The second administration of Prime Minister Shinzo Abe that took power in 2012 changed course from a neoliberal program of maximizing employer flexibility to cut labor costs to a more social democratic policy of improving employee welfare to boost labor participation and productivity. Abe and his advisors did so not due to any ideological conversion but rather as a pragmatic response to the marketplace shift from labor surplus to labor shortage. They embraced policies to support a higher birthrate; increase the workforce, especially among women and the elderly; make workers feel more secure; and raise wages to increase disposable income. This culminated in the “Work Style Reform” (hatarakikata kaikaku) legislation of 2018, which limited overtime hours and promoted more equal pay for equal work. Progressives certainly hoped for bolder reforms, but the policy shift nonetheless altered some Japanese labor practices.

This chapter asks whether the Abe administration’s “third arrow” of structural reforms was useful in fostering innovation and strengthening the global competitiveness of Japan’s economy. It takes the Silicon Valley model and evaluates how much the third arrow of Abenomics added flexibility to some of the core institutions of Japan’s traditional model by pushing toward or adding institutional elements of the Silicon Valley model. The goal for Japan should not be piecemeal adoption but instead strengthening the institutional underpinnings that enable Japan’s startup ecosystem to flourish and coexist with the large-firm-dominated model. This chapter concludes that Abenomics’ third arrow legitimized the institutions supporting Japan’s startup ecosystem by amplifying trajectories of change already underway – not by forcing change in areas that were headed in a different direction. Since institutions supporting the startup ecosystem are emerging in parallel to the existing institutional configuration, the legitimacy provided by Abenomics’ third arrow reforms do represent positive developments and policy for helping innovation in Japan’s economy.