A Growth Strategy with Renewable Energies and Human Resources Development as its Core is Urgently Needed

Faculty Fellow, RIETI

A growth strategy entitled the "Comprehensive Strategy for the Rebirth of Japan" was announced following the settlement of the consumption tax hike issue, the top economic agenda for this year. While this course of developments might seem natural, there was no sign that discussions were conducted on the initial goals of the growth strategy and policies and the reason for the growth strategy's necessity now. Thus, it is necessary to go back to this original point and sort out the growth strategy that the present Japanese economy needs.

Growth strategies as considered by economists are policies to reinforce long-term economic growth capacity through improving technologies and enhancing and efficiently utilizing production factors including labor, energy, and capital. However, for some time now, they have included economic policies that stabilize economic fluctuations and which are not categorized as growth policies. Furthermore, for prime ministers of the respective time to try to reflect their economic policies into growth strategies, such strategies are formulated anew with each successor. (See the table.)

Table: Growth strategies announced in and after 2000
Name Month and year formulated Period of plan or forecast
Structural Reform and Medium-Term Economic and Fiscal Perspectives January 2002
(Junichiro Koizumi)
Japan's 21st Century Vision April 2005
(Junichiro Koizumi)
Untill 2030
Outline of Economic Growth Strategy July 2006
(Junichiro Koizumi)
Untill 2016
Direction and Strategy for the Japanese Economy January 2007
(Shinzo Abe)
Medium- to Long-term Fiscal Policy and an Economic and Fiscal Outlook for the Next 10 Years January 2009
(Taro Aso)
New Growth Strategy June 2010
(Naoto Kan)
Untill 2016
Comprehensive Strategy for the Rebirth of Japan July 2012
(Yoshihiko Noda)
Untill 2020
Note: The cabinet names shown in parentheses correspond to the time of the respective strategy formulation.
Note: The Japanese fiscal year (FY) starts in April. For example, FY2002 starts on April 1, 2002 and ends on March 31, 2003.

Since the beginning of the 21st century, as many as seven long- and medium-term growth strategies have been published. This situation contradicts the essential objectives of growth strategies and has led to public interest toward such economic policies.

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The "Comprehensive Strategy for the Rebirth of Japan" prepared by the Yoshihiko Noda administration reveals virtually only rephrased titles and no significant changes in policy content. It is especially surprising that the growth rate targets of 2% real and 3% nominal--the same target numbers that had been introduced before the Great East Japan Earthquake--have remained unchanged. Unfortunately, Japan, which had its structural reforms postponed during the 2000s, does not have the capacity to realize 2% growth today.

Among its specific policies, similar to the Naoto Kan administration's "New Growth Strategy," the Comprehensive Strategy expects employment growth to occur in the social security sector. However, while employment is, in fact, rapidly increasing in the social security sector, especially for the care services, actual output is not significantly increasing, causing negative growth in labor productivity. As a result, wages remain low. Employment growth should be coupled with institutional design that enables efficient management of social security facilities. There appears to have been no discussion on such improvement.

To formulate a growth strategy now, we should humbly reflect upon the lack of policies during the "lost two decades" and be prepared to rebuild the Japanese economy from scratch. Since the collapse of the bubble economy, we have experienced a prolonged economic slump and the unprecedented Great East Japan Earthquake. Today, Japan cannot afford to have cursory policies. Instead of focusing on a particular industry for growth, we should emphasize more cross-industrial policies.

Based on this premise, three pillars for a growth strategy are energy, human resources, and recovery of international competitiveness.

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The energy issue, especially, has arisen again as a restrictive factor of growth due to the severe accident at the Fukushima Daiichi Nuclear Power Plant. The government is currently reviewing three energy mix scenarios for 2030 based on public opinion, but any of them would require the rate of dependency on renewable energies to increase to 25%-35% by 2030. This is a considerably high hurdle to clear considering the fact that the current ratio of renewable energy stands at a mere few percentage points, excluding hydropower generation, but at the same time is providing significant business opportunities.

