The Japanese Economic System Revisited by ruq19861

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									                                      Press Release
June 25, 2002


                    The Japanese Economic System: Revisited
                          Research Committee Report



1.      Goals of the Research Committee
        Up until the 1990s, the Japanese economic system reflected the high level of
economic growth that had been achieved, and was highly regarded throughout the
world. However, since the 1990s, there has also been more focus on its problems as the
Japanese economy has stagnated. To begin with, what exactly is the Japanese economic
system? If the Japanese economic system is a excellent system, why isn’s it functioning
now? In order to consider this question, we reviewed the issues discussed in connection
with the Japanese economic system, and clarified the role that has been filled up until
now by the Japanese economic system, as well as its merits and limitations. In addition,
we investigated the way this system should be operated, using some concrete examples.
        Based on this awareness, the Policy Research Institute of the Ministry of
Finance has discussed and investigated 6 points (see section 2 below) at its “Japanese
Economic System: Revisited” Research Committee under the leadership of Chairman
Keimei Kaizuka (at that time, Honorary President of the Institute, and professor Law
Department, Chuo University). On May 14, a conference was held to present the results
of the investigations to date. This report is based on those results and is a collection of
the separately-authored sections, mainly by members of the research committee.


2.      Outline of the Report
The points of each section are as follows.


(1)     Japanese Business Operations and Company Activities
        Chapter 1 deals with the operating discipline due to debt, composition of
boards of directors, and the stock ownership structure of Japanese enterprises, which
influence company activities. Some of the characteristics of Japanese companies are as
follows. Stockholders are stable as a result of the crossholding of stock, boards of
directors are composed of members promoted internally, and companies and main banks
share long-term relationships. Until the 1970s, economic freedom and stability were
high, and it was possible to conduct business with a long-range view, so these



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characteristics worked to promote growth. Since the 1980s, however, industry has been
faced with changes in the external environment, such as a need for R&D investment,
overcapitalization in companies, and a contraction of business opportunities. With the
appearance of problems from the practice of promoting employees based on seniority,
along with a drop in the operating discipline of the main banks due to liberalization of
the financial markets, and a regression of restrictions from debt, the disadvantages of
the system have become apparent, contributing to overinvestment, drops in productivity,
and delays in conducting necessary business reorganizations.
        As Japanese businesses entered the 1990s, which brought further major
changes in the external environment and increasing capital market pressure, rapid
differentiation from the once homogeneous structure began to appear. Of particular
interest is the existence of companies proceeding with their own reorganizations in
various ways that were compatible with the practice of long-term employment; and the
fact that the performance of these companies is relatively high.
        Comments on this section included:  It is widely known that empirical studies
show that in the USA performance drops at companies that introduce directors from
outside the company. ‚ It is not necessarily known whether corporate governance has
an effect on company performance in the first place.


(2)     Production Affiliations and Distribution Affiliations (Keiretsu)
        Chapter 2 deals with production affiliations and distribution affiliations in the
automotive and home electric appliance fields, illustrating the relationships between
companies in Japan.
        Production affiliations in the automotive industry are a system under which
the automaker and the affiliated parts manufacturers work together on new-product
development and production processes, based on long-term business relationships,
effectively realizing high quality and performance, for low-volume production of many
different items at a low cost. Furthermore, this business model has been exported
throughout the world, and is universally accepted, and will continue to be dominant
from now on.
        Production affiliations in the home electric appliance industry appear to have
been weakening in recent years.       Unlike the automotive industry, since complex
processes are not required to provide efficient production, there has been a shift to
contract ordering and the establishment of manufacturing bases overseas.
        Distribution affiliations have contributed to the sales growth for the
manufacturers through the affiliated retail shops in both the automotive and home



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electric appliance fields.   Since the 1970s, however, for the home electric appliance
makers, the market share of a new retail channel through volume retailers has been
expanding.    For the automotive industry, increasing personnel costs, etc. have
contributed to decreased sales margins.
         Comments on this section included:  To what degree do the affiliate
relationships in the automotive and home electric appliance industries represent the
Japanese economic system as a whole? ‚ There should be some consideration of the
relationships between companies in the service industry, which accounts for 40% of
GDP.


