Service Sector Productivity in Japan: The key to future economic growth

This paper aims to examine three issues: how bad the productivity performance in Japan’s service sector has been; why it is important to accelerate TFP growth in the service sector; and why TFP has stagnated in Japan’s service sector. The main findings of the paper are as follows. First, TFP growth in the manufacturing sector is much higher than that in other sectors, although the manufacturing sector’s share is declining rapidly. For Japan, whose population is in decline, productivity growth in the service sector is key for economic growth. Second, TFP growth in ICT-using sectors declined substantially after 1995. Third, accumulation of ICT assets in Japan was very slow in comparison with other developed countries. Forth, the low level of intangible investment is probably one important cause of the stagnation of TFP; another is that Japan’s service sector has fallen behind with regard to investment in ICT. Fifth, it seems that Japan’s low metabolism also impedes productivity growth. Sixth, firms invest little in on-the-job training and off-the-job training for part-time workers, and the increase in part-time workers may have slowed down human-capital accumulation. Seventh, it appears that Japanese firms have fallen behind in terms of internationalization and economies of scale.