Barriers to labour union activities were also removed, with the result that workers' job security became better protected and the way was opened for a steady rise in wage levels. Under the "priority production system," stress was placed on increased output of coal and steel, the two main focuses of the nation's industrial attempt. An upswing in steel production laid the foundation for an overall takeoff of production, featuring a surge in capital investment sustained by the recovery of consumption. Production subsequently increased not only in the key material industries, such as steel and chemicals, but also in new industries producing consumer goods, such as television sets and cars.
Japan’s Economy
What is really hindering the Japanese economy at the moment is that they have too many unnecessary workers…just drive over on any given weekend to the Ito-Yokado shopping centre parking lot in Shinyurigaoka (bear with me), a large suburb half an hour west of Tokyo. Actually, it doesn't matter where you go; since the same scene is played out at parking garages, train stations and construction sites all over the country. But on a typical weekend in Shinyurigaoka, there are four guards at the crossroad directing traffic. Another man is on hand to make sure you don't miss the turn that leads to the garage. Five meters down the path, an attendant removes the ticket that the machine just generated and hands it to you. Head up the slope to the first floor and a woman will wave you on, just in case you missed the brightly lit No Vacancy sign over her head. (Every floor, whether full or not, gets its own guard.)
When you leave, you get the same treatment in reverse: more floor guards waving you through, a white-gloved attendant to feed the ticket back into the machine, and a new crew of traffic smoothers to make sure you are safely on your way. By the end of your visit, at least 20 employees have provided you with a service of nearly zero value, maybe it does make things slightly easier, (compare it with the Watford Harlequin on a Saturday for example) but 20 workers, do they want their economy to collapse or what?
Leaving aside the banking system crippled by many bad loans, a government debt equal to 130% of the nation's GDP, deflation that sucks the life from corporate profits and a stock market hovering near its lowest point since 1983. There is a more basic hindrance undermining the world's second-largest economy: Japan's labour force is one of the most unproductive in the industrialized world, not just by a little either.
According to the Japan Productivity Centre for Socio-Economic Development, a government-affiliated research centre, Japanese labourers are 40% less efficient than the Americans, 20% less efficient than the French and 11% less efficient than the Germans. The Japanese lag behind not just us Britons and Swedes as well but the Italians and Spanish, too!
Although Japan’s export industries such as cars and electronics have redefined competitiveness and economic advantage worldwide, the country's far-larger domestic sectors—construction, retailing, agriculture, health care and financial services, among others—have become weak. What may have once been an enlightened government plank to promote universal employment back when Japan really was a developing country is now backfiring massively. The high prices and poor consumer satisfaction that Japanese citizens encounter every day has spurred a never-ending cycle of depressed demand and low growth. "The quality of life in Japan is eroding and low domestic productivity is a primary reason why," says Haruo Shimada, a professor of economics at Tokyo's Keio University and a special advisor to the Cabinet Office. Japan's domestic economy has become the weight around the nation's neck, slowly pulling it to the bottom of the pool.
Tell anyone who doesn't live in Japan that the country has productivity problems and you're likely to be met with disbelief, if not laughter. Companies like Sony, Toshiba and Toyota have made the country famous as the place where they always make things better, cheaper, smarter. Production techniques include—Just In Time Manufacturing, Total Quality Management, Continuous Improvement—these have been imitated from Seoul to Sao Paulo. Japan's leading export manufacturers do deserve this reputation. Statistics show that Japanese export industries like automobiles, electronics and computer hardware are 20% more productive than the worldwide standard. Here’s the problem though: these industries, once you stop to count them, are actually quite few in number. Together, they make up only 10% of Japan's workforce and 10% of its GDP.
Of the remaining 90%, retailing just might be the sickest of the bunch. Large-scale stores are rare in Japan, so if you go shopping, chances are good that you’ll find yourself in a quaint shop (like the sort you’d see in a coastal town in Cornwall) selling teas, sweets, beer and spirits, cigarettes and canned goods, run by a couple and their family— a small business. The problem (purely economic terms) is, this style of selling is a nightmare for consumers and the economy. The shelves at this sort of shop are dusty and sprinkled with the odd dead moth etc, the selection is poor (no dairy, baked goods or produce, etc), and prices are high. The thing is, that the owners of this type of shop can’t afford to lower the prices of their goods whatever the consumer may say This is purely because the owners would stand to loose a lot of money. The high prices are not really their fault; they are built into the way small, independent retailing works. They can't match the buying power, selection, service, price and merchandizing of large-format and convenience store chains.
