Japan’s corporate metabolism. For three years running, we’re seeing merger and acquisition activity as well as domestic business investment reach record levels and management buyouts on the rise. For almost 30 years, corporate leaders have been obsessed with building fortress balance sheets by paying down debt and hoarding cash. They are now investing in the future of their businesses and raising capital efficiency.

Just as employees are starting to be paid for performance, chief financial officers are evolving to the next level. Until now, the company finance department was primarily a de facto bursary, dispensing money. Now, they are beginning to actually evaluate the company’s investment return profile against capital costs performance. Given the national policy goal of doubling asset income, as promoted in unison by the Financial Services Agency, the Ministry of Finance, the Ministry of Economy, Trade and Industry and, of course, the Tokyo Stock Exchange, this is, again, a “certain” trend that is unlikely to change over the coming decades.

To be sure, the net result of these certain Japan trends is poised to result in significant industrial restructuring. The gap between winners and losers will grow. In five to 10 years, Japan is bound to have true national champions, more de facto oligopolies, and far fewer zombie companies. If so, the net result should be higher pricing power for the winners, which in turn means inflation will become much more entrenched than perhaps currently anticipated.

For US companies, the high likelihood of “macro pragmatism” and “micro optimism” should offer steadfast growth in Japan opportunities. The metabolism and liquidity of both human and corporate capital is rising, so actual access to the Japanese market will keep getting better.

Focus on what will stay the same: global uncertainty is a feature, domestic resilience is the operating system. Japan is open for business.

Thank you for reading. As always, comments welcome. Many cheers from sunny Tokyo ;-j

This piece is a slightly modified version of an article on the Japan Outlook in the midst of rapidly changing global realities, originally requested and published by the American Chamber of Commerce in Japan. Thank you, Christopher Jones, for your enthusiasm and professionalism.

ACCJ Journal article