Japan: Selected Issues
Author: International Monetary Fund
Publication Date:
13 Dec 2001
eISBN:
9781451820607
Language:
English
Keywords:
ISCR; CR; Japan; firm; real GDP; inflation target; land price; enterprise mobility; startup firm; NTT company; market power; productivity growth; Productivity; Labor markets; Competition; Labor productivity
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The paper discusses the cures available for the economic malaise that can arise because nominal interest rates cannot be reduced below zero. However, a sufficiently high rate of target inflation can prevent the occurrence. The paper highlights a number of important issues in understanding the transmission of shocks between Japan and the Asia-Pacific region. Structural reforms, information technology, and medium-term growth prospects in Japan have been discussed. The paper traced some of the links between land prices and the financial sector, and economic activity.

Abstract

The paper discusses the cures available for the economic malaise that can arise because nominal interest rates cannot be reduced below zero. However, a sufficiently high rate of target inflation can prevent the occurrence. The paper highlights a number of important issues in understanding the transmission of shocks between Japan and the Asia-Pacific region. Structural reforms, information technology, and medium-term growth prospects in Japan have been discussed. The paper traced some of the links between land prices and the financial sector, and economic activity.

III. Structural Reforms, Information Technology, and Medium-Term Growth Prospects1

“Based on the belief that the top priority of the Koizumi Cabinet is the revitalization of the economy and that ‘without structural reform, there can be no rebirth for Japan,’ we will tackle structural reforms, leaving no sacred areas exempt from these reforms.”

[Extract from Prime Minister Koizumi’s speech at the Eighth Meeting of the Council on Economic and Fiscal Policy, May 18, 2001]

A. Introduction

1. The new government of Prime Minister Koizumi has stated its intention to implement a bold reform agenda to return Japan to strong, sustained growth over the medium term. While the details of this policy are still being worked out, it is clear from the reform blueprint of the Council on Economic and Fiscal Policy (CEFP) that addressing the bad loan problems in the banking sector, fiscal reforms, and structural reforms that boost productivity are at the top of the agenda.2 The experience in a number of faster growing industrial countries in recent years certainly underlines the importance of implementing a far-reaching structural reform agenda in Japan.

2. Given that productivity levels in many sectors of the Japanese economy are well below international best standards, there appears to be considerable scope for raising productivity over the medium term. Indeed, Economic and Fiscal Policy Minister Takenaka has suggested that full implementation of the CEFP reform blueprint could raise potential growth to 2–3 percent over the medium-term, compared to staff estimates of around 1½ percent at present. A number of empirical studies have also estimated that considerable output gains would result from the implementation of structural reforms. While the reform program will need to be broad-ranging to maximize its economic benefits, this paper focuses on four areas that are particularly important: the labor market; entrepreneurship; the regulatory structure and competition policy; and the information technology (IT) sector. The chapter is structured as follows. The benefits of structural reform in Japan are discussed in Section B. Section C assesses reforms to boost productivity and growth, while Section D looks at the potential of the IT sector to underpin stronger growth over the medium-term. Section E concludes.

B. The Benefits of Structural Reforms in Japan

3. A number of competing hypotheses have been advanced to explain the extended period of subpar growth in Japan during the 1990s (see Bayoumi and Collyns (1999) and Boltho and Corbett (2000) for concise summaries). Among recent contributions, Hayashi and Prescott (2001) argue that the primary reason for weak growth has been a sharp decline in productivity growth, possibly because of the increasing failure of the traditional Japanese model to adapt to the requirements of a more deregulated and competitive world economy.

4. It is clear that the decline in productivity growth during the 1990s was significant. Total-factor productivity (TFP) growth in the business sector is estimated to have been around ¾ percent per annum, about one-half of the rate experienced in the 1980s, while labor productivity growth slumped from 2¾ percent in the 1980s to 1¾ percent in the 1990s (Table III.1). Scarpetta, Bassanini, Pilat, and Schreyer (2000) found that the decline in labor productivity growth in the nonfarm business sector during the 1990s was largely the result of lower productivity growth in the manufacturing, construction, wholesale and retail, and finance sectors (although, during the decade, the manufacturing sector accounted for almost all of the productivity growth that took place). The decline in labor productivity growth in Japan is in contrast to most other countries in their study where it increased during the 1990s due to modest improvements in the service sector.

Table III.1.

Summary of Business Sector GDP Growth and Its Components

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Source: Scarpetta, et al (2000).

GDP per employee.

Growth of capital/labor ratio, adjusted for hours worked.

1990-97 for Italy and Japan, 1990-96 for the United Kingdom, and 1991-98 for Germany.

1995-97 for Italy and Japan, and 1995-96 for the United Kingdom.

1990-97 for Canada, Italy, Japan and the United States, 1990-96 for United Kingdom, and 1991-98 for Germany.

