Richard Katz on Why Raising Wages Is the Key to Japan's Revival
PIVOT 公式チャンネル
Richard Katz, a New York–based special correspondent for Toyo Keizai who has followed Japan's economy for roughly 45 to 50 years, came to PIVOT to discuss his book Raise Wages and Japan Will Revive (『給料を上げれば日本は復活する』). His central claim is that decades of stagnant wages are not a side effect of Japan's malaise but its core. Low pay, in his telling, is what produces chronic budget deficits, zero interest rates and dependence on a weak yen. He argues the fixes are well understood, and that politics protecting vested interests is what blocks them.
How an American Historian-Economist Came to Japan
Katz said the interest began by accident. As a history and economics major at Columbia University during the Vietnam War, Katz wanted to take a course on Vietnam, but the university offered none. A seminar on Japan was available, so Katz took that instead, knowing almost nothing about the country except that toys from childhood that broke after three days were "made in Japan." This was before Toyota and Sony had built their reputations.
Three things in that seminar held Katz's attention. The first was the drama of Japanese history, which Katz compared to a soap opera of repeated rises and falls. The second, viewed from inside the anti-war movement, was how Japan had resisted Western attempts to take it over, and the role industrial policy played in Meiji-era modernization. The third was the growing trade friction between Japan and the United States, which, along with the postwar economic miracle, was a natural subject for an economics student. Katz then began freelance writing for Japanese publications.
Katz stressed that this half-century of observation was not about advancing American interests but about wanting Japan to do better for its own sake. Katz described Americans as a "can-do" people rather than a shikata ga nai ("it can't be helped") people. So instead of asking why Japan is the way it is, Katz asks how Japan could become better.
Why Wages Have to Rise
Katz started from what Katz called a fundamental principle of economics: over the long term, real wages per hour must grow at roughly the same rate as GDP per hour. If workers aren't paid enough, they can't buy what the economy produces. Something else then has to fill the gap. Either the government runs constant budget deficits, or the yen is cheapened to push exports. Failing wage growth therefore produces macroeconomic instability. In this framing, Japan's budget deficits, and its zero interest rates, are symptoms of Japan's problems rather than their cause.
Katz said this holds for every economy, but Japan has the largest gap between productivity growth and wage growth. Real wages for the typical worker, Katz said, are no higher today than in 1990, which no other market economy has done. The interviewer noted that this was obvious from the book's graphs, and Katz described themselves as "a bit of a graphaholic."
Three Ways to Get Wages Moving
Because companies are not raising wages on their own, Katz argued the government has to be involved, and laid out several levers.
Minimum wage. Katz called this Japan's clear success. For about 15 to 20 years, Japan has raised the minimum wage by about 3% a year. Katz estimated this has lifted perhaps 20 million people out of near-poverty incomes. Now that inflation has returned, Katz said the target should be 3% after inflation. Katz described this as easy: "You write a law, you do it."
Equal pay for equal work. Japan already has laws requiring equal pay between men and women and between regular and non-regular workers, but Katz said they are not enforced. Labor inspectors exist, yet the labor ministry does not enforce the rule. The justice system imposes no punishment on violators. Companies argue that the work isn't truly equal because some small share of it, around 1%, differs, and judges usually side with them. Katz argued this hurts not just individual workers but the whole country, and that it worsens the aging of society. Like the minimum wage, it is something the government could easily fix.
Weakening the grip of lifetime employment. Katz argued that lifetime employment means companies rarely compete for workers. In the high-growth era its benefits outweighed its costs, but Katz thinks the balance has flipped. Firms can deny real raises because workers can't easily leave, and anyone who does leave risks ending up as a non-regular worker.
Katz pointed to places where competition does exist as evidence. Companies compete when hiring new graduates out of high school or college, and starting wages have begun to rise substantially. Workers with specialized skills such as software can also choose among employers. Among people who switch jobs, Katz said, only about 10–15% used to get a raise of more than 10%. Now about a third of job-switchers get a raise of at least 10% at their new company. When the interviewer noted that workers in their 40s see only small increases, Katz agreed. The gains go mainly to younger workers with skills in regular jobs, and much less to the unskilled. The point, Katz said, is that it shows market forces can raise wages when competition is allowed.
Shunto, Small Companies, and "Should They Exist?"
The interviewer cited the 2026 shunto (spring wage negotiations), in which nominal wages reportedly rose 5.26%. Katz replied that only about 16% of Japanese workers are covered by the shunto. Katz was glad for them but asked about the other 84%, who are not getting 5%. If inflation settles at the 2% target, Katz said, nobody knows whether companies will pay workers more than inflation or go back to paying less.
