Op-Ed in the Financial Times: Why Gender Diversity Matters for Japan's Economy

The following op-ed by Kathy Matsui, Vice-chair and Chief Japan Strategist at Goldman Sachs Japan, appeared in the April 23, 2019 edition of the Financial Times.

Why gender diversity matters for Japan's economy
By Kathy Matsui

Two decades have passed since we published our first report on womenomics, but has anything really changed on Japan’s gender diversity front?

After all, based on the World Economic Forum’s latest Global Gender Gap Index, Japan ranked just 110 out of 149 countries, and the systematic lowering of female applicants’ exam scores by a local medical university in 2018 suggests that the diversity agenda is moving backwards, rather than forwards.

However, there has been progress. Thanks to widespread labour shortages and Prime Minister Shinzo Abe’s declaration that “Abenomics is womenomics”, Japan’s female labour participation rate — previously among the lowest in the OECD — has soared to a record 71 per cent, surpassing both the US and Europe. Japan now boasts one of the most generous parental leave benefits globally, companies are required to disclose gender diversity statistics and labour reforms mandate legal limits on overtime hours and equal pay for equal work.

Despite such progress, Japan continues to face a demographic tsunami, where one out of three citizens are elderly and by mid-century its workforce will shrink 40 per cent from 75m to 45m. Japan remains one of the few countries where the number of registered pets (dogs and cats only) outnumbers children under the age of 15. Indeed, the IMF recently warned that in the absence of meaningful structural reforms, demographic headwinds could cause Japan’s real GDP to decline by more than 25 per cent in 40 years.

Averting such a scenario requires a three-pronged approach involving government, corporations and society.

Government policies should be aimed at areas including creating more flexible labour contracts to eliminate the rigid duality of full-time versus part-time workers (the latter now account for 40 per cent of all employees and 70 per cent of all part-timers are female). They should require gender pay gap disclosures — Japan’s gap is the largest of the G7 at 25 per cent — and rectify tax disincentives that discourage married women from working full time. Policies should also introduce parliamentary gender quotas (at 14 per cent, Japan’s female representation in the Diet is lower than Saudi Arabia and Libya) and promote female entrepreneurship. They should loosen immigration rules to allow more foreign child/elder caregivers, especially because Japanese fathers typically spend less than 1.5 hours a day on childcare and household chores — half that of fathers in the UK and US.

Companies should sensitise their managers to gender differences through unconscious bias training, create more flexible work environments, shift from seniority to performance-based evaluations and engage male diversity champions.

Society needs to dispel myths such as “the more women work, the lower the birth rate” (empirical evidence shows the opposite is true), shift gender role stereotypes in the media and encourage more girls and women to pursue science and technology-led education and careers (Japanese women hold more university degrees than men, but Japan’s ratio of female researchers/scientists is the lowest in the OECD).

While the wishlist is long, the rewards are potentially massive. Closing the gender employment gap could lift Japan’s GDP by 10 per cent, and in a “blue-sky scenario” that also assumes the ratio of female versus male working hours rises to the OECD average, the GDP boost could expand further to 15 per cent. For businesses, Japanese listed companies with higher female manager ratios tend to deliver a higher return on equity and sales growth.

How Japan chooses to manage its demographic headwinds over the next several years will serve as an important template (or not) for how other countries should cope with their own ageing societies. The good news is that two tailwinds should help advance the womenomics agenda over the next 20 years: the rapid expansion of environmental, social and governance investing, and the shifting attitudes of younger-generation Japanese males.

Since 2011, Japan has seen a 23 per cent compound annual growth rate in the number of domestic asset owners to the UN’s Principles for Responsible Investment, and the world’s largest pension fund — the Government Pension Investment Fund — has begun allocating funds to companies that demonstrate progressive diversity practices. Notably, proxy adviser, Glass Lewis, revised its 2019 Japan voting guidelines so that it will begin issuing recommendations against members of boards who do not have any incumbent or proposed female members.

Thirty years ago, more single Japanese men preferred their future spouses to be full-time housewives than working outside the home, but this has since reversed, with the majority now preferring their spouses to work. This suggests that the desire for work-life balance is growing among men as well as women.

Within the Japanese stock market context, the million yen question is: Does gender diversity actually have an impact on corporate fundamentals and share price performance?

Japanese listed companies with the highest female manager ratios boast the highest average sales growth and return on equities. Furthermore, our screening of 50 “Japan Diversity Leaders” has outperformed the market by 9 per cent since 2017. In other words, diversity indeed matters.