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Overall Condition of the Economy and Industries

Current State

Out of the Long Tunnel of Recession

In 2004, Japanese industry made a comeback out of the dark tunnel of recession it found itself in after the bursting of the economic bubble. Industries are treading a full-fledged path of recovery, and extreme pessimism regarding the future has all but disappeared. Management is beginning to regain confidence.

   With the exception of just a few industry sectors like construction, virtually all sectors saw growth, with the automotive industry as the biggest driver of growth. The three top Japanese automobile manufacturers - Toyota Motor Corporation, Nissan Motor Co., Ltd. and Honda Motor Co., Ltd. - together accounted for FY2003 current income that surpassed two trillion yen. Digital industries centering on mobile phones and electronics, also became pillars that supported economic recovery. Even major consumer electronics manufacturers, which saw sustained stagnation, achieved profitability. This wave also hit the industrial materials manufacturing industry, with specialists estimating that steel and chemical engineering is seeing the highest levels since 1990 - 1991. The growth of global demand, centering on China, is behind this.
   On the other hand, the construction industry is still in the doldrums. It is being affected by lowered public works spending that has resulted from the government's fiscal crunch. Another cause of this stagnation is said to be the fall in construction tender prices resulting from the fact that it has become difficult in recent years to form Dango cartels.

Dango (bid rigging), in which contractors privately form an agreement in advance on bid prices, etc. used to be a habitual practice of the Japanese construction industry. Industries that are heavily dependant on government subsidies and aid are also still seeing a downturn. The agro-industry is a prime example of this.

The Automotive Industry Drives the Japanese Economy

There was a time when production, that is to say the Japanese manufacturing industry, was so overwhelmingly strong that Japan was said to be the "factory of the world." It began shortly after World War II with the textile industry, followed by the steel and chemical industries. From the post-war economic boom onward, consumer and industrial electronics gained strength. However, Taiwan, Korea, and now China caught up with Japan in terms of consumer electronics, and we have seen, for example, related Japanese plants being moved overseas or scaled down.

During the 1980s, Japan was the world leader in semiconductors. At one point, it had an 80% share of the world market for Dynamic Random Access Memory (DRAM) storage elements. But, with the rapid growth of Korean manufacturers and the recovery of American firms, major Japanese players pulled out of this market, one by one. There are no longer any remnants of what used to be an industry that was closely associated with Japan. The same is happening in the case of personal computers. The exception in this field is digital cameras. When OEM (Original Equipment Manufacturer; production under the brand name of another company) is included, digital cameras manufactured in Japan account for a 75% share of the global market.

Even under such a climate, the automotive industry retains a top global position. It is an industry that is representative of Japan in every aspect. Statistics announced by the Japanese Ministry of Economy, Trade and Industry show that value of the domestic production of automobiles has reached nearly 38 trillion yen, accounting for 13% total output by the Japanese manufacturing industry. The Japan Automobile Manufacturers Association estimates that more than 10% of Japanese workers, or roughly 7 million people, are employed in fields related to automobile manufacturing. The number of cars produced in Japan in 2002 reached 8.62 million, as compared with 5.12 million in Germany and 5.02 million in the Untied States. Japan is truly the world's top manufacturer of cars.

There are several reasons why automotives have come to represent strong industry in Japan today and show outstanding performance while other traditional manufacturing industries are struggling. An automobile is comprised of twenty to thirty thousand parts, and combined strength in many fields, such as machine tools, metal molding, robotics and electronics, become essential. In this sense, conditions were favorable for Japan, which has a broad industrial base. Furthermore, the spread of the Just-in-Time production system originated by Toyota, Japan's technological development capabilities as represented by hybrid cars, and the success of offshore production in the US as well as Europe are some of the other reasons.

A Weak Software Industry; Video Games an Exception

Software is one of industries that are weak in Japan. Domestic firms are far behind those of the United States in the development and production of computer software as well as movies and other visual content. The exception is video games, which continues to maintain a high share of the global market. Japanese videogame software accounts for the greater majority of popular videogames in the U.S. As for videogame hardware, more than 70% of sold in America are those of Japanese manufacturers.

The high quality of Japanese manga (comics) and anime (animation) and the plentitude of related human resources are supporting the Japanese videogame software industry. The biggest weak point of Japanese industry, which is basically maintaining favorable conditions, is the financial services industry centering on banking. Through decades following the end of World War II, Japanese banks and financial services were under the strict guidance and supervision of the Ministry of Finance. Banks were not permitted to conduct other financial services, and vice versa. There was no room for individual companies to create and devise original products. A delay in Japan's implementation of deregulation and liberalization resulted in Japan falling behind the U.S. and Europe in terms of competitiveness in this field. Furthermore, even major financial institutions faced the threat of bankruptcy due to the enormous amounts of non-performing loans that were left after the bursting of the economic bubble.