The interviewer raised the objection that about 70% of employees work for small companies that can't afford raises. Katz pushed back: they say they can't, but many can. Katz then asked: if they can't afford to raise wages, should they be in existence? Katz cited Sweden, which raised wages and left companies a choice. They could improve productivity or go out of business, in which case more productive firms could hire their workers. That reallocation from unproductive to efficient companies is how Katz believes a healthy market economy should work.
Katz said Japan does poorly on this measure. Looking at heavily patenting, innovative firms versus those that patent little, Katz said Japan shows one of the smallest shifts of labor toward the innovative firms. Katz blamed government loans, credit guarantees and similar measures that keep firms alive even when they say they haven't been able to raise wages for 30 years.
The Bank of Japan's Dilemma
Asked about the Bank of Japan's rate hikes, Katz said they may not have much effect, since rates remain low. The BOJ faces a dilemma. Headline inflation is too high, but Katz said 80–90% of price increases over the past four years came from food and energy, the import-intensive sectors. Part of that reflected global price rises tied to Ukraine and Iran, and part reflected an ever-weakening yen. The "healthy," domestically led inflation that people hoped for is too low because wages are so low. Real personal consumption, Katz said, is no higher than in 2013, a dozen years without growth. Katz called the result a kind of stagflation, a hard problem for any central bank, which explains the BOJ's caution.
Katz agreed that bond yields are rising globally. If the 10-year JGB yield keeps climbing, it could slow business investment and housing, which Katz said is already "in the dumps," and so slow the economy. Fighting inflation calls for higher rates, while supporting growth calls for low rates, and Katz said it is not clear what to do.
Why the Debt-Crisis Talk Is Alarmist
Katz rejected claims that the government won't be able to service its debt now that long-term yields are around 3%. Most of the debt, Katz noted, was issued when rates were very low. Next year the typical interest rate on Japanese government debt will be around 0.6–0.7%, Katz said, and current market rates won't become a real problem for years. Talk of a government credit crunch or debt crisis is therefore "very, very alarmist."
In Katz's view, excessive government debt in Japan doesn't show up as a dramatic financial crisis. It shows up as a slow erosion of growth potential: the economy grinds slower, wages don't rise, and living standards stagnate.
Equality: A Strength Japan Is Losing
The interviewer, who said the "lost 20 or 30 years" had covered most of their life, asked whether Japan was at least fortunate to have less inequality than the US or UK. Katz called equality of opportunity one of Japan's best features, the result of determined effort. Katz added that equality among people who are all poorer is not good, and warned that Japan is losing that equality.
Katz's example came from the bureaucracy. Early in Katz's career, officials at the Ministry of Finance or METI typically had ordinary fathers who ran a small sake shop or worked as salarymen at small companies, often in the prefectures. They rose through exams. Today, Katz said, most policymakers' fathers were at elite companies or were elite bureaucrats. Among new recruits to METI or MOF, Katz said it used to be perhaps one in ten from a private high school. Now it is six or seven in ten, mostly from private schools in Tokyo or Osaka. Officials once knew the typical person's experience because they had lived it. Katz argued that today's officials do not, which makes their policymaking "very, very abstract."
Too Much Equality: The Undervalued PhD
Katz also argued Japan can have too much equality in one respect. A janitor at a public school and one at Hitachi should earn about the same, but a PhD scientist should earn far more than a janitor. In Japan, Katz said, PhDs are paid very poorly. They give up years of income, scholarships are meager, and companies prefer to train their own people rather than hire university PhDs. As a result, Katz said, Japan is the only major country where the number of PhD students is falling.
The interviewer suggested brain drain. Katz agreed that some people leave and that Japan struggles to attract foreign talent, but pointed to a further problem, citing a former METI official. Katz described Prime Minister Takaichi's 17-sector growth program as feeling "like a fairy tale," very unrealistic. Take quantum computing. Japanese physicists are among the world's leaders, but science and technology alone don't create growth. Growth comes from companies that can turn science into economic value. According to that former official, company-trained researchers don't understand what academic scientists are saying well enough to commercialize it, and the same applies to fields like autonomous cars. Katz called paying PhDs what they're worth, and having companies hire them, a very big issue for Japan's recovery.
The Weak Yen and the Takaichi Government
On the government's view that a weak yen benefits Japan, Katz said Takaichi personally would like a weak yen. But under Ishiba, the LDP lost in both the upper and lower house elections, partly because the weak yen was raising household prices. The opposition cleverly campaigned on cutting the consumption tax, Ishiba refused, and the LDP lost, even though, Katz said, the opposition was not very competent. That political pressure, Katz argued, forced the Takaichi administration to accept that while it doesn't want a strong yen, it doesn't want it weaker either. Katz said it appears to have drawn a line around 160, but doubted it wants 150 or 140.
