Japan's social contract under severe stress

Only a few decades ago, Japan seemed to have one of the world's strongest social contracts. But today, it is under severe stress.

Only a few decades ago, Japan seemed to have one of the world's strongest social contracts. But today, it is under severe stress.

What do we mean by a social contract? Although we are all individuals, we live in societies with governments. By living in a society, we surrender certain "freedoms" from our “state of nature”, like the freedom to do things that might disturb social order and peace. We subject ourselves to the law, but we gain protections and rights in return, including the right to choose our government, if we live in a democracy. It's a deal, a "social contract".

All societies have some sort of social contract. Feudalism, which was widespread in medieval Japan and Europe, is an example of a social contract between lord and serf. Under a dictatorship, there is also a social contract as dictators face the risk of rebellion by unhappy citizens. In ancient China, even the emperor could lose the mandate from heaven if he mismanaged the country.

In the wake of World War 2, Japan established a new social contract for the management of its society and economy, perhaps one of the most complex social contracts of all. Japanese citizens surrendered their individual freedoms to a much greater extent than most countries. But for several decades after the second world war, high economic growth resulted in growing prosperity, low unemployment, and a safe and secure society. In short, Japan's social contract was a good deal.

The strong economy was delivered by a joint effort of government, officials and business, the "iron triangle". Large enterprises had easy access to cheap finance. But they had to pay high prices for electricity, construction, transportation and retailing, as these sectors were subject to high regulations. And they kept their SME suppliers, which employ one-quarter of the workforce, afloat when times got tough.

Loyal, hard-working and obedient workers were rewarded with job security (lifetime employment in large companies) and seniority-based wages. Worker training was offered by companies which turned these workers into “company men”, rather than knowledge workers. Job security meant that the government did not need to have an elaborate social safety net. Non-working women were a key element here as they provided care for children and the elderly. Japan’s society was basically egalitarian. Almost all considered that they were part of the middle class.

This system was underpinned by a political security contract with the US which provided Japan's defense and open markets for its exports, but tolerated for many years Japan’s highly regulated, mercantile policies. And the final part of the deal was that the Liberal Democratic Party was kept in power by a compliant electorate who benefited from financial largesse coming from Tokyo.

But the Japanese social contract started cracking a few decades ago. Following the appreciation of the yen from 1985, Japanese enterprises began offshoring the labor-intensive parts of their business to lower cost countries in Asia. Japanese firms now do 30% of their manufacturing overseas -- and for Toyota, the figure is double that.

This was the beginning of "irregular employment" in Japan -- contract, short-term, part-time, casual work and the like. Irregular employment now accounts for 38% of employment, double that of two decade ago. This was also the beginning of a widening in the gap between rich and poor, and a rise in relative poverty.

Then there was the financial crisis, which began in earnest about two decades ago. Many banks and enterprises became dysfunctional zombies. The government was slow to tackle the crisis. A quick-fire approach of "creative destruction" would have cleaned up the mess, and opened the way for a new period of strong growth. This should have been complemented by liberalization and deregulation of the service and agricultural sectors. But this was not to be. Twenty years on, Japan still has a sluggish economy, which creates insufficient opportunities for its citizens.

The government has attempted to keep the economy afloat by fiscal stimulus. All too often this involves spending on infrastructure projects of limited value. It amounts to wasted subsidies to infrastructure companies, their employees and the regions that might have a bridge to nowhere, or a road with very few cars.

The result is a ballooning public debt, now well over 200% of GDP. And massive future liabilities are accumulating for financing the retirement and health costs of a rapidly aging and now declining population. When Japanese citizens are born into Japanese society, they wake up to this debt hanging over them!

In the old days, Japanese women were all too often "office ladies", with very few in positions of responsibility. They typically stopped working when they started a family. But the Japanese women of today are very different. They are well educated, on average better than men. They are independent-minded, thanks to inspiration from their Western counterparts. They are keen to earn salaries, especially since their husbands now get lower bonuses.

But Japan's male-dominated society has been slow to adapt, and above all slow to provide childcare facilities which might facilitate a working career. The consequence has been declining marriage and birth rates. Another factor behind declining marriage is the economic insecurity due to growing irregular work and inequality. Status-conscious Japanese girls do not like to marry men with irregular jobs.

Nearly half of men and one-third of women in their early 30s are still single. True, other developed countries have also seen a decline in marriage rates. But in socially conservative Japan, only 2% of babies are born out of wedlock, compared to 40% in the United States and nearly half in the United Kingdom.

Some talk of a "womb strike"! Another phenomenon is the "parasaito shinguru", single women who live with their parents beyond their late twenties in order to enjoy a carefree and comfortable life. And many young boys who see little hope for their future are choosing to withdraw from social life, often seeking extreme degrees of isolation and confinement. Estimates of these boys, "hikikomori” in Japanese, range from 200,000 to 1 million.

A major consequence of all this is Japan's rapidly aging and now declining population. Based on current trends, by about the year 2200, the Japanese population would be less than 15 million, massively down from 127 million. In other words, a broken social contract is leading to the decay of Japan's society.

After five decades of Liberal Democratic Party rule, the Democratic Party of Japan came to power and governed for three years from 2009 to 2012. The DPJ quickly became an unpopular government. True, they made mistakes. But they also had very difficult challenges to manage -- the triple disaster of earthquake, tsunami and nuclear meltdown; attempting to renegotiate the location of US bases; provocations from China; the global financial crisis; and continuing economic weakness. Inexperience and an uncooperative bureaucracy did not help.

The LDP has now returned to power, but basically by default, because of the DPJ's unpopularity. Voter turnout has been low, especially among youth. In other words, Japanese citizens have a very low level of confidence and trust in the government with which they have their social contract.

This low level of confidence and trust has been exacerbated by the management of the nuclear meltdown by the Tokyo Electric Power Company (TEPCO), which has been characterized by incompetence, a lack of transparency, cover-up, and dishonesty. Today, as we write, highly radioactive water is still gushing into the sea, and radiation levels around Japan's Fukushima nuclear plant are 18 times higher than previously thought.

The initial euphoria about "Abenomics" is also fading. The main effect to date has been a depreciation of the yen, to the benefit of large exporting companies. Workers salaries and bonuses have benefited little. And it remains to be seen whether the iron triangle of business, bureaucrats and politicians would allow the deep structural reforms that the country desperately needs.

Lastly, while the US remains committed to its alliance with Japan, it now has to balance its relationship with Japan with its relationship with China, a rising, complicated and prickly power. The US quite plainly does not want to get involved in Japan's disputes with China over the Senkaku Islands in the East China Sea. In other words, Japan's social contract with the US is less absolute than it once was.

Every country reaches a point in its history where it needs to reinvent itself, and reinvent its social contract. Both the US and the EU are now going through heart-wrenching changes, which will likely be for the better. Even China under the new President, Xi Jinping, seems to be reformulating its social contract, as the government seeks to tackle corruption and improve the performance and image of the Communist Party.

Japan is now in desperate need of revolutionary change. But in a country where 6 out of 10 voters are over 50 years old, it is difficult to see a revolution coming soon.