Atkinson: Raising Productivity Key to Combating Population Decline

The Yomiuri Shimbun

12:11 JST, January 23, 2021

This is the 12th installment of a series in which intellectuals share their thoughts on political issues that the administration of Prime Minister Yoshihide Suga will tackle this year. For this installment, The Yomiuri Shimbun interviewed David Atkinson, the president of Konishi Decorative Arts and Crafts Co., which repairs temples and shrines. The following is an excerpt from the interview.

The biggest challenges Japan faces are the aging society and population decline. The country’s labor force is forecast to fall by about 30 million by 2060. The burden of social security costs borne by the working population is expected to double over this period. This harsh reality will affect every Japanese citizen.

Economic growth is composed of population growth and productivity growth. If the population declines, Japan’s social welfare system can only be maintained by increasing productivity and income levels. However, as Japan’s productivity is the lowest of large developed countries, there is considerable scope for productivity growth.

The Japanese government has implemented policies to improve productivity such as work style reforms. Yet, these reforms are mainly targeted at large companies. However, since 99.7% of companies and 70% of the workforce are represented by small and midsize enterprises (SMEs), a significant improvement in productivity must depend on focusing on these companies.

Japan’s productivity is low because the average size of Japanese companies is much smaller than that of other developed countries: half of that in the United States and about two-thirds of companies in Europe. The size of companies is closely linked with productivity. The larger a business becomes, the higher the productivity, the smaller the scale, the lower the productivity. This is a fundamental principle of economics.

Even though the impact of the spread of infections of the novel coronavirus is relatively small in Japan compared with that in other developed countries, many SMEs have been hit hard. The main reason for this is that their productivity is so low. The virus is highlighting the hidden weakness of Japan’s industrial structure.

■ Economies of scale

The most effective means of promoting the reorganization and consolidation of SMEs is hiking the minimum wage. If the minimum wage rises, corporate managers are incentivized by the increase in personnel costs to invest in mechanization. If companies cannot respond on a stand-alone basis, managements have the option of merging to increase economies of scale. As companies grow, they will have more resources available for innovation.

Some argue that as the number of companies declines, the number of jobless people would increase. This is true when the population is growing. When the population was growing, SMEs did indeed absorb the increase in the size of the workforce. But in today’s Japan, the labor force is decreasing. In this environment, a decrease in the number of firms simply means aggregation of the workforce. If anybody, it would be only the number of company presidents that would decrease.

For corporate executives, it is obvious that the lower the level of wages the better, and no increase in wages maximizes profits. Maintaining the status quo is for them the ideal policy. Left up to corporate executives, there won’t be any progress made in the reorganization and consolidation of smaller companies. Thus, the central government has to take the lead, and that means raising the minimum wage.

The Small and Medium Enterprises Basic Law is a barrier to raising the nation’s productivity. This law defines SMEs as manufacturing companies employing up to 300 workers, and retail companies employing up to 50 employees. SMEs receive preferential tax treatment and other benefits. As a result, firms are incentivized not to increase the number of employees in order to continue to be able to receive these benefits. Companies do not achieve optimum size, and the average corporate size falls.

■ Greater analysis needed

Of course, there are some SMEs whose productivity is higher than those of large companies. However, that does not justify generalizing from these statistical anomalies to all SMEs and arguing that all SMEs are sacrosanct and that the productivity of SMEs is not really low. Now is the time to objectively examine and thoroughly analyze the causes of Japan’s low productivity.

Many Japanese companies have a high level of technological competence, and Japanese workers are highly educated and diligent. Despite this, the minimum wage and productivity remain abnormally low.

Major crises such as a massive earthquake in the Nankai Trough and an earthquake in the Tokyo metropolitan area are predicted to occur in the near future. If productivity remains low, and given the existing national debt of over ¥1 quadrillion, Japan might find it extremely difficult to respond to a massive natural disaster.

I hope that the government will start as soon as possible to change the SME policy environment to stimulate productivity and economic growth.

— This interview was conducted by Yomiuri Shimbun Staff Writer Hiroyuki Tanaka.

■ Profile

David Atkinson, 55, President of Konishi Decorative Arts and Crafts Co.

Born in the United Kingdom in 1965. He graduated from the University of Oxford and majored in Japanese studies. After serving as a partner in U.S. investment bank Goldman Sachs, he joined Konishi in 2009. He has served as the CEO of Konishi since 2011. Since his book on new strategies for a tourism-oriented country, published in 2015, caught the attention of Prime Minister Yoshihide Suga when he was chief cabinet secretary, he has been part of Suga’s brain trust. Atkinson is a member of the government’s Growth Strategy Council.