Asked for the ideal rate, Katz said they didn't know. Katz added that the government can't set the yen. Intervention rarely works unless the currency is far out of line with fundamentals. The BOJ has raised rates for a long time, and the yen has weakened rather than strengthened. In this regard, Katz said, the market is more powerful than the government.
Katz explained Takaichi's preference as siding with big companies that export and hold overseas investments. A weak yen, Katz argued, transfers income from ordinary people, consumers and SMEs to those big companies. People talk about protecting the automakers, but what about auto workers, or people who buy cars? Katz said the traditional view that a weak yen is good for Japan is really good only for some people in Japan. Exporters aren't passing their higher profits into wages or domestic investment, and carmakers keep producing more offshore.
What South Korea Shows
Katz finds South Korea instructive because its institutions resemble Japan's: an aging society, many non-regular workers, an inefficient service sector. Yet Japan tried to compete through low wages and a weak currency, while Korea had a stable currency and large wage growth.
Katz traced part of this to Korea's democratization. Two key forces behind the democracy movement were organized labor and the church. Once a contested two-party system emerged, progressives pushed for wage hikes, and some non-military conservatives followed. Korean workers, Katz said, now earn much more than Japanese workers. Companies can afford it because Korea shifts resources from weak to strong sectors far more than Japan does. Korea also has more new, entrepreneurial companies. On a measure of human capital that counts its contribution to growth, not just years of schooling and test scores, Katz said Korea does better.
Katz noted one risk: too many eggs in one basket. Samsung accounts for about 20% of Korean exports, and Katz asked what happens if Samsung goes the way of Sony. The broader lesson, Katz said, is that Japan's problem is not culture but policy, which can be changed.
Why Katz Thinks Japan's Problems Are Easier Than America's
Katz surprised the interviewer by saying Japan's problems are easier to solve than America's. In the US, Katz said, half the country hates the other half. There is a large undereducated underclass, high incarceration, higher crime and a drug problem, and simple policies can't fix these. In Japan, Katz said, very smart people know exactly which policies would help. They aren't adopted because a one-party democracy favors big companies, "zombie" small firms that make up a voter base, and agriculture.
Energy was Katz's example. Solar and wind look expensive in Japan partly because much solar is built in mountainous areas with landslide risk. Meanwhile, Katz said, Japan has so much abandoned farmland that solar or wind on it could generate as much electricity as Japan produces in a year, enough for renewables to supply most of the country's energy. Land-use laws forbid it. When Katz is told the rules protect farmers, Katz asks: what farmers? They've abandoned the farms. When told it's about food self-sufficiency, Katz replies that abandoned farms don't produce food, and calls the argument propaganda and myth. Katz said that after Iran, it should be clear that reliance on oil and gas is insecure, so renewables would bring cheaper and more secure energy. Katz blamed politics protecting the fossil fuel lobby.
On food security, Katz noted that nobody suggests refusing to import oil for energy-security reasons or growing one's own oil. Japan depends on the world for energy anyway. Katz acknowledged the world has become more dangerous because of Trump, and said the US won't return to normal even if Democrats retake the White House. Still, Katz said, food security is an excuse rather than the real reason.
Against Degrowth
Asked how wage-led growth answers the argument that Japan and the world should stop pursuing growth, Katz was blunt. Billions of people are very poor, some relying on cow dung or wood for heating and cooking and getting sick from it. Degrowth tells them to stay poor, which Katz called "a recipe for people dying." Katz added that degrowth is not merely zero growth but a call to make people poorer.
Katz argued that technology has always been the answer. A century ago people feared running out of wood, then coal arrived. They feared streets buried in horse dung, then came the automobile. Each solution creates new problems that call for new technology. Today, Katz said, perhaps 30 or 40 rich countries are growing GDP while their energy use holds steady or falls in absolute terms, because they are more service-based and use energy more efficiently. Rich countries can afford the savings and low interest rates needed to deploy new technology, and Katz credited inventions from rich countries with making solar and wind cheaper and cleaner than fossil fuels. Nobody will volunteer to be poor, Katz said, so degrowth won't happen, and if it did, people would be worse off.
The One Indicator to Watch, and Reasons for Optimism
Asked for the single indicator to watch over the next year, Katz said: whether wages for the entire workforce, not just shunto participants, grow faster than prices on a sustained basis, not just for a few months. If that happens in a sustainable way, Japan is on the right track.
