Economic Recovery in Japan: Figure the Odds
By Hiromi Murakami
26 June 2001
The Daily Japan Digest
Those who are waiting for a sustainable economic recovery in Japan to
help the global economy, should not hold their breath. Japanese leaders
have been notoriously unwilling to take the bold, courageous steps
needed to save their sinking economy, and while Prime Minister Koizumi
appears to be a champion of structural reform, he simply does not have
the stable power base needed to execute his reform policies.
Heading for China: Meanwhile, many of Japan's most efficient and
competitive manufacturing firms--leading engines of economic
growth--are heading for China in order to survive. Matsushita
Electronics, for example, has opened digital communications R&D
facilities in Beijing. Fujitsu, NEC, and Hitachi recently announced
plans to increase production in China, and Toyota launched its first
joint production with a Chinese automaker last year.
Such behavior is not unusual, of course. In 1995, when the exchange
rate reached a record Yen 79 to the dollar, many Japanese firms fled to
Southeast Asia in search of cheap labor that would let them continue
exporting to the United States. What is significant about the current
exodus, however, is the damaging effect of Japan's ongoing structural
impediments, which restrict or harm the competitiveness of its more
cost-efficient firms and thereby ensure that growth-generating
industries will move abroad.
Put simply, Japan is not a friendly environment for growth industries.
The manufacturing sector is efficient, flexible, and innovative, but it
is hampered by exorbitant energy prices, high wages, and a heavy
regulatory burden. The legal process for obtaining patents is still
lengthy and burdensome. Subsidized, state-owned firms still dominate
certain markets, and protected industries remain exempt from the
Anti-Monopoly Law. Moreover, Japanese employment customs prevent firms
from laying off employees, and pension laws keep workers from changing
Lucrative Market: By contrast, Japanese industry is discovering
significant advantages in China. For starters, the emergence of a
Chinese middle class promises a lucrative market, especially for
electronics. Moreover, inexpensive engineers are more readily available
on the mainland, and production quality is beginning to exceed that in
Granted, there are risks, like widespread violation of intellectual
property rights. But even those are outweighed by the high
cost-structure and business-unfriendly environment at home. There is
more than a little irony, for example, in the success of Uniqlo, a
Japanese apparel firm that shifted production to China and is able to
sell Japanese consumers clothing of quality equal to brands made at
home, but at less cost.
In sum, Tokyo policymakers need a wake-up call. About 30% of Japan's
GDP, and 20% of employment, are generated by manufacturing. The loss of
these longstanding engines of growth will have a profound effect on the
Japanese economy. Nevertheless, for the sake of short-term political
advantage, the bureaucrats and politicians continue to protect
inefficient, uncompetitive service industries--construction, utilities,
distribution, retailing, medical and financial services--at the expense
of efficient, competitive, growth industries. The inevitable result is
high prices and low demand--and no likelihood of sustainable recovery.
Out of Date: Tokyo must stop making excuses for its economic woes and
recognize that the dual economic structure is no longer sustainable.
While Japan has stubbornly continued to rely on exports--along with a
closed market, fiscal infusions, and a depreciated yen--its Asian
neighbors have already recognized that the export-led growth model is
out of date, and have begun to make appropriate structural shifts.
Japan needs to follow suit. Along the lines of the 1986 Maekawa report,
the Japanese market system needs to be made more open and transparent
in order to encourage the entry of growth firms, a more competitive
environment, lower prices, the expansion of domestic demand, and global
This means, of course, that Japanese politicians and bureaucrats will
have to risk their political well-being and inflict considerable pain
on their core constituency. Prime Minister Koizumi seems intent on
giving it a conscientious effort, but he will face stiff resistance
from the LDP elders. Suffice it to say that, until the day structural
reform is begun in earnest, the geese that lay the golden eggs will be
flying across the Sea of Japan--and the global economy may want to pin
its hopes somewhere else.
Hiromi Murakami is Research Associate at the Economic Strategy Institute in Washington