Paving the way for sustainable transformation
This article is an excerpt from our research publication SJ3: The pathway to regenerative business. A Japanese version is available on Note.
Ken Shibusawa is one of Japan’s leading commentators on stakeholder capitalism and sustainable investment. In 2001, he founded Shibusawa & Co., an investment advisory firm. He is also co-founder of mutual fund, Commons Asset Management. As an advisor to Prime Minister Kishida’s policy initiative, the ‘New Form of Capitalism’, Shibusawa-san has a front-row seat in Japan’s ongoing struggle to implement structural change.
We spoke with him about the changes necessary to unlock innovation in the corporate sector.
Before we talk about the future, what do you see as the historical context for sustainable transformation in Japan?
Well, I was born in 1961, which was the Showa period, a time of Japan as number one. We were actually so successful that we got a lot of bashing from the United States. So we took this ‘Made in Japan’ model, where we made things in Japan and basically delivered them to the developed nations of the world, and changed it to a ‘Made by Japan’ model, where we said, okay, we’ll make it in your country. That was a very rational model change. But the Heisei period that had started with ‘Japan bashing’ ended with a sense of ‘Japan passing’.
Now, I think we’re at a very interesting juncture in the way Japan as a society has evolved. It could be the biggest structural change ever, certainly within my lifetime. The reason is demographic. The ‘Dankai’ (baby boomers) and ‘Dankai Junior’ (baby boomer junior) generations were like a double barrel shape that has shifted upward over the last 30 years. I was looking at this trend 10 or 15 years ago when I started Commons Asset Management and I thought, wow, look what happens in 2020. All of a sudden the labour force goes into a steep drop towards 2050. With those population demographics, it’s impossible to have a flourishing economy based on the Showa model. It can’t just be ‘Made in Japan’ or ‘Made by Japan’. It should be ‘Made with Japan’, with the world.
What do you see as the barriers and triggers for structural change?
Well, since I already mentioned them, ‘Dankai Juniors’ are now in their 40s, and when they were trying to get a job, nobody was hiring. So instead, at the banks, trading companies and large corporations, most of the long-term hires are the people we call the ‘Bubble Nyusha’, who entered the workforce from 1988 to 1992. They’re now in their 50s and retirement is just ahead. With perhaps one more post in their current company, you can’t really expect them to be motivated to innovate. I was speaking with the CEO of a Kyoto-based company who calls them the ‘Clay Layer’. Nothing seeps from above, and nothing seeps from below. It’s an interesting way of seeing it. But this ‘Clay Layer’ will soon be onto the next pasture, and large Japanese companies’ organisational decision making processes should flow better.
The real trigger for change could be labour reform. I actually think Kishida-san might be the most underrated Prime Minister ever, because he’s trying to do things that no other PM has done before. Doubling the defence spending was one, whatever your views on that might be. But from the corporate standpoint, the big idea coming from the Kishida administration is his ‘New Form of Capitalism’. I’ve been on the committee for this since 2021 and the main agenda is how to increase wages. We need structural change in the labour market and corporate practices to increase wages structurally.
So wage increases are key to transforming Japanese capitalism?
Let me share my own example. In my 20s and 30s, I worked in foreign financial institutions and the pay was not bad at all compared to Japanese institutions. Why? Because there’s labour market liquidity for people that are willing to jump ship to work for a foreign firm, which didn’t give you as much stability. For me, just having that experience of changing jobs and seeing your salary go up, that’s normal, right? But in Japan, when you start talking about labour liquidity, people think about layoffs, and that’s a big taboo.
What I noticed about the Kishida administration is that they were not able to use the word ‘rodo-shijo no ryduo-sei’ (labour market liquidity), but they did manage to use the word ‘rodo-ido no enkatsuka’ (promoting labour mobility). They’ve started talking about the importance of reskilling and how mobility should be both inside and outside the company. If you don’t increase opportunities for your own employees, they’ll go somewhere else, right? Basically, it’s about changing that old Japanese ‘uchi (outside)-soto (inside)’ way of thinking and making it more seamless.
Let’s talk about the next generation. Are companies doing enough to attract and retain their skills?
While Japan has made some progress on gender diversity and acceptance of foreign workers, there’s still a real lack of diversity in terms of age. You see young talented people who say they want to change the world by joining a corporation, but when they see that they have to wait 30 years until they are given roles of responsibility I would imagine the talented people that the company wants to hire either won’t come or won’t stay.
Several years ago, a business organisation that I belong to invited two Millennials to talk to our committee as guest speakers. One of them told the committee how, in the past, young talented people joined large corporations because that’s where you go to get the resources to be able to excel. But these days, young people won’t work for large companies if they come and they’re restricted. Even little things like accessing the Internet at work. What he was saying was absolutely true. The best and brightest out of top universities now start their own company.
Does the approach to education also need to change?
Education reform has been discussed for decades, but it never gets anywhere because the exit strategy for education in Japan is being hired by a ‘good’ company. In large companies, top management sees the changes and understands that they need new talent for the changing times. But when it gets to the personnel department trying to hire 300 or 400 new recruits, it becomes a cookie-cutter kind of thing. If you don’t fit, you’re out.
So in order to entice educational reform, large companies need to change their hiring process first. For example, they could start rewarding young people who worked for two years in Africa as a volunteer, and treating that as two years of valuable experience rather than two years behind. And then start placing these people in positions where they can make a difference.
At Fabric, we’re seeing that large Japanese companies are increasingly open to working with external startups as well as cultivating those resources internally. Are you seeing something similar?
I think there’s this village mentality which defines the lives and behaviours of lots of people in Japan. People feel uncomfortable being exiled from their ‘village’, whether they’re in academia, government, or the private sector. But that mentality is slowly breaking down. Thirty years ago, I would never have imagined a bank called Mitsui Sumitomo Bank. That would be just totally out of whack. Mitsui and Sumitomo? Wow. So people can cross these lines for business.
All large corporations these days have their corporate venture capital group, so they are tapping into things that are happening externally. And I know that Fabric is working with different companies to set up innovation programmes that give these younger and middle layers of the company a chance to actually build and design new things. When you have the CEO of a major company committed to that kind of programme, and it’s set up to be inclusive for the younger generation, things happen.
Shibusawa-san reminds us that demographics are key to understanding both change and inertia in Japan. The generation now entering the workforce may be the most empowered ever, and they only want to work for companies that can help them achieve their goals. Japanese corporations need a new human capital strategy to attract younger talent while also finding new outlets for the tremendous knowledge base of older workers. This balancing act, if done right, can unlock innovation from above and below. But it also requires a huge amount of empathy towards all involved. This is where Japan can tap one of its greatest strengths: a collective mindset that ensures no-one is left behind.
Fabric is a Strategic Design and Sustainability consultancy helping businesses move towards more innovative, sustainable futures. Based in Tokyo, we’ve been consulting with global and local companies since 2004. We have extensive experience bringing together design thinking, sustainability, and human insight to deliver good strategy for clients.
