Japan's prime minister laid out an ambitious economic plan that could usher in 'a new form of capitalism' and boost a 'shrinking middle class'

• Japanese Prime Minister Kishida Fumio called for a new form of liberal democratic capitalism.
• Fumio says unfettered state capitalism has led to widening income gaps and social tensions.

Japan's prime minister has an ambitious economic plan that could usher in "new form of capitalism."

At the World Economic Forum's virtual event, the Davos Agenda 2022, Japanese Prime Minister Kishida Fumio on Tuesday called for a new form of liberal democratic capitalism that places importance on communication between the government and workers on the front line. In a special address to business, government and civil society leaders, Fumio announced he intends to do this by transforming Japan's economy with investments in green technology, digitization and human capital.

"A key focus of my administration will be the revitalization of Japan through a new form of capitalism," Fumio said.

Japan is facing many economic challenges, including climate change, a social transformation, widening income gaps and rising poverty levels, partly due to economic policies put in place by a former prime minister. Fumio's plan addresses economic growth through green energy, technology, and equality.

"Democracy is in crisis due to shrinking middle classes and unforeseen emerging tensions in geopolitics and geo economics," he said. Here's his vision for a "revitalized" Japan.

Plans to lead the green tech revolution

In Japan, nominal wages rose just 1.2 percent from 2012 to 2020, while the average wealth for the typical Japanese household fell by 3.5 percent from 2014 to 2019. In 2020 alone, Japan's 50 richest households saw their collective wealth climb 48 percent to $249 billion.

The division can partly be attributed to the economic stimulus brought on by Abenomics, a set of economic policies under Japan's former prime minister Shinzo Abe. The polices failed to boost household wealth, according to Shigeto Nagai, head of Japan economics at Oxford Economic. In Tuesday's address, Fumio emphasized that the time has finally come for "historic economic and social transformations".

"There has been an overreliance on competition and self-regulation to constrain the excesses of market forces," Fumio said. "This must change."

On his list of changes is a plan for Japan to lead the world in the green transformation. Fumio says in the next few years, the country will more than double its investment in green technology. It will also introduce a new carbon pricing system that will aim to cut greenhouse gas emissions and further Japan's pursuit in becoming a carbon emissions trading hub for Asia.

Japan is the world's fifth largest carbon emitter. In 2021, after receiving pressure from several environmental groups and European countries, the government pledged to trim emissions by 46% by 2030. Fumio says that implementing smart grids, upgraded power and distribution networks as well as low-carbon energy sources like solar and wind energy are likely to aid in that goal.

Along with green energy investment, Fumio says another area of concern for Japan's economic and social reformation is its approach to digitization. "While Japan has traditionally lagged in digital uptake, COVID-19 has given Japan a chance to leap-frog its digitization efforts," he said. To support this, Japan's government will invest heavily in next-generation networks, optical fiber, and 5G-related infrastructure, which will extend to 90% of the population over two years.

Investment in human capital

Fumio also has big plans for the nation's population as he will encourage businesses to be more transparent about their practices in an effort to drive investment in human capital. Data shows educational systems and labor markets are large sources of variations in economic outcomes and deeper investment could further economic growth. "Investment in people is often regarded as a cost, but it is a source of medium to long-term corporate value," Kumo said.

As Fumio makes it his mission to lead Japan into the future, the world will be watching. His emphasis on green technology, digitization and human capital could introduce a new frontier in what the World Economic Forum refers to as the Fourth Industrial Revolution.

"The capabilities of the Fourth Industrial Revolution open up new possibilities and opportunities, "Klaus Schwab, the World Economic Forum's Founder and Executive Chairman said. "The future will be much greener, more digital and human centered."