Beyond that, Katz wants to see equal pay for equal work actually enforced. Then workers wouldn't fear changing jobs or moving from stagnant to productive sectors, because losing a job or seeing a company fail wouldn't mean becoming a non-regular worker. Katz also called for Scandinavian-style adult education, since some jobs will disappear. A 55-year-old unskilled worker won't become a programmer, Katz said, but can still gain skills that make them employable.
The interviewer observed that the job market seems more flexible than before. Katz agreed, at least for the more skilled part of the population. Skilled young people are willing to switch companies. Firms that never used to hire mid-career now must, because people inside them don't understand digital technology. Katz called this a very good sign and one reason for hope. Some things are getting worse and some are getting better, Katz said, which makes Japan's situation complicated and interesting. Katz ended by saying, "ultimately, I'm an optimist about Japan."
But Japan has the biggest gap between the growth of productivity and real wages. For the typical worker, real wages are no higher today than they were in 1990. Can you imagine that?
70% of the employees are working for small companies, which cannot afford to raise wages.
Some of them can. A lot of them can. If they can't afford to raise wages, should they be in existence?
The current government's position is the weak yen benefits Japan.
Transfers income from ordinary people, consumers and SMEs to the big companies. But what about the auto workers or the people who buy autos? So that's why, and that's been this traditional view that a weak yen is good for Japan. Some people in Japan.
So a lot of the problems are not easy, but there are clear solutions that could be done. They're not done because politics is protecting the sacred cows, protecting the vested interests.
Thank you for inviting me.
This is your second time to come to this studio, right? Here.
Yes.
Yes.
Now you're based in New York.
Yes, I am.
And so you've covered Japanese economy, Japanese society such a long time, but how—
45 years now.
45 years, okay.
Maybe almost 50, maybe.
Okay.
Oh God.
Can I ask, it's such a basic question, but how did you start covering Japanese economy?
I was in college during the Vietnam War. I had read a lot about Vietnam, but I'm in college, so I want to take a class about Vietnam. But at that point, I went to Columbia University, and they had no teaching about Vietnam. They had no course on Vietnam. I was a major in history and economics. And so I thought they had a seminar about Japan. So I took that.
Now, at the time, I didn't know anything about Japan. The only thing I knew was that when I was a child, if my parents bought me a toy and it broke three days later, oh, sure, it was made in Japan.
Oh.
This was before the reputation of Toyota and Sony, etc.
Mhm.
But then I took this course and several things intrigued me. One is Japan's history is very dramatic. It's like a soap opera. It was up, it's down, it's up again, it's down again, it's up again, right?
Mhm.
Secondly, because of the Vietnam War, me being part of the anti-war movement, Japan had successfully resisted American or European attempts to take it over. And so how it did that and the role of industrial policy in rapid modernization, the Meiji era, was very, very interesting from that standpoint.
And then thirdly, the trade friction between Japan and the US was growing. So, as an economics major, this was very, very interesting. And again, Japan's ability to have the economic miracle in the post-war through industrial policy and improve itself was very, very intriguing. So, put it all together and Japan got very interesting to me and I started doing freelance writing for Japanese publications.
So, you've seen the changes for about 50 years.
Yes. Yes.
From the US perspective.
Yeah. Well, sort of, but not from the standpoint of what's the US interest, but really from the standpoint of becoming very interested in Japan and wanting Japan to do better for Japan's own sake. Americans tend to think to every problem there's a solution, and we're kind of a can-do country.
Mhm.
We're not a shikata ga nai country.
Oh.
So, therefore, when I think about what are the problems in Japan, I'm always thinking about what are solutions. Some people will look at a country like Japan and say, "Why is Japan the way it is?" And I think about how could Japan become even better?
Mhm.
And so, you look at things differently.
Well, that's a very interesting point. You have a very different kind of perspective.
Yes.
The title itself, Kyuryo o agereba Nihon wa fukkatsu suru, it's very clear for me to understand, but what's your strategy and how can we make it happen?
First of all, to explain why is it necessary to raise wages—
Okay.
—for Japan to revive. So, that's the first point. And then how do we do that?
Okay.
It's a fundamental principle of economics. Wages have to grow over the long term more or less at the same rate as GDP per hour. So, real wages per hour and GDP per hour, they have to grow at the same rate. Why? If you're not paying wages, people can't afford to buy stuff. So, who is going to buy all the stuff you can produce if workers can't do it? Then the government has to constantly run budget deficits, or cheapen the yen to try to export more.
And so, the failure of wages to grow creates all sorts of macroeconomic instability. In that sense, Japan's budget deficit is not the cause of Japan's problems, but a symptom, a result from Japan's problems.
So, it's a symptom.