When Japanese companies faced the oil crisis in the 1970s, they raised the ratio of investment in energy saving and significantly decreased energy consumption units. Dissemination of renewable energies would require reduction of power generation costs and development of new energy control technologies such as the Smart Grid (next-generation electricity transmission grid). During this time, the ratio of research and development investment of Japanese companies increased from 3.8% in 1973 to 19.6% in 1983, according to a study conducted by the Development Bank of Japan. Considering this, the above target is not impossible to achieve, provided that appropriate subsidies are given for energy investment and deregulation relating to construction of geothermal plants is conducted.

The development of human resources, the second pillar, is an area in which target setting and policy measure selection is difficult. The Comprehensive Strategy for the Rebirth of Japan, in its draft, focuses on school education in this area. However, more concerning than the restructuring of school education is the decrease in spending by companies on employee training. While managers of Japanese companies always call for human resources, in actuality, companies' expenditure on training in the late 2000s decreased to approximately 10% of the level at the peak immediately following the bubble era. Also, the ratio of non-regular employees not requiring internal training is increasing.

A study conducted by the author and other researchers at Research Institute of Economy, Trade and Industry demonstrates that an increase in non-regular employment and a decrease in expenditure on intangible assets such as human resources development lead to a decrease in company and industry productivity. Company spending on human resources development, especially for training in response to globalization and technological innovation, are indispensable investments in areas relating to information technology that have been supporting the Japanese economy for the last two decades, and fixed capital formation as well as policy support would be required.

In relation to human resources development, it is worth noting that the proposals made by the Frontier Subcommittee under the Council on National Strategy and Policy suggest development of diverse employment systems including lowering of the retirement age for workers under regular employment. Joji Tokui, professor at Shinshu University, and I made a similar proposal in the mid-1990s. While maintaining human resources development brought about by Japanese-style, long-term employment and in line with the extended working years, the proposed employment system reform intends to develop a fluid labor market for people in their 40s.

This reform inevitably requires changes in the seniority-based wage system. A study by Daiji Kawaguchi, associate professor at Hitotsubashi University, and other researchers demonstrates that workers' productivity is the highest in their 30s. If a wage system matching the productivity curve is introduced, they can be prepared for the risk of people choosing a second career in their 40s.

The last pillar is the recovery of the international competitiveness of Japanese industries. Although attention is being paid this year to the decrease in international competitiveness of home electric appliances including flat-screen television sets, various economic data had already predicted the decline of the Japanese manufacturing industries. Kyoji Fukao, professor at Hitotsubashi University, pointed out in the Keizai Kyoshitsu column dated April 27, 2007 that the productivity of Japanese electric-appliance makers was lower than that of Samsung Electronics and LG Electronics, both of South Korea, in the early 2000s. A "survey on overseas direct investment" conducted by the Japan Bank for International Cooperation in July 2010 also indicated the inferiority of Japanese companies to Korean companies in overseas markets in terms of all capacities including product development, production technology, sales, and management.

It should be noted, however, that the decrease in Japanese companies' international competitiveness is not solely due to their management but also greatly affected by the significant appreciation of the yen following the collapse of Lehman Brothers in 2008.

In discussing the yen exchange rates, while that to the dollar and the euro attract much attention, what is important for Japanese exporting companies are those to the Korean won and the Chinese renminbi (RMB). The yen-to-won rate appreciated by as much as 50% from 2000 to 2012. The yen-to-RMB rate, despite China's rapid growth, appreciated by 10% during the same period. The government should take advantage of the strong yen to support Japanese companies' entry into overseas markets and work to realize adequate exchange rates by purchasing foreign bonds and increasing direct transactions in RMB, thereby expanding the currency exchange markets of the East Asian countries.

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The United States and European advanced countries are all suffering from economic crises. Lessons we can learn from the situation are that we should entrust financial system stabilization policies to the financial authorities and leave the role of setting the post-crisis economy on the road to recovery, including economic structural reforms, to growth strategies.

The "Comprehensive Strategy for the Rebirth of Japan" emphasizes the enhancement of Japan's presence in the world. Formulation and prompt implementation of a growth strategy that attracts other advanced countries' attention would enhance its presence the most and contribute positively to the world.

>> Original text in Japanese

* Translated by RIETI.

August 22, 2012 Nihon Keizai Shimbun

September 13, 2012

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