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Japan's Three Challenges; Labor, Healthcare and Governance

Speech by Yasuhisa Shiozaki
Former Minister of Health, Labor and Welfare
Member of the House of Representatives, Japan
Center on Japanese Economy and Business
Columbia University, February 27, 2018

It is my great honor to have a chance to share Japan's challenges and its prospective at the Center on Japanese Economy and Business, with such distinguished guests. Under the leadership of Professor Patrick, the CJEB has always had a great influence on the Japanese economic policy, and would like to first appreciate the efforts taken by Professor Patrick as well as the Columbia faculty members.

Today, I would like to share the three major challenges which I believe the Japanese economy is facing and how we are thinking ahead to overcome these challenges.

First challenge is the changes in the demography, where we are facing four key changes; aging society, low birthrate, decreasing population, and down trend in the labor force. How we continue to achieve economic and social growth under this challenging environment is our top priority agenda. The second challenge is how we sustain and improve our healthcare system despite the demographic challenges derived from extension of longevity and fiscal stringency. And our third challenge is the improvement of corporate governance, which is the key driver to incentivize Japanese corporate boardrooms to function effectively and aggressively.

1.Four key demographic changes and our labor reform

The four key demographic changes are trends happening simultaneously in Japan. Although many of the industrialized economies and some of the emerging economies are already experiencing some of these phenomenon, experiencing all of these demographic challenges simultaneously is witnessed nowhere else. Therefore, how we, as a country, overcome these problems, especially an aging issue, and how we continue to achieve economic and social growth should have meaningful implications to the future policies of other countries to follow similar challenges.

However, many associate the demographic transition with pessimistic scenarios, and talk about it as a "mission impossible" to sustain and grow the economy and the society. However, one must be aware that the pessimistic scenarios assume that existing social structure will be maintained at a status quo. Such is a choice which our country is not planning to take.

We understand by experience that we will need to implement full-scale structural reforms in every corner of the social and economic system to overcome the further challenges of demography, especially in the labor system. During the high-economic growth period, Japan was able to overcome the "middle income trap" supported by the "demographic dividend (bonus)" from the increase in the working population. And vice versa, we have experienced the burst of the bubble economy in the early 90's followed by long economic stagnation, due, to a certain extent, to the "demographic onus" when we started to face a decrease in the working population.

We understand the impact of demographic transitions and that it is associated with down pressure to the potential economic growth rate without improvement in labor force, productivity and capital investment.

As for the challenge to increase labor force, who will contribute to tax payment and social security premiums, we are seeing two diverse approaches; 1) inviting new workforce to the current basket of working population, and 2) increasing the future workforce.

In Japan, labor force participation rate among women declines after marriage or birth; the so called "M shaped curve". In addition, about 100,000 workers leave their jobs annually to take care of their elderly family members.

For the elderly population in Japan, the average life expectancy is extending, and many voice their willingness to continue to work. Enhanced participation of the elderly in our workforce will allow individuals to earn additional income to supplement pension benefits. It will also allow our elderly population to continue to feel inclusion to the society by both leveraging their skills and working flexibly.

People with handicaps and ailments are also proactively seeking working opportunities. It is crucial that we create a better working environment for all those who have the will to work and allow them to work flexibly according to their capabilities and their wish.

In order to address the challenge, the Abe administration launched an initiative called the "Japan's Plan for Dynamic Engagement of All Citizens" in June 2016. The Abe administration has set a goal to create a society where all citizens, regardless of women or men, young or old, handicapped and ailments, whether you have failed or not, can play an active role disregard of place, whether be at home, in the workplace or in the community.

To achieve this ambitious goal, the Abe administration plans to enhance childcare and long-term care support to ensure chances to give births and look after their family without the risk of having to lose their jobs. I believe that these policy initiatives are the key lever to create a virtuous cycle of economic growth and redistribution of income, where fruits of economic growth are reinvested for further growth in many areas including social security of childcare and long-term care.

In addition, to ensure success and improve labor productivity, the Abe administration introduced the "Work Style Reform" which calls for a dynamic change in Japanese traditional corporate working culture. The government is urging companies to eliminate long working hours and offer equal pay for equal work principle to redress disparity between regular and non-regular workers, representing about 40% of all workers in Japan. The equal pay for equal work principle is critical as it will change the Japanese common wage practice from job based to a skill-based wage practice. It would enhance the labor mobility and set a better environment for talented workforce including foreign professionals, thus facilitating the industrial structural transition to more high-value-added, productive and more competitive industries. Debate over a system to solve dismissal disputes by financial compensation should also be concluded in due course to back up the improvement of labor mobility. I believe that we cannot sustain and grow our economy without diversity in workplace at the time of globalization.

Outcome of these policies are to be seen in upcoming years; however, I strongly believe that we are pursuing the right path, seeing already an improvement in employment rate for the elderly from 66% in 2005 to 76% in 2015 for men, and from 39% in 2005 to 49% in 2015 for women. In addition, according to a recent report, the employment rate for women aged between 15 to 64 has reached 69%, a historical high, up by 6% points in the past 5 years, overtaking U.S. and France at 67%.

2.Healthcare Reform

Let me now turn to the second challenge, which is for Japan to improve and sustain its healthcare system despite the demographic challenges and fiscal burden. The only path forward to overcome this challenge is by reducing the difference in time span of life expectancy and the healthy life years, where individuals are able to enjoy healthy longevity and the government could ensure long-term sustainability of the social security system. A similar concept which was depicted by Professor Lynda Gratton of London Business School in her book, "The 100-Year Life".