Or the zero interest rates. So, that's why it's necessary. And that's true of all economies, but Japan has the biggest gap between the growth of productivity and real wages. For the typical worker, real wages are no higher today than they were in 1990. Can you imagine that? There's no other market economy that has done that.
It was obvious when I saw the graphs.
Yeah. I'm a bit of a graphaholic.
Yeah.
So how do you do it? There are several ways. The government has to be involved because companies are not doing it. Here are several ways. One way which Japan has done, which has been very successful, is raising the minimum wage by 3% every year. It's been about 15 years or 20 years now almost that Japan has done that. That's lifted maybe 20 million people out of levels of income that were near poverty level. And it's been tremendously successful. Now that inflation is here, it really should be 3% after inflation. So that's one way. And that's very easy to do. You write a law, you do it.
The second thing, which Japan could do but does not do, is this. Japan has laws saying equal pay for equal work between men and women, but also between regular and non-regular workers. The law is not enforced. The labor ministry does not enforce it, even though labor inspectors are out there. They don't enforce it. The justice ministry, there's no punishment for companies that violate it.
And what companies say is, well, the work isn't really equal because like 1% of it is different. And the judges side with the companies usually. So you really need to enforce that law. Again, it's something that the government could easily do. So it really hurts not only the individuals, but it really hurts the whole country. It worsens the aging of society.
Third thing is this. Lifetime employment means there's not a lot of competition for workers among companies. Where companies have to compete for workers, they have to pay higher wages. Now, in the high-growth era, the benefits of lifetime employment were greater than the problems with it. But now it's the opposite. And one problem is that the companies can afford to say we're not going to give you a real wage increase because you can't go someplace else. Because if you go, you might end up being a non-regular worker.
But if we look at situations where there is competition, we see the difference. So, for example, where is there competition among companies for workers? When they're first hiring somebody out of college or out of high school. And then the person can choose. And so the starting wages have now started to really grow—
Yeah.
—because they're competing. And also, people with very special skills, let's say software, where they can choose their job. When somebody does switch jobs, there used to be maybe 15 or 10% would get a wage hike of more than 10% for switching. Now a third of those who switch get a wage hike of at least 10% at the new company. So, things to do to promote more competition and to weaken the force of lifetime employment would also raise wages. In other words, the market forces would really work to raise wages.
New workers getting more, they're paid well, but our age, like 40s, I think the—
Small wage increase.
Yeah, small wage increases. Particularly younger workers with a skill. If you're totally unskilled, not so much. But if skilled at a regular job, yeah, absolutely.
I see.
So, it shows it can be done.
We workers are always asking companies to raise wages, and in the 2026 Shunto, nominal wages rose 5.26%. It's growing, but still it's not enough.
That's the Shunto. So, only 16% of Japanese workers are involved in the Shunto. So, fine. I'm happy for them, but what about the other 84%? They're not getting 5%. And so if they hit, say, 2% inflation, if they hit that goal, we don't know what companies are going to do. Will they pay workers more than the rate of inflation or will they continue doing what they've done before, which is pay them less?
But 70% of the employees are working for smaller companies, which cannot afford to raise wages.
They say they can't, but you know what? Some of them can. A lot of them can. And if they can't afford to raise wages, should they be in existence? One of the things that was done in Sweden, which is they said, "Let's raise wages and the companies will have a choice. Either they have to find a way to improve their productivity or else they will go out of business." And if they go out of business, then the companies which are more productive can afford to hire them and then workers can go from the unproductive company to the more efficient company—
Mhm.
—and then the overall economy becomes more and more efficient. And that's the way a market economy should work. So, in Japan, for example, if you look at the companies that do a lot of patenting, they are innovative, so they're creating patents, new inventions. Is there a shift of labor from the companies that do a lot of patents to the companies that don't? No, Japan's one of the least having that shift. So, that means you're not shifting workers from the least productive sectors to the most productive sectors, which is the whole point of a market economy working healthy, is that workers do shift.
So, if companies say we can't afford for 30 years to pay any wages, then maybe you shouldn't be in business, but the government keeps them in business through government loans, through government credit guarantees, all kinds of measures like that.
You just mentioned the government, so I want to ask, do you see any changes with the government's policy in terms of this rate hike, the rate hike's impact on the Japanese economy?
I'm not sure how much of an impact it will actually have. The rate is still low. The Bank of Japan has a dilemma because the headline rate of inflation's too high. But 80 to 90% of those price increases in the last four years came because of food and energy, the import-intensive sectors. Some of that was because of the rise in global prices because of Ukraine and Iran, but some of that was because the yen kept getting weaker and weaker and weaker.