1995-97 for Canada, Italy, Japan and the United States, and 1995-96 for the United Kingdom.

West Germany for 1980-90.

5. Scarpetta et al (2000) disaggregated labor productivity growth into three components: changes in within industry productivity performance; the impact of the shift of resources between different industries; and residual effects. They estimate that during the 1990s most of the change in labor productivity growth in OECD countries was due to productivity performance within industries, rather than employment shifts across industries. The role of resource shifts between sectors was found to be more important during the 1970s and 1980s. These broad results are true for Japan, although resource shifts between sectors have been less important historically in Japan than in most other countries.

6. Looking at aggregate labor productivity levels, Scarpetta et al (2000) found that Japan lags significantly behind most other OECD countries (Table III.2). In the manufacturing sector, this differential is somewhat smaller, although still significant. The McKinsey Global Institute (2000) found that while productivity levels among Japan’s manufacturing exporters—particularly in the automobile, steel, machine tools, and consumer electronics sectors—exceed those in the U.S. by around 20 percent, in the domestic manufacturing and service sectors productivity is significantly below U.S. levels.

Table III.2.

Productivity Levels in OECD Countries, 1950-98

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Source: Scarpetta, et al (2000).

7. Assessing the potential impact of structural reforms on productivity and economic growth is difficult because of the problems of measuring the impact of current regulations on economic performance and of establishing appropriate benchmarks for the post-reform economic structure. However, a number of attempts have been made to quantify such impacts on the Japanese economy, although the results are very sensitive to the underlying assumptions made. Shimpo and Nishizaki (1997) reported that most studies found that reforms would have a significantly positive impact on real GDP, although the size of the estimated gains varied considerably from 2½ to 18¾ percent of GDP. The estimate made by the Economic Planning Agency (EPA) (1994) was in the middle of this range at 8 percent. A more recent study by the Ministry of International Trade and Industry (MITI) and the Sanwa Research Institute (2000), however, found a much larger impact, with real GDP growth estimated to be 214 percent per annum higher for ten years. This larger estimate of the potential gains is due to the authors’ attempt to include the impact of IT diffusion and the creation of new markets on the economy, which accounts for 1½ percent of the estimated annual increase.

8. In a study of major industrial countries, the OECD (1997) estimated the impact of reforms on a broad range of economic variables based both on the aggregation of the estimated gains in a number of key sectors and from simulations of a dynamic macroeconomic model based on the Interlink model. The results suggest that the long-run potential output gains (over a period of 15 to 20 years) in Japan are of the order of 5–6 percent, broadly in line with those in France, Germany, and Spain, and well above the 1 percent estimate for the United States. A significant part of the potential productivity gains in Japan were found to come from reform of the distribution sector.

9. An alternative approach to the simulations used in the studies cited above is to relate broad indicators of regulation to economic performance. Porter (1998) used a survey of business leaders and government officials to construct a microeconomic competitiveness index and found that this index was a significant explanatory factor in standard cross-country growth regressions. Similarly, Dutz and Hayri (2000) used a wide range of variables that attempt to capture competition policy, market structure, and enterprise mobility (entry and exit of firms) in different countries, and again found that such variables are significant explanatory factors in standard cross-country growth regressions.

10. In terms of the indices that have been constructed to measure structural rigidities or competitiveness, Japan tends to fair relatively poorly. These indicators generally suggest that structural rigidities in the Japanese economy significantly exceed those in the faster growing industrial countries, although they are in line with many of the Euro area countries (Table III.3 and Figure III.1). For example, in Porter’s Microeconomic Competitiveness Index, Japan ranks eighteenth out of the fifty-two countries considered (sixth out of the G-7 countries, ahead of only Italy), while in the Lehman Brothers Structural Policy Index, Japan ranks twelfth out of the 21 OECD countries (see Edwards and Schanz, 2001). Broader indicators of world competitiveness published by the International Institute for Management Development and the World Economic Forum that combine a wide range of macroeconomic and microeconomic variables with the results of surveys of businesses yield similar conclusions.

Table III.3.

Surveys of Global Competitiveness

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Source: International Institute for Management Development; Babson College; and partly reproduced from Deutsche Bank Foreign Exchange Research, April 2001.
Figure III.1.
Figure III.1.

Product Market Regulation and Per Capital Real GDP Growth in OECD Countries

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Sources: Nicoletti, et al (2000); and staff estimates.

C. Structural Reforms to Raise Productivity Growth

11. The results of these empirical studies and the analysis of cross-country productivity data suggest that considerable benefits could accrue to the Japanese economy from the implementation of a bold and broad-ranging structural reform program. This section looks in more detail at a number of areas where reforms could yield particularly significant benefits.