These sorts of shops in Japan make up 55% of the retail labour force measured in hours worked! In the U.S for example they make up only 19% and France 26%. They are, in other words, still the way Japan sells things. And they are sadly unproductive, generating only 19% of the output of the average store in the U.S.A. That pathetic performance, combined with the quaint shops’ large share of the labour force, pulls Japan's total retailing-sector productivity down to just half that of the U.S.
The result of that inefficiency is layers of increased costs are passed on to Japanese consumers, who face one of the world's highest costs of living, which in turn depresses demand. Opposing to the shop-a-holic stereotypes, Japanese buy fewer goods than their counterparts in other nations. Americans, for example, consume 63% more clothes, spend more than twice as much at restaurants and hotels, and about 2.5 to 3 times as much on books and cars. Larger stores would help increase efficiency and bring down costs, but government regulations designed to keep the small-business people in business and prevent that from happening.
The Large Scale Retail Location Law, for example, gives small-business owners a significant say in the approval process for new stores larger than 1,000 sq. meters opening in the area. Likewise, a combination of low property taxes and high capital-gains taxes encourages struggling sole proprietorships to bumble along for years rather than just sell out and leave the market.
Unfortunately, retailing is far from Japan's only stunted sector, and rampant over employment—as in that parking garage outside of Tokyo—is only the beginning of the problem. Hobbled by the government policies designed to help them, most domestic industries are basket cases. Often prevented from consolidating and insulated from competition, most businesses are too small to achieve economies of scale, are poorly managed, and use antiquated equipment and business models—all of which hurt productivity and increase prices.
What went wrong?
Japan become host to a handful of world-leading exporters offset by thousands of value destroyers at home? Simple truth: Japan's economy was born this way. Not long after the end of World War 2, the government reasoned that due to the country's lack of natural resources and small population, its only hope for recovery was to produce high-value finished goods that the rest of the world wanted, at consistently improving quality and prices. And then, as only the Japanese can, the entire country single-mindedly set out to achieve that goal. Government bureaucracies picked favoured industries, giving companies in those fields the incentives and market protection they needed to improve quality until they were ready to compete with the world's best. And thus Japan's textile, steel, automobile and finally, semiconductor and computer industries were born.
While international competition was the watchword for exporters, the government sought universal employment and stability at home. With coffers flush from the nation's high personal-savings rate, the government launched massive public works projects designed to rebuild a smashed infrastructure, provide jobs and spur internal demand. For the domestic industries, Japan pursued consistently protectionist, anti-competitive policies, with the intention of keeping as many companies afloat as possible. "Ten percent of the country was allowed to be capitalist, and the other 90% was socialist," says Eisuke Sakakibara, director of the Global Security Research Centre at Keio University and a former vice minister of finance. He's not really joking. Antitrust laws were virtually nonexistent; cartels flourished and high tariffs pushed away foreign entrants.
"For a long time," Sakakibara continues, "the dual economy worked." Throughout the 1960s, 1970s and most of the 1980s, Japan's unique form of bureaucratic capitalism was spectacularly successful. Beginning in the late 1980s, however, the world began to change. International competition has intensified dramatically, trade barriers elsewhere have fallen, China snapped out of its slumber, and Southeast Asia and South Korea have proven that they can match Japan as high-tech manufacturers and exporters. But rather than confront a new competitive landscape head on, Japan still acts as if it is a developing country that needs to be protected.
Instead of deregulating or evolving into a post-industrial economy more focused on services than manufacturing, or encouraging exports in anything other than cars, electronics and similar goods, Japan has been returning (with increasing desperation) to what always worked so well in the past: emphasis on high-glamour manufacturing, new public-spending projects and continued domestic protection. Japan already has more infrastructure than it needs (its "bridges to nowhere" have been made famous by frequent ridicule in the local press) and government debt handily exceeds GDP. But like the laboratory pigeon that keeps hitting the lever even though the reward is no longer coming, Japan's government can't stop banging away with its favourite but increasingly useless placebos: public spending and tax incentives.
What can Japan do?