But if you look at the kind of healthy domestic-led inflation people wanted, 2%, because wages are so low, real personal consumption is no higher than it was in 2013, a dozen years with no growth. So, you have a kind of stagflation. The economy is not growing well, and yet the headline inflation is too high, but the healthy inflation's too low. That's a difficult problem for central banks. So, the Bank of Japan's being very, very cautious about that.
And then now, it's not only Japan, but the US and Europe as well, about the rate.
Oh, yes. And the bond rates are going up globally at this point. Yes, very much so. You're right.
Kind of like international relationships, do you think that's an effect on the Japanese economy?
Well, it depends how far it goes. If the long-term bond rate goes up, the 10-year JGB, the Japanese government bond, that will tend to slow housing, which is already in the dumps. It will tend to slow business investment. So, it could have an effect of slowing down the economy. So, that's the dilemma, right? To fight inflation, you want to raise rates, but to stimulate growth, you want to keep rates low. So, it's not clear what to do.
But, right now, some people say some things which I think are just wrong and very alarmist. Like people say, "Oh, the government won't be able to pay its debt because the interest rates now, long-term bond is 3%." But, actually, most of the government debt was acquired during the period when interest rates were very, very low. Next year, the typical interest rate in Japan of the government debt will be something like about 0.6, 0.7%. The kind of rates now we're talking about won't really become a problem for years to come. So, the idea that there's some kind of a credit crunch for the government or a crisis in government debt is very, very alarmist.
So, I think the impact of too much government debt doesn't show up as some kind of a financial crisis. What it shows up as is the slow corrosion of growth potential. And the economy sort of grinds slower and slower, and wages don't go up and living standards are stagnant. That's where we see the effect. We don't see a dramatic financial crisis.
In Japan?
In Japan.
I've lived this so-called lost 20 years or lost 30 years most of my life.
Yes. Yes.
We thought we're so unlucky. But, when we see the inequality or the gap in the US or the UK, are we kind of lucky because we don't see that much inequality in Japan? What do you think of that?
I think that's one of the best features about Japan, is that Japan made very, very determined efforts to have equality and opportunity. Now, I think the danger is Japan is losing that. The average person's living standard is much, much less. So, equality is good, but if we're all equally poor, it's not good.
But I'll give you an example. And this explains part of why policy is a problem. When I began working on Japan, I would meet officials from the Ministry of Finance or from METI, and I would say, "What did your father do?" And their father was like my father. He was an ordinary person. Maybe they had a little sake brewing shop or were a salaryman at a small company. They were not elite people. And many of them were in prefectures. But they were smart and they did well in the exams. And so they rose to the top.
Now, if you look at people now who are making policy, most of them, ask them, "Well, your fathers?" And they were at elite companies or elite bureaucrats. Out of new recruits to METI or MOF, it used to be maybe one would go to private high school. Now, six or seven out of every 10 come from a private high school in Tokyo or Osaka, right? Or from the big cities. So, it's very elite people from the private schools because their parents had money.
So, it used to be the bureaucrats knew the experience of a typical person because that's where they came from. That's where I came from. These people don't know that experience. And that changes how they think about policy. It becomes very, very abstract. That is a problem.
Now, on the other hand, there's a way in which you can have too much equality. A janitor working in a public school and a janitor working in Hitachi should get pretty much the same wage. But a PhD scientist should get a much, much higher salary than the janitor, right? But PhD scientists in Japan are paid very, very poorly. So, someone has given up years of income through the schooling, and the scholarship money is not very good.
And then companies don't want to hire PhDs from the university. They want to train their own. So, as a result, Japan is the only major country where the number of PhD students is decreasing. And what's the result of this?
Brain drain.
Well, not only brain drain. People don't leave Japan. Well, some do. That's one of them, yes. But you're going to get other people to come to Japan.
They don't come.
So, that's part of it. You're right.
About that. But in addition, this was explained to me by a former METI official. In part of Takaichi's 17-sector program, which to me feels like a fairy tale, very unrealistic. Absolutely. I'll tell you why. For example, she said, "We're going to be a leader in quantum computing." Well, it's true that Japanese physicists are among the world's leaders in quantum computing.
But science and technology by themselves do not create growth. What creates growth is companies that know how to take the science and turn it into economic value. And what he's saying is these PhD scientists that the companies train themselves, they do not understand the science, what the scientists are saying, well enough to figure out how do we turn it into economic value. Same thing with autonomous cars, etc.
And so, one thing you got to do is start paying PhDs what they're worth and companies hiring them. I think a very big issue in Japan's ability to recover. And so, yes, everybody needs a good wage, but the point is, if you have a very big skill and you spend a lot of money and time getting that skill, you should be paid what you're worth.
