Priorities for the Japanese Economy in 2016 (January 2016)

What Future Are We Trying to Realize for Our Society with Economic Growth?

Fellow, RIETI

Possibilities and limitations of growth policies

In 2016, we will see the further implementation of concrete measures toward the realization of a "society in which all citizens are dynamically engaged," a new goal advocated by the government of Prime Minister Shinzo Abe. While the original three arrows of Abenomics--i.e., aggressive monetary easing to end deflation, flexible fiscal measures to stimulate the economy, and further deregulation to promote private-sector investments--need to be evaluated for their actual effects at some point in the future, the new set of measures can be defined as a move to add new aspects to reducing constraints on labor supply by reinforcing measures to address an aging population and low fertility, building on the basis of the original three key policy measures. In any case, economic growth is the primary policy goal, suggesting that stagnant growth, a problem the Japanese economy has been facing ever since the burst of the economic bubble, remains a major policy challenge. We have been tackling this problem for nearly two decades. And yet, despite this length of time, putting an end to the post-bubble era of the Japanese economy will be difficult so far as the homogeneous economic structure remains unchanged and Japan continues to face similar policy challenges. Thus, the same era--one that is ongoing and referred to as the "lost two decades"--will likely continue in 2016. Still, I would like to consider some issues about our perceptions of economic growth.

Previously, I discussed the historicity of economic growth and the limitations of deregulation theories, pointing out some potential problems with economic policies in recent years (Note 1). Driven by an increase in the workforce population and productivity gains, Japan's gross national product (GNP) has grown year by year. We have long defined this phenomenon as "economic growth," which has come to be widely seen in more recent years as a goal that should be achieved by government policy measures. Although various policy measures have been employed, those focusing on a market-based allocation mechanism have prevailed, as indicated by the fact that deregulation theories have been dominant for years (Note 2). However, as I pointed out earlier, economic growth is not a product of the development of a mature market mechanism alone. The organization of the labor process as human activity has been an important factor for economic growth. Therefore, whether deregulation fosters economic growth is not self-evident, and it is important to consider the roles of corporations (Note 3). This time around, I would like to briefly examine, under the light of the same sort of interest and from the perspective of industrial structure, the implications and limitations of a future society as seen through the lens of economic growth as a measure of progress.

Characteristics of service industries

The end of Japan's high growth period came under the influence of two major factors: 1) limitations to productivity improvement resulting from high-mix, low-volume production, a manufacturing practice that reflects increasingly diversified consumer preferences, and 2) a shift in the industrial structure toward a service-driven economy, which occurred in part as a result of manufacturers seeking to discriminate their products from those of their rivals (Note 4). In examining economic activities by focusing on the industrial structure, one important approach is to identify the characteristics of a critical labor process in producing a certain type of goods or services. Mikio Sumiya, an economist who advocated this approach, defined the coal industry as mining work, in which the drilling of coal and its underground transport (i.e., haulage and hoisting) constitute the core labor process (Note 5). Applying the same approach to other industries illuminates the differences between some industries in the industrial manufacturing sector and those in the service sector. The mass production of mechanical finished products, such as automobiles and home appliances, was realized in such a way that resulted in significant savings on labor and hence a remarkable improvement in productivity per worker (Note 6). At the same time, industrial manufacturers are characteristic in that they retain a manual work process and have significant spillover effects on employment. In the era of growth, the allocation of resources within a company guaranteed a fair distribution of income to workers, thereby increasing opportunities for consumers to participate in the market, which in return spurred further mass production to create a positive growth cycle. Such a virtuous cycle, also referred to as the formation of a mass consumption society, was observed in Japan's postwar high growth period. We can say that mechanical industrialization, which had a tendency to lead to improved productivity and an increase in the working population, also tended to be accompanied by the phenomenon of economic growth (Note 7).

A characteristic unique to service industries, as opposed to industrial manufacturing industries, seems to lie in the fact that their development cannot be attributed solely to improved productivity. For instance, in the case of the apparel industry, not only improved productivity in each stage of the production process (e.g., reeling, weaving) but also added values such as designs and images have contributed to an increase in sales (Note 8). Certain additional values such as brand power might have helped increase sales per employee, and consumers, for their part, have acknowledged the utility of brands along with competitiveness in prices resulting from improved productivity. Meanwhile, even if a hairdresser improves productivity by increasing the number of customers he or she serves from 20 to 100 per day, it would be highly questionable whether it is a desirable way of working. Seen in this context, it would be difficult for Japan, where the industrial structure has shifted to one dominated by service industries, to achieve high growth (Note 9).

Probably, the important message to be taken from this is not that a growth strategy should focus on other industries as the key driver of the economy because service industries are ill-matched with productivity improvement and economic growth. Rather, if service industries are considered to have become an indispensable element of our society, we need to change our mindsets and think flexibly, breaking away from the conventional wisdom of assuming economic growth as a goal. What is important is to think rationally and recognize that we can no longer define or capture changes in society in terms of economic growth.

I should quickly add that this is not to deny the importance of improving efficiency in service industries or implementing innovative work processes. Such efforts are important if improved productivity is the basis for the development of a certain service industry that would enable people to achieve greater utility or provide them with a larger variety of options to choose from (Note 10). However, we need to look at things from the perspective of whether productivity improvement aimed at economic growth can fulfill demand for social services, such as those provided by nursing care service providers (Note 11). In this regard, it is noteworthy that initiatives for enhancing parenting support and elderly care services under Abenomics are aimed at addressing the problem of low fertility and population aging, i.e., liberating women socially and unleashing them into the workforce, and preventing workers from being forced to quit their jobs to provide care to family members. Still, those measures to promote women's participation and prevent job loss due to caregiving responsibilities are defined as part of the process of achieving the ultimate goal of economic growth. This suggests that we still have our limitations in that, even in today's service-oriented society, we are looking forward to seeing further growth in the GNP as a result of improved productivity.