(3)      Japanese Financial Systems (Main Banks)
         Chapter 3 deals with the long-term financial transaction relationship (main
bank relationship) between specific banks and specific companies that seems to be
unique to Japan.
         Japanese main banks seem to monitor the operations of companies that receive
loans through the transaction relationship, and seem to heighten the operating
efficiency of the company by imposing discipline on the manager. Empirical analysis,
however, does not reveal any significant evidence of this (see Figure 1). The contribution
to improving operating efficiency is from the high debt ratio, and even in the 1970s this
“the discipline by the main banks” could not be confirmed. In addition, the main bank
system is also seen in Germany, so it is not unique to Japan.
         This inadequate functioning of the main banks was already starting to appear
during the high growth period due to regulations limiting competition. Furthermore,
this weakness exposes the process of the shift in the main loan subjects of the banks,
from manufacturing industries (commodity industries) facing severe international
competition to non-manufacturing industries (non-commodity industries), such as real
estate, financial services, and service industries.
         In the future the financial intermediary function of the main banks will
gradually decrease, although the traditional main bank relationship will continue for
medium and small businesses. The main banks are also expected to fill the role of
supporting the supply of funds to venture businesses.
         Comments on this section included:  It is only a myth that main banks began
to disappear after the end of the period of high growth, much like the myth that the
main banks fueled rising real estate prices. ‚ During the high growth period, wasn’t
there some contribution by the main banks to the easing of financial restrictions on
business?



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                          nce
          Figure 1 Performa compa                nies w sta ma
                                    rison of compa                        t
                                                       ith ble in-bank relaions
                                     ith      b
                          and those w unsta le ma             tions
                                                   in-bank rela




                                                                         Ma ba
                                                                             in nk               in nk
                                                                                               Ma ba
                        in nk
                    Ma ba                    in nk
                                           Ma ba                         -s table              -unstable
                    -s table               -unstable


                    Real added-value production value growth rate         Real added-value production value growth rate
                    (annual rate)                                         (annual rate)
                    Real capital annual of increase
                                      rate                                                  rate
                                                                          Real capital annual of increase
                    Rate of increase in number of full-time               Rate of increase in number of full-time
                    employees                                             employees



        ote         in nk                    ny    t                        in nk oughout the per from the
      (N 1) A •gma ba -s table•h isa compa tha stayed with the same ma ba thr                        iod
               of
      beginning the 1960sto the beg       of
                                    inning the 1990s   .
        ote                 l     l
      (N 2) The real capita annua rate of incr                  ny•                 c          d
                                              ease is each compa f s real capital sto k estimate based on the
                  r       h
      redemption ate publis ed bythe E           n
                                      conomic Pla ning  Agency.

         ce:           om able 2 in C
      Sour Extracted fr T           hapter 3




(4)          Japanese Employment Practices
             Chapter 4 deals with Japanese employment practices, such as the long-term
employment system and the seniority-based wage system.
             The lifetime employment system, the seniority-based wage system, and the
separate labor unions system for each company are the “three sacred treasures” that are
characteristic of employment practices in Japan. In the 1980s, these practices were
lauded as an efficient production system allowing high productivity to be achieved, with
the praise reaching a peak at the beginning of the 1990s.                          However, with the current
increase in the number of past-time and other workers, the share of the labor market of
male regular employees at large companies who receive the long-term employment and
seniority-based pay has been decreasing. In addition, comparing the number of years of
employment and the salary curves of workers with their international counterparts
indicates that the long-term employment system and seniority-based wage system are



                                                                    4
not found only in Japan (see Figure 2 and Figure 3).
            The long-term employment system and the seniority-based wage system have
the advantages of increasing the incentive for education and training, recovery of the
company’s personnel investment and unique form of personnel capital, as well as
efficient decision-making and implementation through informal networking based on
reliable relationships among colleagues. At the same time, there are the disadvantages
for both labor and management, such as fixed personnel costs and increased costs to
change jobs. Since the 1990s, the Japanese economy has transitioned into a period of
low growth. In this time of an aging society with few children and a changing industrial
structure and technology, the disadvantages of the system are becoming more
outstanding.


                                       g                              ment
                       Figure 2 Percentae of workers bylength of employ




     Japan


     England


     Germany


     France


        y
     Ital


     USA


                         Over 20 years           10-19 years               5-9 years            Under 5 years

      ce)           sic   vey            s
 (Sour Japan: •gBa Sur of Earning Structur h (1976), E
                                                   e•                     ew        s    vey•         SA: ur
                                                               ngland: •gN Earning Sur h (1979), U •gC rent
 Popula        v                :
       tion Surey•h (1973), other•gStructur of Earning in Indutry•h (E 1972)
                                            e         s         s       C
 (N              SA
   ote) For the U and E  ngland, w              ll
                                   orkers from a industries are included. or other nations only ma
                                                                           F              ,          ctur      t
                                                                                                  nufa ing indusry
 workers are included.

    ce:           om able 2 in C
 Sour Extracted fr T           hapter 4




                                                         5
                                          ages by age (ma
                   Figure 3 Difference in w                 cturing)
                                                         nufa


                                                              ~ (20
                             Management and white-collar worker24 yr.=100))




             Up to 19     20 ~ 24 yr   25 ~ 29 yr.   30 ~ 44 yr       45~54 yr        55 and up

                                          glan
                                        En d               r st
                                                      Forme We               France           Italy
                  Japan (1997)
                                        (1995)       Germany (1995)          (1994)           (1995)


                             r gBasic Survey of Earnings cture•h, other: EU gStructure of Earnings
                               •
(Source) Japan: Ministry of Labo                      Stru                  •
Statistics 1995•h
                      are e                              ual         I
(Note) For Japan, wages th monthly portion of the fixed ann income.n other cases, wages are the
total monthly income.