Very fundamental.
Yes, exactly.
Issue here in Japan. But as you mentioned about the government, Takaichi government, I want to ask you about Takaichi government's position: the weak yen benefits Japan. But what do you think? What's your perspective?
She personally would like to have a weak yen. Under Ishiba, the LDP lost upper house and lower house. And one of the issues is that the weak yen is really raising the prices the households have to pay. And so, the opposition was very clever about saying let's cut the consumption tax. And Ishiba said, "No, no, no, no, no." And so, they lost.
The political pressure to do something is so big that finally the Takaichi administration really had to accept. They don't want a strong yen, but they don't want it to get any weaker than it is already. It looks like they've drawn a line in the sand about 160. But do they want 150 or do they want 140? I don't think so.
What do you think the best rate is?
I don't know, but it looks like their activity is to try to keep it there. But the market's going to do what the market's going to do. And the government cannot decide what the yen rate will be. It's very hard for intervention to succeed unless the currency is way out of whack with fundamentals. Bank of Japan has been raising interest rates for a long time and instead of the yen getting stronger, it's gotten weaker. It's not so easy to say, "Oh, we want a stronger yen. Let's do something to have a stronger yen," because the market in this regard is more powerful than the government.
And we are in a different phase right now.
Different phase. But the reason why Takaichi is favored is she's all for the big companies. They can export more. They have investments overseas. But that really transfers income from ordinary people, consumers, and SMEs to the big companies. "Oh, we should do everything we have to do to protect the auto companies." But what about the auto workers or the people who buy autos? That's been this traditional view that a weak yen is good for Japan. Well, it's good for some people in Japan.
Right.
To exporters, but the exporters are not passing on their increased profits in wages or more investment, whatever. The car companies are producing more and more offshore.
Not for the ordinary people living in Japan. We're not benefiting anything from there.
That's why she has had to change her stance on that, because the political pressure was so big that the LDP lost. Even though the opposition was not very competent, they still lost.
I read this book and then you mentioned about the success of South Korea. It's called a kind of success.
To me, the reason why it's interesting is because in many ways Korea is very similar to Japan.
Yes, aging society.
A lot of non-regular workers, very inefficient service sector, problem of aging, etc. Right? So, a lot of the institutions are very similar. Different things they did to succeed. One is Japan has relied upon trying to succeed by having low wages and a weak currency. Korea has had a stable currency and very big growth in wages.
Initially Korea was a very low-wage country. One of the things that happened was in the effort to democratize Korea and get rid of the military dictatorship. Behind that democracy movement were two important institutions. One was labor, and secondly, the church. They were very important.
That's very interesting.
As it became a two-party contested system, the progressives in Korea began pushing wage hikes, and even then some of the conservatives who were not military dictators began to push wage hikes. And so wages have grown. Korean workers now earn much more than Japanese workers.
And so how do the companies afford to do it? Because they have the productivity. There's much more shift than in Japan from weak sectors to stronger sectors. Now, one difficulty of that is they put too many eggs in one basket. Samsung is like 20% of Korean exports. That's very risky. What if Samsung goes the way of Sony? Because you can't be perfect forever. That's a very risky strategy.
But they also have more new companies, entrepreneurial companies. The human capital, the way they have educated—if you measure human capital not only by years of schooling and test scores, but how it contributes to the growth, Korea does better on that index. What it tells me, the problem is not Japanese culture. The problem is nothing we can't change. Policies can make things better. And I will tell you as an American, I think actually Japan's problems are easier to solve than America's problems.
It's easier?
Easier.
What does it mean?
Half of Americans hate the other half and the other half hates them back. We have a big underclass in America who doesn't get an education. We put more people in jail. Our crime rate is higher. The drug problem. We have all kinds of problems that are not easy to solve by simple policies.
In Japan, very smart people in Japan know exactly the policies that would help. Why aren't they being done? Because of politics. Because the one-party democracy is favoring either the big companies or the zombie smaller companies, the voter base, or the agricultural sector.
Let me give you an example. Fossil fuel energy is high-cost energy. But in Japan, solar looks like very high cost, wind looks like very high cost. Why is it so high cost? All this solar power is built on these mountainous areas—not all of it, but a lot of it—mountainous areas, landslides, etc. But there's so much abandoned farmland. If you build solar power or wind on this abandoned farmland, you have enough abandoned farmland to produce electricity as much as Japan produces in a year. This could produce. So renewables could produce most of Japan's energy.