Labor market

12. The flexible labor market in the United States has been an important aspect of its strong economic performance during the 1990s and the rapid spread of new technologies and production techniques (Council of Economic Advisors, 2001). Labor market flexibility encompasses both workers with desirable skills being able to switch to more rewarding jobs and firms being able to adapt their work force to changing economic conditions. It is particularly important in high-technology industries where the pace of innovation and industry evolution is especially rapid.

13. However, a number of indicators suggest that while labor compensation is quite flexible over the business cycle, the Japanese labor market is not very efficient at reallocating labor between firms and across sectors. The inability or reluctance of firms to adjust their labor force appears to have been an important factor behind the decline in productivity growth during the 1990s. The concurrent increase in the unemployment and vacancy rates since the mid-1990s, as seen in the outward movement of the Beveridge Curve, and the rise in the structural unemployment rate indicate an increasing mismatch in the labor market (Figure III.2).3 The proportion of those unemployed for over one year in total unemployment has also risen from 15 percent in 1993 to 26 percent in early 2001. Significant mismatches between the supply and demand for labor in key industries also underscores the failure of the market to reallocate labor (Figure III.3).

Figure III.2.
Figure III.2.

Japan: Developments in Structural Unemployment

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Sources: Ministry of Public Management, Home Affairs, Posts and Telecommunications; Ministry of Health, Labour and Welfare; and staff estimates.1/ Definition of the unemployment rate here excludes the self-employed from the workforce.
Figure III.3.
Figure III.3.

Japan: Labor Sufficiency 1/

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Source: Bank or Japan, Tankan Survey.1/ Indices indicate the proportion of firms that responded that they had excess (Insufficient) labor.

14. From an international perspective, Japan has one of the least mobile workforces in the OECD. For example, labor turnover (which measures the movement of individuals into and out of the workforce) in Japan is about half that in France and Germany and about one-fifth that in the U.S., while the average job tenure of men in Japan is the longest among large OECD countries (job tenure of all employees is slightly below Italy because of the shorter average tenure of women) (OECD, 1997) (Table III.4). Genda and Rebick (2000) find that there is a high rate of job-changing among Japanese under the age of 30, but then the proportion who settle into long term jobs is very high.

Table III.4.

Average Tenure, 1995

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Source: OECD Employment Outlook (1997).

15. A number of features of the Japanese employment system help explain the relatively low degree of labor mobility. Among the most important are the practices of “lifetime employment” and seniority-based wages which act as disincentives for workers to change jobs (underpayment in early years of work is expected to be compensated for in the future, and workers are therefore inclined to stay with a firm until their intertemporal wages are balanced) and for firms to hire older workers.4 Firm-specific knowledge acquired through on-the-job-training—another feature of the lifetime employment system—has also tended to make skills less transferable to other firms. Widely shared social stigma towards losing jobs and/or being jobless has also induced incumbents to remain in their positions and not risk changing jobs, while pension schemes designed for traditional employment practices have lacked portability (although the recent enactment of 401-k style private pension legislation should help to begin to address this).

16. However, other institutional factors have also been important in impeding labor market flexibility. Japanese employees enjoy high levels of protection from dismissal, both because trade unions have put employment protection ahead of wage gains and because labor laws are strictly interpreted. While the employment protection legislation itself is relatively liberal, and dismissing employees is a basic right of employers, case law has strengthened employee protection by introducing strict conditions under which employers may dismiss workers other than for malfeasance. Specifically, before an employer can dismiss workers it needs to be able to show that it has excess labor, that it has tried every other alternative, that it has an objective way of choosing its target, and that it has reached an agreement with the union. The OECD (1999a) find that Japan ranks among the stricter OECD countries in terms of employment protection legislation. Yashiro (1999) finds that in the majority of cases where large firms have tried to dismiss workers, case law has found their dismissals to be invalid.

17. A number of changes have taken place in the labor market in recent years. Some evolution away from the “lifetime employment” and seniority-based wage systems has occurred, although views differ on how widespread this is, and the government has not actively targeted the issue.5 The government has, however, introduced a number of measures to improve the functioning of the labor market. For example, the professions that can be handled by private job placement and temporary employment service (“job dispatching”) agencies were expanded in late 1999 to give the private sector a greater role in the job search and temporary employment markets. Further, the social safety net was enhanced in April 2001 by extending the maximum term of unemployment benefit payments for middle- and old-aged workers who were involuntarily separated from their previous jobs from 300 to 330 days.

18. However, significant impediments to a flexible labor market remain. There has been little progress in easing existing employment protection legislation, while government policies to address the increasing skills mismatch have not yet been successful. Important sectors such as construction and medical services are on the negative lists that preclude private job placement and dispatching agencies from operating in these areas. Publicly supported retraining programs to help the unemployed obtain the skills needed to re-enter the workforce have often been ineffective due to their lack of customization and specialization, and international experience suggests that greater private sector involvement is needed to make programs more effective (OECD, 2000b). Further, while the new private (401-k style) pension legislation could ease the process of switching jobs for employees, it is not clear to what extent these pensions will develop under the existing tax system. Lastly, despite the recent lengthening of the duration of unemployment benefits, this may still not be enough to provide an adequate safety net for the unemployed.