It was not until around 2000 that the move towards the merger, acquisition or partnerships of and between financial institutions was accelerated. As of the autumn of 2004, the Japanese financial services industry has been reorganized into seven major financial services/banking groups: Mizuho, Mitsubishi Tokyo, Mitsui Sumitomo, UFJ, Resona, Mitsui Trust and Sumitomo Trust and Banking. The financial industry, nevertheless, has not yet completely recovered from the effects of the bursting of the economic bubble. UFJ and Resona both recorded losses for FY2003.

It is said that productivity in industries such as agriculture, construction, foods, energy, wholesale and retail, remain at a level that is about two-thirds of the U.S. This is because companies that should otherwise have left the market are lingering through subsidies and protective administration.

The reduction of official regulations leads to a lowering of the burden placed on the people. Administration is streamlined and made more efficient, providing a greater forum for the private sector to exert their strengths. With this as a basic policy, Japan has been earnestly launching on deregulation since the 1980s. The results of such efforts are gradually being seen, but resistance forces still remain strong. The privatization of the Japan Highway Public Corporation has already been decided, and the postal service is scheduled to be privatized in 2007. Whether the privatization of the postal service will proceed smoothly is likely to become a key, for the time being, to forecasting the future of Japan.

History

Demand Created by the Korean War Boosts the Japanese Economy

In the last stages of the Pacific War, Japan was pretty much reduced to ruins as a result of bombing by U.S. Forces, with its industrial infrastructure severely damaged. After the end of the War, there was a serious shortage of supplies, which led to hyperinflation and deflation to counter it. The economy saw continued stagnation. However, the Korean War, which erupted in June 1950, gave a boost that paved the way for the revival of the Japanese economy. A broad spectrum of demand was created by this war, from heavy industry products such as military trucks, locomotives, rail-track materials, oil drums, barbed wire and iron pillars, to services such as transportation and communications. This gave Japan the momentum for it to enter into its era of high growth.

Consumer Boom for the "Three Sacred Treasures" of Japanese Households

Consumer consumption, which had been repressed during World War II through slogans such as, "Extravagance is the Enemy," and "We Shall Not Want until We Win," exploded when post-war chaos settled down in the 1950s. In particular, there was great demand for consumer electronic products such as television sets (monochrome), washing machines and refrigerators. These three items represented an affluent lifestyle and were called the "three sacred treasures." In October 1964, the Tokaido Shinkansen (bullet train) Line commenced operations between Tokyo and Osaka.

This was just prior to the opening of the Tokyo Olympic Games. Consumer demand from the latter half of the 60s shifted to the "three Cs," cars, coolers (air conditioners), and color TVs, and related industries experienced rapid growth.

The Arab Oil Shock and Demise of the Post-war "Japanese Miracle"

In August 1971, U.S. President Richard Nixon announced the New Economic Policy as measures to defend the U.S. dollar. The "Nixon Shock," which temporarily suspended the convertibility of the gold to the dollar as well as introduced new import surcharges, had a swift global impact. The value of the yen, which had been favorable for Japan in terms of exports, was forced to appreciate. This was followed by the first oil shock. The Fourth Arab-Israeli War broke out in October 1973, and Arab oil producers raised the price of crude oil by 70% and imposed an embargo on countries that supported Israel. This had a major impact on Japan, which had been consuming large amounts of oil. The price of not only oil products but also almost all daily commodities rose sharply. Consumers resorted to stockpiling while retailers held back on sales. It was a period of hysteria that saw a double-digit annual increase in commodity prices.

Trade Friction as a Result of Over-dependence on Exports

The second oil shock occurred in 1979. The structure of Japanese industry changed greatly through the two oil crises, and it saw the rise of the fabricating industry which consumed less amounts of energy. The main player shifted from industrial materials manufacturing, with its consumption of a large amount of energy, to the machine industry such as automotives, electronic and electric machinery, and precision instruments.

It was during this time that the world saw the end of the era of Japan's rapid growth. Japan ceased to record the nearly 10 percent annual growth-averages of past years. It not only moved into a period of low economic growth but became ever more dependant on exports. This was not only because domestic consumption was at a standstill but also due to the slowdown in investments. Japan looked abroad for demand. Exports, centering on Europe and the United States, rose sharply while there was little growth in imports. It was difficult for foreign products to cut into the Japanese market because of stagnant domestic consumption, countless restrictive legislation that remained toward imports, and a complex distribution mechanism. With Japan enjoying a trade surplus while its partners recorded deficits, Japan became the target of global criticism and the root of economic friction with other countries. Issues related to the structure of Japanese industry, including closed trade practices which did not welcome entry by newcomers and the high number of government regulations, were singled out for criticism by abroad.