But the land use laws say, "Oh, we can't use it for these purposes." I said, "Well, change the law." And people say, "Well, we have to protect the farmers." I say, "What farmers? They've abandoned the farm." Or, "We need food self-sufficiency." I say, "Abandoned farms don't produce food."
Right.
All propaganda. It's a myth. If people have abandoned the farms, then allow it to be used for more productive purposes. And then you could have not only cheaper-cost energy, but also more secure energy. After Iran, we should recognize that dependence upon fossil fuels and oil and natural gas, etc., is not secure. It's insecure.
Right.
But again, the politics protecting the fossil lobby. A lot of the problems, there are easy solutions—not easy, but there are clear solutions that could be done. They're not done because politics is protecting the sacred cows, protecting the vested interests.
Then they think about the food security, and then maybe we should think about that.
But if the farms are abandoned, they're not producing any food.
Right. You're right.
Nobody says let's not import oil because of energy insecurity.
Right.
They don't say let's grow our own oil. Japan is dependent upon the world for its energy. If you have a world of stability and secure things, then you import food. Now, it's become a more dangerous world because of Trump. And the US is not going to go back to normal, even if the Democrats retake the White House. Not going back to normal.
It takes time to go back to normal.
Time to go back. But anyway, it's kind of an excuse. It's not the real reason. It's protecting the fossil lobby.
I see. Thank you very much. How do you position wage-led growth against the degrowth argument that Japan and the world should stop chasing growth altogether?
There are billions of people who are very poor. Are you telling them to stay poor? Is that your answer? People who depend upon cow dung for heating and for food, people who burn wood for food, and they get sick, they get emphysema and eye diseases, you're telling them to stay poor. The countries who use energy, they don't want to stay poor. It's just not going to happen. It's basically a recipe for people dying, degrowth.
And this is not only zero growth, it's actually saying let's make people poorer. And what happens is that technology has always been the solution. So, 100 years ago, people were worried, "Oh, we're burning too much wood. We're going to run out of wood." But then they discovered they could use coal. Then they said, "Oh, our streets are going to be overrun with horse dung because of the carriages." But then you have the automobile.
And the history of humanity is things create problems. And then you create a solution through technology to solve that problem. But that solution then becomes another problem down the line, and you need another technology. You find that right now in rich countries, GDP is growing. There may be 30 or 40 countries where GDP is growing, but their energy level is either staying the same or falling in absolute numbers. They're past energy peak because they're more of a services economy, because they use energy more efficiently, etc.
Degrowth is not going to happen because no one's going to say, "Okay, I'm willing to be poor." Who will volunteer to be poor? Nobody. So, it's not going to happen. And if it did, it would make people worse off.
Growing is important.
But you have to grow. It's rich countries that are using technology more efficiently. It's rich countries that can afford to save enough and have low enough interest rates to employ that technology. And as a result of rich country inventions, solar and wind are now cheaper and cleaner than fossil fuels. So, technology is the solution. We don't need to get poorer to solve our problems.
Next one year, what single indicator on wages or prices should we be watching most closely?
If I have a single indicator, the single indicator is that on a sustained basis, not just for a few months, on a sustained basis, wages, not just for the Shunto, but for the entire working population, grow faster than prices. That's the indicator we have to look at. And if that is being done and then we see how it's being done and it's sustainable, then we're on the right track.
Right.
That's what I would look for.
Great. Thank you very much. If it's not a single, do you have any other things that you want to mention, or the message to the Japanese economy?
I think we need to see where equal pay for equal work really happens, so that people are not afraid to change jobs, to move from stagnant sectors to the more productive sectors, because they're not worried if they lose that job, that company fails, they'll become a non-regular worker. So, they have security.
We also need to have adult education like they do in Scandinavia, because some jobs will disappear. So, how to train people for new jobs. Now, a 55-year-old unskilled worker will not become a computer programmer, but still there are things that they can do that provide more skills, so that people all have the skills to now be hired and change jobs. Those are the things that I would look for.
Right. I think the job market is a little bit more flexible than before, and education, I think the situation is getting better, but...
The job market is more flexible than it is before. And because very skilled, educated young people who know their skill, they're willing to switch companies to do it. And now companies that never used to do mid-career hiring, they now have to do it because of technology. The people inside don't understand digital. So, they have to hire these other people. I think that is happening at least for the more skilled part of the population.
And that's a very good sign. And that's one of the reasons I'm hopeful about Japan, because some things are getting worse and some things are getting better. It's a very complicated situation and a very interesting situation. So, ultimately, I'm an optimist about Japan.
Thank you very much for very deep thought about Japanese economy and Japanese society as well.
Yes, my pleasure.
People thought pretty well.
So, that it will be good video, this.
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