Some people say that the Japanese economy is recovering from the economic and financial crisis triggered by the Lehman Shock the year before last. However, in reality, many Japanese people probably find no improvement in the sense of stagnation they feel in their everyday lives. They even seem unable to see any new light for the future. I believe the reason for this lies in the uncertainty about “what will drive Japan’s revenue and employment in the future.”

There have been various arguments about the answer to this question. Some insist, “Japan can depend on its advanced manufacturing technology,” and others oppose this sentiment, saying, “No, manufacturing is out of date. Finance and IT will drive Japan.” Some say, “Internal demand should be the driver of future growth,” but others say, “No, Japan should focus on fast-growing Asian markets.” “Such a policy will urge every company to shift operations offshore,” some others reply. In connection with these arguments, there are people who advocate the unfounded praise of Japan, unproductive pessimistic views, or idealism alienated from reality.

Although there is a grain of truth in each of these arguments, none of them fully describes the future vision of the Japan’s industry. I believe that unless Japan conceives a comprehensive vision of its industrial future and takes action toward that vision, it will prove impossible to shake off the sense of stagnation among the people.

This is why our Industrial Structure Vision 2010 thoroughly analyzes the challenges facing Japan’s industry, along with worldwide developments. It has revealed a “deadlocked position” that exists with the government and the private sector of Japan, in which both lag behind new trends in the world’s business and markets. To break this situation, both sectors should make a paradigm shift in thinking, based on an analysis of the status quo.

By thoroughly analyzing the status quo, we can find some myths and truths in these complicated arguments.

For example, look at the commonly heard argument that Japan should increase the rate of consumption because Japanese people save too much. As a matter of fact, the rate of savings among Japanese households has already dropped below that of American households, reaching one of the lowest levels among the developed countries. Consumption cannot be increased without a rise in income. However, wages for Japanese workers did not increase even during the longest economic expansion period in postwar Japan in the 2000’s.

There is also an argument that Japanese companies earn too much and therefore the government should increase burdens on them so that more money can be redistributed to consumers. However, data shows that labor’s relative share in Japan is one of the highest among the developed countries.
Both facts suggest that Japan should create a virtuous circle in which the government pursues a larger pie rather than merely focuses on how to slice up the current pie, and eventually prompts the rise in personal income.

In recent years, the Japanese industry’s expansion of added value has been primarily relying on specific manufacturing sectors with global competitiveness, such as auto manufacturing. However, Japan’s export ratio is actually low by international standards. This demonstrates that many companies, except specific ones, are not directly connected to the world’s growing markets. Japan and Germany, which both excessively depend on globally competitive manufacturers for growth, wage levels have hardly risen over the past 20 years despite significant improvement in labor productivity. This suggests that a growth model dependent on specific global manufacturers causes the difficulty of raising wages in the face of wage competition with emerging countries. To expand the added value of Japan at large, it is essential for industries other than specific global manufacturers to become involved in growing markets. In other words, Japan’s industrial structure itself needs to be transformed.

There is an argument about Japanese companies that they lead the world in high technology and are therefore competitive. However, the fact is that it was only the first few years that Japanese companies were dominant in the world market for either LCDs or DVD players. As the global market boomed, Japan’s share of the world market rapidly declined. The situation is much the same for profitability. In many industries, the profitability of Japanese companies is less than half that of their global competitors. These facts indicate that it is not specific companies or specific products but a common business model for Japanese industries that have caused them to lag behind the world.

There are divided views about globalization. Some argue that globalization leads to the hollowing out of domestic employment. Others say that this is why Japan should convert from the foreign demand-dependent model to the domestic demand-dependent one. It is true that supplies run short of domestic demand in certain areas, as demonstrated by the issue of children on waiting lists for nursery schools, and growth in domestic demand can be expected in these areas. Domestic demand is crucial for Japan. However, if you look at the big picture of the market, it is obvious that the driver of market growth is shifting from Japan and other developed countries struggling with an aging population and a falling birthrate, to emerging countries. No country can achieve sustainable growth if it holds back from growing markets. If Japan wants to save itself from decline, Japan has no other choice but to aggressively push forward with globalization.

However, if Japan pursues only globalization without taking action to stop the decline in its international competitiveness as a business location, Japan will lose both domestic jobs and added value. A recent questionnaire survey found that Japan’s location competitiveness in Asia, or the advantage of operating in Japan, has sharply fallen over the past few years. In fact, an increasing number of Japanese and foreign companies are relocating their business sites to other Asian countries.

This so-called “hollowing-out” phenomenon should be prevented not by putting a brake on globalization but rather by making Japan’s tax system and social infrastructure (e.g., airports and harbors) so internationally appealing as to attract business operations that produce added value and jobs to Japan. Globalizing human resources is another key strategy. Government-wide discussion should be continued on issues such as the education system. At the same time, we must realize that Japan can afford no further delay in globalization. We must develop, or attract in some cases, as many advanced professionals ready to compete in the global market as possible. As part of effort toward globalization, it is also crucial to aggressively draw foreign companies that would produce added value and quality jobs in Japan.

What we need to focus on is not domestic and inward-looking arguments about allocation, such as which the government should assist, businesses or workers, or whether it is appropriate for the government to support foreign companies. In the face of globalization, other national governments are fiercely vying with one another to obtain added value and quality jobs in their countries. If Japan sticks to inward-looking debates, we will inevitably decline.

Even after realizing all these harsh realities, we must not forget that there are emerging opportunities for the Japanese industry. Social issues such as environmental and energy constraints and the aging population with a falling birthrate make the situation much more challenging for Japan than other countries. Nevertheless, if Japanese industries capitalize on their original technologies and successfully devise business models to solve these problems ahead of others in the world, those models will give them a new source of international competitiveness.

To make these “shifts” a reality, all the parties concerned, not just the government but also companies, industries, and people working for these companies, must take their own action toward transformation. There is also a need to redefine the relations between the public and the private sectors in light of global trends and public calls for solutions to social problems. The Industrial Structure Vision 2010 shows detailed prescriptions for fulfilling this goal.

It is companies and industries that create employment. To improve the quality of employment, corporate and industrial competitiveness must be boosted. If we move in this direction, what lies ahead will be a virtuous circle that brings quality jobs, higher wages and greater consumption. The government is presenting this vision and launching policies not just for expanding corporate earnings. There is a grand goal set further ahead: “Each and every Japanese person enjoys affluence.” With this goal in mind, the entire nation should face up to the current stagnant situation, along with difficult challenges, and share the future vision and the prescriptions set out for both the public and the private sectors.

That is all I would like to say about the Industrial Structure Vision 2010.

June 2010
Masayuki Naoshima
Minister of Economy, Trade and Industry