Source: Extracted from Table 8 in Chapter 4
                                                             )
Administration / General operations workers (20 ~ 24 years = 100



          Comments on this section included:  The results of a sudden shift to a
short-term results-based salary system has a negative effect on personnel development.
‚ The current fluidity of employment is the result of logical behavior by the companies,
but the long-term employment practice is like an intangible asset, and there are many
problems with the protective labor market regulations.


(5)       Industrial Policies of the Ministry of Economy, Trade and Industry


          Chapter 5 deals with the effectiveness of the industrial policies of the Ministry
of Economy, Trade and Industry (former Ministry of International Trade and Industry).
          After World War‡U , typical industrial policies included large-scale subsidies,
entry regulations, production capacity adjustments, and cartels. These were the source
of Japan’s postwar economic growth through stimulation of business investment in



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economically highly-strategic industries, and promotion of rapid industrial growth.
                     An investigation of the industries that succeeded and those that failed shows
that in the successful industries there was no large-scale subsidy system from the
government, nor any significant intervention regarding competition; instead, the
government contribution was provided in the form of stimulating innovation by creating
the initial demand for new products, shortening repayment periods, and imposing
rigorous standards. In many cases of failed industries, there was apparent government
intervention, such as price controls, preferential taxation and policy money, restrictions
on new entries to the market, approval of anti-recession cartels, import quantity limits,
and imposition of high import tariffs. (See Figure 4).


                eness of gov
Figure 4 Effectiv                         l policies
                            ernment industria
Successful Ja panese industries                                                                  p
                                                                                   Unsuccessful Jaanese industries
·   Semiconductors                                                                 ·               e
                                                                                      Privateairplans
·   VCRs                                                                           ·  Chemica ls
·   Facsimiles                                                                     ·  Stock brokerage
·   Home a  udio equipment                                                         ·  Software
·   Car audio                                                                      ·  Cleaning products
·   Typewriters                                                                    ·  Apparel
·   Microwave and satellite           ons
                             communicati                                           ·  Chocolate
    devices
·   Musical instruments
·     nufa
    Ma cturing robots
·   Home a  ir-conditioners
·   Sewing ma   chines
·   Carbon fiber
·   Synthetic fiber textiles
·   Cameras
·   Soy sauce
·   Video games
·   Automobiles
·   Forklifts
·   Truck and bus tires
·   Trucks




         e           ention
Little govrnment interv                                                                    b
                                                                                   Considerale gov            ention
                                                                                                  ernment interv
S o u r c eE:x t a      c t efdr oTma   b l ae 2 s   n i C4 nd h a   p t e5r




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         Japan’s industrial policy functioned effectively for about 20 years after the
postwar reconstruction. Since then, it has not been a source of miraculous growth,
instead, it has contributed to failure. In the future, the government should contribute
indirectly to the development of an environment that promotes business competition.
         Comments on this section included: Up until the beginning of the 1970s all
countries regulated industry through government control. Furthermore, in capitalistic
countries, during periods of economic development the government fills the role of
protector of domestic industry and industry promoter. Industrial policy from a
centralized authority is not necessarily unique to Japan.


(6)      Industrial Policies in the Social Services Fields


         Chapter 6 deals with the industrial policies for social services fields, such as
medical care, welfare, and education, which are not covered by the industrial policies of
the former Ministry of International Trade and Industry.
         In these fields the government protects and encourages business proprietors,
thereby indirectly safeguarding the interests of service users. These areas are subject to
even stronger government intervention than the industrial policies of the former
Ministry of International Trade and Industry.
         Up until the 1970s, Japan was in a catch-up period, for example, in the field of
medical services. The national medical insurance system was established, making
medical services available at a lower cost than in other countries, so the average life
expectancy increased. In education, a basic standardized education service was
provided for youth, with a high degree of external economy. However, due to the lack of
competition and changes in the society, the range of service users has expanded, and the
needs of service users have diversified, at the same time that there has been a
tightening of financial restrictions.   Particularly since the 1990s, there are increasing
restrictions on both quantity and quality, and the need for reform is increasing.
         So far, in the social services fields, market failure is not offset by government
intervention in the markets. The government should shift to a policy of making direct
income transfers to people with large income restrictions, and stimulate the markets by
shifting from resource allocation dictated by the government to free choice by service
users.
         Comments on this section include:  Although this field is not affected much
by outside pressure, and it is difficult to shift to a system that makes use of market
forces, there may be many useful portions of the EU activities to promote regulatory



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reform for their unification. ‚ It is important to quickly establish a means for revealing
detailed information, as well as a mechanism for outside evaluations based on that
information.


