One theme that will have a serious impact on society this year is the 2024 Problem. This refers to the seismic shift in some industries that will be triggered by the revision of the Labor Standards Act as part of work style reforms, which will set the upper limit for overtime work at 45 hours per month (360 hours per year). The Labor Standards Act was originally revised in 2019, but there was a five-year grace period in place for work where immediate application of the new revision would be difficult, and this grace period is set to expire in April.

The applicable fields include driving, construction, and doctors. The 2024 Logistics Problem is often highlighted in the media, but this just means the impact on logistics is significant, and the problem itself goes beyond logistics and includes the transportation industry (buses, cabs, etc.), which involves driving.

Even I, with no connection to these industries, have heard directly from the business leaders of the logistics and construction industries about their frustrations regarding the revisions, which seem to have added insult to injury to the already severe labor shortage. This probably reflects the great impact on these industries, especially for small, medium and micro enterprises.

Now, as an outsider, I have no way of knowing how much of an impact this revision will have on the industries, but I imagined (with a bit of exaggeration) what kind of changes these “work style reforms” will have on society, including but not limited to this problem, as it is a topic of interest for me.

(1) In order for companies to maintain orders while caps are placed on the number of hours worked per worker, they will need to secure more workers. If many companies opt for this approach, they will have no choice but to raise wages in order to secure workers. This would lead to higher wage growth (whether moderate or not), which would contribute to higher inflation in Japan.

(2) At the same time, companies will not simply look to secure workers, but will also have a strong focus on figuring out how to improve productivity. This will drive them to look into technology, which will lead to the advancement of systems to improve efficiency, the use of AI, and the promotion of automated driving. Furthermore, these technological developments, coupled with their widespread use, will lead to cyclical growth in technology.

(3) On the other hand, companies that are less attractive and less able to boost productivity will be left behind. In other words, this will accelerate the competitive cycle among companies. The losing companies will be weeded out, either by going out of business or being absorbed. Winning companies will absorb the losers, which will soften the oversupply and gradually create a more appropriately competitive environment.

(4) Many companies will raise selling prices appropriately in response to the cost increases and accelerated investment to improve productivity that occur in the process of (1) through (3) above. This is an essential move to keep a company operating soundly, and as more and more companies operate this way, those on the receiving end of the price increase will gradually be more understanding. Reflecting cost increases onto prices will improve the likelihood of higher earnings, and this will also play a role in driving up inflation.

(5) As part of this movement, if wage growth begins to outpace inflation, we can expect to see consumption expand. Higher consumption will translate into better corporate performance, which in turn will generate higher payments and investment, further wage increases, and higher profits (i.e., higher tax payments and higher corporate value). These will lead to a virtuous economic cycle from various angles, which will enrich the Japanese economy.

(6) If wage growth remains lower than inflation, real wages will decline and consumption will not expand, which could prevent the creation of a virtuous cycle in the economy. Despite these concerns, policies to tighten the labor balance seem to have a certain significance in terms of encouraging companies to make the various changes mentioned above. Just as in the case of living organisms, companies and industries that are compatible with the environment will survive, and those that are not will be eliminated. It seems that Japan is finally moving in this direction.

This 2024 Problem is one aspect of the policy move to “raise wages.” While this alone will not lead to a dynamic change, the labor shortage and work style reforms appear to benefit both companies and the Japanese economy, facilitating adaptation to societal changes. Furthermore, this trend will encourage the acceptance of more overseas workers, and beyond that, a major shift in policy toward actively accepting immigrants will be up for discussion. (In a hundred years, human races will be mixed all over the world anyway, so why not move forward sooner rather than later?)

It does not stop there. Recently, I have been getting the sense that the government’s thinking is undergoing a major change. For example, a recent news report stated that “Financial Services Agency orders major P&C insurers to sell strategic shareholdings.” This order was issued in response to the scandals of major non-life insurance companies, and is probably a warning to all companies that have strategic shareholdings. The message is, “Sell the shares that are not directly related to your business and invest directly in your business, or return the money to your investors.”

The Tokyo Stock Exchange’s call for improvement of “companies with P/B ratios below 1x” was made under the same rationale, and in this way the movement to call for corporate reform is gaining momentum. The current trend points toward the government becoming an activist in a way. What’s behind this is the “Doubling Asset-based Income Plan,” which aims to stimulate the economy by shifting people’s financial assets from savings to risk assets and by boosting their income from those assets. I believe that the expansion of NISA is also in line with this rationale.

This is the situation, and it seems that politicians are finally getting serious, and Japan has started to take steps in the right direction, although there will be some twists and turns. Accordingly, I believe that policies aimed at moderate inflation will be implemented more and more going forward. Inflation results in a decline in the value of money, which in turn encourages a shift from savings to risk assets, and a rise in asset prices enriches the economy. In addition, this will lead to a substantial reduction in the debt of our country, which is said to be the largest in the world. The recent rise in the Nikkei index to 40,000 yen seems to imply this. I believe that we are finally out of long-term deflation and have entered an era of long-term inflation. So let’s transform our old way of thinking, as this is a great opportunity for those who do.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.