The Bursting of the Economic Bubble and its Repercussions

Japan's path to stabilized growth seemed assured in the late 1980s after Japan had overcome two oil shocks, and Japan re-entered a state of super economic growth. Ear-pleasing phrases such as "Japan as number one" and "the 21st century would be Japan's century" abounded, while share and land prices rose sharply in a short period of time. The Japanese went on a buying spree, snatching up shares, bonds, real estate, and even works of art around the world. The bubble economy, which began in November 1986, continued for 51 months and lasted until February 1991, during which time banks put out loans indiscriminately, and money games of unprecedented scales were unfolded.

The repercussions were disastrous. When the bubble burst, financial institutions found themselves strapped with massive bad loans and were absorbed or went under. The ballooning amount of nonperforming loans gradually began to drain corporate stamina. The once highly-admired Japanese management style, with lifetime employment as one of its major pillars, became an anachronism. The Japanese economy continued to worsen, excess facilities were disposed, and corporate downsizing became a boom. Instability continued, and when it looked at times as if the economy was on the upturn, it would immediately revert to a downward trend.

When deflation and a decrease in consumer prices hit Japan, pessimistic views forecasting that "Japan would sink" was heard. The 1990s was dubbed "the lost decade" for Japan in the sense that the country was too busy cleaning up after the economic bubble to implement any forward-looking measures to revive its economy.

Forecast

Three Key Points towards the Future

Point 1
Aim to Become the Global Leader in Nanotechnology

The Government of Japan and the Nippon Keidanren and other economic organizations have identified leading-edge industries, especially nanotechnology, as priority fields that major investment should be made in. Nanotechnology is thought to lead to "dream-like inventions" such as medication that zeros in on cancer cells, portable fuel cells or resin that will not tear despite its thinness. The Japanese government estimates that the domestic market for nanotech products will reach 20 to 30 trillion yen by 2010. Japan is currently a global leader in the research and development of nanomaterials. In the 1980s, the U.S. Government shifted to a pro-patent (pro-intellectual property) policy, and high federal budget priority was placed on fundamental fields. A similar move by Japan did not come until about 20 years later. For this and other reasons, Japan has been repeatedly suffering bitter experiences in the cutting-edge field research and development race. Genomes (genetic codes) are a prime example. In the decoding of the human genome sequence, completed in 2000, the U.S. contributed roughly 70 percent of the basic map and Great Britain about 20 percent, while Japan accounted for a mere 6 to 7 percent. Japan will draw on this experience as it tackles the nanotechnology development race.

Point 2
Information Appliances Show Potential to Become a Major Hit

There is a big surge in sales of information appliances such as flat-screen TVs, DVD recorder/players, and mobile phones equipped with digital cameras. The information appliance market is expected to surpass 1 trillion yen in 2006, and it looks like the market will become even bigger as products that completely integrate consumer electronics, computers and networks are launched in the future. The Japanese Ministry of Internal Affairs and Communications announced in February 2004 that it will begin drafting communications standards for the connection of all information appliances used in homes.

Point 3
The Falling Birthrate and Growth of the Elderly Industry

It is estimated that that the elderly 65 and older will comprise 35.7 percent of the Japanese population by 2050. As of 2004, home-based services that utilize Japan's Long-term Care Insurance System as well as nursing homes and other facility services are beginning to mark sharp growth. Services for the elderly will, without doubt, become a major industry in Japan.

On the reverse side of the coin in the long-term, Japan's falling birthrate will become the Achilles' heel of Japanese industry. Fewer and fewer children are being born in Japan, and its birthrate in 2003 was a mere 1.29 per woman. This is, of course, not only below the birthrate of the United States but also of northern European countries. The proportion of the working-age population (between 15 and 64) has already been declining since 1996. While the working-age population declines sharply, there is a big surge in pension, healthcare and nursing care expenditures. It is certain that the economy and industry will weaken as a result. One solution is to accept more foreign workers, something that Japan has shown reluctance in up to now. According to one UN estimate, Japan will need to accept an average 160 thousand immigrants per year in order to maintain its working-age population once a full-fledged era of low-birthrates hits. Another solution is to increase the number of women in the workforce. Measures such as enhancing child-care services and providing support for part-time work styles are under consideration.