I believe that the key to achieve this policy objective is to incentivize the extension of healthy years for individuals and payers in our current social security services.

One of the levers to tackle the challenge is to maximize the use of ICT, including artificial intelligence in health policy. By connecting and analyzing big data on annual health checks, medical claims, and long-term care bills, individuals should be able to detect signs of disease at an earlier stage, and health providers and payers will be able to intervene prior to contracting a disease, or at least, prevent progression of the disease.

The question is, how the government can achieve this. The Ministry of Health, Labour and Welfare of Japan had been developing discrete and fragmented separate data systems in each health checks, medical care and long-term care without any coordination mechanism that could allow the supply of different types of care in a consolidated manner.

Consequently, quarter billion health check data, 16 billion medical claim data and half a billion long-term care bills were separately stored with sluggish output speed and for very limited use due to personal data security and public interest reasons.

This must be corrected, and the treasure of the data needs to be leveraged for a better health services. As the Minister for Health, Labour and Welfare, I initiated a ministry-wide health care ICT initiative for more speed and utility and mapped out a concrete blueprint of a "Data Health Reform" plan in July last year.

The blueprint report specified the recommendations; such as, 1) establishing an integrated data platform for individual health check, medical care, and long-term care for personal health management, and 2) reforming the function of the public review board of medical claims by enhancing IT based analysis, including the use of Artificial Intelligence. 3) And for the first time ever globally, we are going to develop long-term care based on digitalized data that can improve or maintain the health status of elderlies. These initiatives will all be implemented by 2020.

In addition, as the Minister, I have increased incentives of payers to encourage further health promotion activities as well as to provide them with an infrastructure to facilitate utilization of health big data. Also, under the initiative, the Ministry will provide prefectural governments with more authority in terms of mandate, budget, information, and human resources to act as local health headquarters to play a more active role in promoting preventative health care and efforts to prevent diseases from progressing severity.

I would also like to introduce an interesting initiative to improve medical service productivity in Japan. In the areas of healthcare and long-term care, we have introduced a key concept of "value for money". One of the measures I proposed as the Minister was to improve both productivity and quality of medical treatment services by shifting tasks among medical doctors and other health care professionals.

In Japan, medical doctors have exclusive responsibility for diagnosis and treatment which makes doctors extremely busy, and often times, associated with low productivity. It was becoming essential to reduce the burden of medical doctors, and allow various healthcare professionals to play more active roles and award their contribution, to improve both the quality and productivity of healthcare services and allow for additional space of new value creation in healthcare.

All these mentioned initiatives imply that the government should not solely cut its social security budget to lessen its fiscal deficit, but rather, extend the role of the government to encourage the extension of healthy life expectancy of individuals, which as a consequence will help to improve the overall fiscal cost of social security. What we are now aiming for is to become the "Most Healthy Nation" through digitalization and reforms in current healthcare practices.

3.Corporate Governance

Let me now move on to talk about the challenge to strengthen the corporate governance in our country.

The Abe administration has set the goal for annual real economic growth rate of 2%. In order to achieve this goal, we cannot rely solely on the increase of labor force and improvement of individual's productivity. To maximize the value of the limited labor force, Japan needs to drive innovation.

For this reason, the Japanese government has introduced the "Stewardship Code" for the asset managers and the "Corporate Governance Code" for corporate executives to improve productivity and drive innovation of the Japanese economy.

To give out my honest opinion, in terms of corporate governance in Japan, we are only at a starting point. And many more changes and courage are required for the initiatives to become full-fledged. It may also take some time for Japanese corporate boardrooms to realize more significant progress required to meet specific demands of global investors. But to put it differently, it means that the potential benefits are enormous. At this point, I would like to point out four key issues to be addressed immediately.

First, is strengthening corporate governance by prescribing fiduciary duties to the executive officers who do not sit as elected directors, but substantially manage companies at a very senior level.

For most Japanese companies, which currently do not implement a three-committee structure, executive officers are nothing other than employees under the current Companies Act, who has to obey instructions from senior executives on the board and has no liability when sued by shareholders for their malfeasance. The Ministry of Economy, Trade and Industry is now addressing the issue, and I strongly support the early legislation of the reform.

The second immediate action required is the full compliance of the corporate governance code, where an explanation of the company should be mandated whenever independent directors are not appointed.

The third point is to reduce the cross shareholding practices. Japanese banks still currently hold cross shares with their borrowers which sometimes become a non-performing asset for the bank and become the root cause of low productivity and profitability. A combination of more incentives in tax and disclosure policy would effectively reduce these unreasonable practices.

The fourth and final point is to create strong incentives for corporate pension funds to sign the Stewardship Code, through enhanced disclosure to employees and policy holders.

These are the immediate four actions which I believe Japan needs to tackle urgently to strengthen the corporate governance of the Japanese economy, which of course will need to be followed by further drastic reform to meet the global standard of corporate governance.

4. Conclusion

To conclude, what I would like to highlight again are the three challenges that Japan is facing. The unique demographic transition with decreasing trend of labor force poses challenge to our economic and social growth. Sustainability and improvement of Japan's healthcare system under the demographic challenge and fiscal stringency is another. Strengthening of corporate governance is a long and challenging journey, but this reform must always be pushed forward with full energy.

None of these three challenges have an easy path ahead. However, history tells us that it is always the toughest challenge that creates something innovative. I welcome any advice, suggestions or support from the CJEB and the distinguished participants here today.

Thank you very much.


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