Identifying policy challenges

What goals should we look to in drawing a future vision of our society? Unfortunately, it is not easy to answer this question. What we can say at the moment is that in tackling such challenges as facilitating women's participation, improving employment opportunities for people with disabilities, and preventing job loss due to caregiving responsibilities by promoting the elderly care service industry, we should aim not only to achieve economic growth but also to increase options for individuals to choose from so as to enrich their lives. Likewise, in promoting service industries, it is important to add new perspectives such as enriching people's lives and livelihoods, rather than focusing solely on economic growth. Seen in a broader perspective, it is not self-evident whether job security can be achieved by economic growth, and it may be necessary for the government to focus on enhancing measures to help displaced workers or promote employment (Note 12). It is hard to expect a remarkable increase in the production of goods and services, and Japan has been struggling with low growth for about 20 years. Taking a rational look at this reality of the Japanese economy makes us realize the need to use a different yardstick to measure the development of our society, which makes it all the more important to take a flexible approach in tackling social challenges. At least for the coming year, caregiving for elderly people and low fertility will remain high on the public policy agenda, and the government's initiative designed to address these challenges--even in the context of realizing "society in which all citizens are dynamically engaged" toward achieving the ultimate goal of economic growth--may become an important step forward in designing the future of the Japanese economy, if such initiatives evolve into public support measures that would provide a greater variety of options for individuals to choose from.

December 25, 2015
  1. ^ Kawamura, S., "The Historicity of Economic Growth: Considerations to be given to growth policies," RIETI Column, August 6, 2013.
  2. ^ More precisely, market-based competition can be explained as follows: The role of the market can be defined as the act of exchange, which is an important element of the human society. If exchange is the primary goal, the pursuit of profit through the price mechanism has been developed as a secondary goal of the act of exchange, because those excelling in the hoarding of money, a medium of exchange, can dominate the process of exchange (Miwa, Ryoichi, Keizai Seisaku-shi no Hoho [A Method for Historical Analysis of Economic Policies], 2012, University of Tokyo Press, Chapter 1; For the hoarding of money based on price differentials, see also Iwai, Katsuhito, Venice no Shonin no Shihon-ron [Capitalism according to the Merchant of Venice], Chikuma-Shobo, 1992, etc.) Among the functions of the market, the pricing mechanism is probably most preferred as a perspective of analysis in economics. And the reasoning for affirming the development of such analytical approach is based on the historical background that the allocation of resources through the pricing mechanism has achieved welfare for people as well as belief in the extremely stretched interpretation thereof. Deregulation theories in recent years can be interpreted as reflecting the logic that the market as a pricing mechanism works to stimulate business-to-business competition and hence is expected to boost productivity. This seems to leave unanswered the question of how we should consider the possibility of the pricing mechanism having instabilities that are potentially market distorting. For instance, recall any episode of huge volatility in the financial markets (see also Takeda, Haruhito, "Shihon Shijo no Hatten to Sono Igi ni kansuru Oboegaki [A Note on the Development Stages of the Capital Market]," Keizai Ronso Vol. 180, No. 1, 2007, Kyoto University Economic Society).
  3. ^ Kawamura, S., "Economic Growth as a Policy Goal and the Importance of Considering the Roles of Corporations," RIETI Special Series on Priorities for the Japanese Economy in 2014, December 27, 2013.
  4. ^ Takeda, Haruhito, ed., Kodo Seicho-ki no Nihon Keizai [Japanese Economy in the Era of High Growth], Yuhikaku, 2011; Takeda, H., Datsu Seicho Shinwa [Ending the Myth of Economic Growth], Asahi Shimbun Publications Inc., 2014.
  5. ^ Sumiya, Mikio, Nihon Sekitan Sangyo Bunseki [Analysis of the Japanese Coal Industry], Iwanami Shoten, 1968.
  6. ^ Hereinafter, Takeda ed., op. cit. and other works cited above are used as general reference.
  7. ^ Strictly speaking, it is not self-evident whether an increase in employment will continue to guarantee an increase in income and thereby help expand markets for industrial manufacturers. It remains a question how resources will be distributed, i.e., whether people will use their increased income for consumption or savings.
  8. ^ Also see Ishii, Susumu, "The Japanese apparel industry and consumer society: 1950 to the 1970s and beyond" (in Japanese with a summary in English) in Socio-Economic History, Vol. 70, No.3, 2004.
  9. ^ We need to be careful in discussing the general characteristics of the service sector that is extremely diverse and encompasses a wide variety of industries. It should be noted that my argument here is about the characteristics of service industries as compared to those of industrial manufacturing industries.
  10. ^ Recent analytical work on productivity in service industries includes: Morikawa, Masayuki, Productivity in the Service Industries: Empirical analyses using microdata (in Japanese), Nippon Hyoronsha Co., Ltd., 2014.
  11. ^ As pointed out repeatedly, we have defined productivity improvement in terms of the concept of growth. Such logic tended to be effective when industrial manufacturers were the core industry. However, it seems ill-advised to try to achieve higher productivity in all sorts of workplaces in today's situation, where service industries dominate.
  12. ^ Regarding these points discussed here, see also Jinno, Naohiko, Ningen Kaifuku no Keizaigaku[Economics for Reviving Humanity], Iwanami Shoten, 1997; and Ito, Mitsuharu, Nihon Keizai o Tou [Questioning the Japanese Economy], Iwanami Shoten 2006.

December 25, 2015

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