(7)      Summary of Findings


         The Japanese economic system can be called an integrated system that
emphasizes the long-term relationships between people, goods, and money. The support
for the system for each of these components has come from the Japanese employment
practices for people, the relationships between companies for goods, and the main-bank
relationships for money. As a result of the stagnation in the 1990s, it has become clear
that long-term relationships are not necessarily always desirable. This report presents
the “changed nature” hypothesis and the “non-existence” hypothesis with regard to the
Japanese economic system as a cause of this stagnation. The “changed nature”
hypothesis states that, although the Japanese economic system has earned a certain
respect for increasing economic efficiency, its essence has changed. The “non-existence”
hypothesis explains that there never was any Japanese economic system causing the
improvement in economic efficiency. The “changed nature” hypothesis focuses on
Japanese business operations, the Japanese employment practices, and some
relationships between companies.        The “non-existence” hypothesis emphasizes the
industrial policies for general industry, the Japanese financial system, and industrial
policy for the social services fields. However, there are separate evaluations for each
field, and there is no evaluation of the Japanese economic system as a whole.
        Even today, there are Japanese systems working to improve economic efficiency,
including the manufacturing affiliations in the automotive industry, and companies and
labor working together on personnel investment; but, there are also systems that have
ceased to fill these roles. In particular, over-regulation in the social services fields is not
functioning to meet the current diversification in the needs of citizens.




*The content and opinions of this report are entirely those of the authors, and in no way
represent the official position of the Ministry of Finance or the Policy Research
Institute.




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  (Reference) Table of Contributing Authors and Commentators


Topic                            Author                          Comments
1. Japanese Business             Hideaki Miyajima (Professor,    Tadao Kagono (Professor,
Operations and Company           Waseda University)              Kobe University),
Activities                                                       Hideki Kanda (Professor,
                                                                 Tokyo University), and
                                                                 Masaru Kaneko (Professor,
                                                                 Keio University)
2. Production Affiliates and     Tatsuya Kikutani (Assistant     Kenn Ariga (Professor, Kyoto
Distribution Affiliations        Professor, Kyoto University)    University) and
(Keiretsu)                       and                             Kazuo Yoshida (Professor,
                                 Hiroshi Shiochi (Professor,     Kyoto University)
                                 Kyoto University)
3. Japanese Financial Systems    Akiyoshi Horiuchi               D. Atkinson (Managing
(Main Banks)                     (Professor, Tokyo University)   Director, Goldman Sachs
                                                                 Securities) and
                                                                 Hideaki Miyajima (Professor,
                                                                 Waseda University)
4. Japanese Employment           Yoshio Higuchi (Professor,      Kazuo Koike (Professor,
Practices                        Keio University)                Tokai-Gakuen University)
                                                                 and
                                                                 Naohiro Yashiro
                                                                 •i Chairman, Japan Center
                                                                 for Economic Research•j
5. Industrial Policies of the    Hirotaka Takeuchi               Goro Ono (Professor, Saitama
Ministry of Economy, Trade and   (Professor, Hitotsubashi        University) and
Industry                         University)                     Ushio Chujo (Professor, Keio
                                                                 University)
6. Industrial Policies in the    Naohiro Yashiro (Chairman,      Akiyoshi Horiuchi (Professor,
Social Services Fields           Japan Center for Economic       Tokyo University),
                                 Research)                       Yoshio Higuchi (Professor,
                                                                 Keio University), and
                                                                 Ushio Chujo (Professor, Keio
                                                                 University)




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7. Summary of Findings           Keimei Kaizuka (Honorary         Overall comments on the
                                 President, MOF Policy            entire report:
                                 Research Institute; Professor,   Fumikatsu Tokiwa (Special
                                 Chuo University) and             Advisor, Kao Corp.),
                                 Yutaka Harada (Vice              Tsuyoshi Takagi   (President,
                                 President, MOF Policy            Zensen Doumei),and
                                 Research Institute)              Masahiko Aoki (President,
                                                                  Research Institute of
                                                                  Economy Trade and Industry,
                                                                  IAI)




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