A growing number of economists are declaring that it's time for a little creative destruction. "Stirring competition is the single-most-important strategy for driving productivity higher," says economics professor Shimada. "That means getting rid of government subsidies and tariffs for protected industries and dismantling quasi-governmental monopolies." But that is a lot easier said than done. For one thing, those protected industries have had plenty of time to develop powerful lobbying groups, which are now among the ruling Liberal Democratic Party's biggest contributors. Many Diet members, in fact, are known by which zoku (tribe) they are members of: construction, agriculture or health care. Change is coming in dribs and drabs, but usually only after a prolonged fight. Liquor licenses will be fully deregulated next September, and telecommunications opened up a few years ago to a fair degree of success. "There is movement," says Masaaki Kanno, chief economist for JP Morgan in Tokyo, "but it is too little, too slow."
Another factor holding back structural reform is the acknowledgement from all parties that it would almost certainly bring about lots of short-term pain, including numerous bankruptcies and high unemployment. "There's no doubt that the structure needs to be changed," says former Finance Vice Minister Sakakibara, "but people are afraid of the costs." Many Japanese wince just discussing joblessness; they speak about acquaintances who have been fired as if they'd been afflicted with a horrible disease. Many Japanese commentators claim that high unemployment is unacceptable because the nation does not have a well-developed social-welfare system—not seeming to realize that allowing an estimated 17 million surplus workers to remain on the nation's payrolls is a much more expensive version of the same thing.
Furthermore, it is also widely believed that increased productivity will lead to permanently high unemployment. Economic theory (and a preponderance of historical evidence) suggests that unemployment is only a temporary consequence of reform. Higher productivity leads to lower prices, which spurs increased consumption, which requires increased production—and more jobs. Wal-Mart, for example, wiped out the American equivalent of the Nakamura store—to nationwide hand wringing—throughout the 1980s and 1990s; unemployment is lower in the U.S. today than it was then, and at 5.7% is lower than Japan's unemployment rate is now. Since 1990, according to the Japan Productivity Centre for Socio-Economic Development, labour productivity has improved 49% in the U.S., 26% in France, and 18% in Germany. Japan's productivity, meanwhile, has increased only 13%.
But why absorb pain today when you can put it off until tomorrow? Walk the streets of Tokyo and there is no sense of urgency, no indication that the country has a credit rating equal to Botswana's. Part of Japan's quiet confidence comes, no doubt, from the $6 trillion in personal savings its citizens have amassed, thanks to its exceptionally high 13% household-savings rate. That totes out to $150,000 per capita, or nearly two and a half years' worth of the average worker's income per household—making it a massive, self-funded social safety net, insulating the country's citizens, at least to a degree, from the economic turmoil around them. And because many accounts are still government guaranteed, the Japanese just keep socking it away, no matter how bad the economic news gets. The government, meanwhile, directly controls 20% of that money through its postal savings system, which it has treated as an always-replenishing piggy bank to fund its huge public-spending projects. And therefore the giant, unproductive cycle of money and labour churns on. Still, it might get harder to muddle through in the future, since there are indications that the most reliable part of Japan's economic engine—its high-profile export industries—is under unprecedented attack. "Japan's competitive positioning is declining internationally," says Ken Courtis, vice chairman of Goldman Sachs Asia in Tokyo. "There have been huge productivity gains in the U.S., while China has lower labour costs. Japan is getting it from every side. There is no place for them to hide."
The country may also be staring at an internal demographic time bomb that will make efficiency and productivity all the more pressing in just a few years. Japan's working population peaked in 1997 at 67.9 million people and is predicted to decline to 60 million by 2025. Kiyohiko Fukushima, chief economist of the Nomura Research Institute in Tokyo, predicts that Japan's working population will decline so dramatically in the years ahead that the country will face an unprecedented shortage of workers—making society's current fears about unemployment doubtful.
Japan will have no choice but to move every able body it can to the most competitive and productive industries possible. Furthermore, Japan may have to relax immigration restrictions, extend the retirement age beyond 60 and bring women into the workforce more aggressively, just to meet its labour needs.
Conclusion
Japan may manage to settle into a kind of rich status, but the country is probably finished as an economic overachiever. The high-growth story in Japan is over and GDP is unlikely to improve. With far fewer people working, output may stagnate no matter how productive Japan's workforce becomes. All of which means that someday soon in the suburbs of Tokyo, and across the nation, you may have to start parking your car all by yourself.
"Has Japan paid the price for growing too fast?" I conclude that it has, with next to 0 GDP growth to look forward to and an increasingly aging population the country is going to find it extremely difficult to keep pace with the world’s other major developed countries.