Barriers to entrepreneurship

19. The formation of new businesses plays a crucial role in the growth process, being a manifestation of new ideas and products and an important part of the resource reallocation process in response to a changing economic environment. However, the rate of new business start-ups in Japan is low by international standards, and has declined over time compared to the broadly stable rate of start-ups in the U.S. (Table III.5 and Figure III.4).6 While the low level of new business formation was not a constraint to the high growth rates that were achieved until the late 1980s, when growth relied heavily on intra-firm expansion, there are a number of reasons why the decline may be a concern now (Imai and Kawagoe, 2000). First, the end of the growth process relying on technological catch-up has made it necessary for companies to be more innovative, and deregulation and globalization have opened up new opportunities and competitive challenges. In this environment, large, established, companies may lack the flexible organizational structures and entrepreneurial abilities to respond quickly to changing market circumstances. Second, evidence from Japan suggests that, despite the past reliance on existing companies to drive the growth process, younger and smaller companies still tended to grow faster, implying in turn that a key source of growth momentum could be deteriorating with the decline in the rate of start-ups.

Table III.5.

Indicators Related to Entrepreneurship

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Source: Partial reproduction of Imai and Kawagoe (2000).
Figure III.4.
Figure III.4.

Business Formation and Dissolution 1/

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Sources: Cabinet Office; and U.S. Small Business Administration.1/Data for business formation and dissolution in Japan and the United States are not directly comparable due to differences in definition and intervals.

20. A number of factors are generally believed to affect the incentives for new business start-ups, including the availability of risk capital, the legal infrastructure, the administrative processes that need to be met, flexibility of the labor market, and demographic factors (young people are likely to be more entrepreneurial). In Japan, cultural factors that attach a social stigma to those who fail in their attempt to start a new business could also be added.

21. The availability of finance, including venture capital finance—a form of private equity that targets startup firms primarily in emerging industries—is essential for new business formation and the development of new technologies. Venture capital firms also provide guidance and other forms of support to operations that are needed by small start-up companies. However, given the domination of bank intermediated finance and the relatively underdeveloped nature of the securities markets, the availability of equity capital to early stage start-ups has generally been lacking in Japan. Venture capital is supplied primarily through the financing arms of banks and other financial corporations, and has tended to focus on the later stages of firm development or the financing of leveraged buyouts of existing firms rather than funding the creation of new ones. Imai and Kawagoe (2000) estimate that 38 percent of new venture capital investment went to companies that were over 20 years old in FY1996, a further 20 percent to those between 10 and 19 years old, and less than 25 percent went to those less than 5 years old. Venture capital has also been deterred by tight listing requirements that make it difficult to take young companies public and may explain the emphasis on investment in later stage companies.

22. The administrative burdens placed on a prospective entrepreneur are also an important factor. Nicoletti, Scarpetta and Boylaud (2000) ranked Japan thirteenth out of 21 countries in terms of the administrative burdens for start-ups, based on the number of procedures, the number of services, delays in the procedures, and direct and indirect costs. Imai and Kawagoe (2000) suggest that it takes twice as long and costs about ten times as much to start a business in Japan compared to the U.S.

23. The government has taken a number of measures to stimulate business start-ups. The Basic Law on Small and Medium-sized Enterprises was revised in 1999 to shift policy away from protecting these enterprises toward providing support for new business creation. The New Business Creation Promotion Law, originally introduced in late 1998, was expanded in 1999 to provide partial exemption from the provisions of the Commercial Code and greater financial support to create a more conducive environment for starting new businesses.7 The Industrial Revitalization Law of 1999 also offered tax incentives to promote start-ups, while the so-called “Angel Tax,” expanded in 2000, introduced preferred treatment on both realized gains and losses from investment in nascent firms to attract investors. The recent seven point plan has also suggested that additional tax incentives will be considered for new companies. A series of new capital markets have been established to facilitate the transaction of shares of new firms, including the New Market, NASDAQ Japan, and the Market of High-growth and Emerging Stocks (MOTHERS). The financial “big bang”, by easing entry into the securities business, has also reduced the cost of IPOs. However, the still limited availability of venture capital, substantial administrative burdens, and rigidities elsewhere in the economy remain disincentives to business formation.

Regulatory structure and competition policy enforcement

24. Controls on entry act as important impediments to market competition in a number of key sectors of the economy. For example, in the retail sector, the Large Scale Retail Law (LSRL) (in effect until mid-2000) tightly regulated the entry of stores larger than 1,000 square meters, a relatively low threshold by international standards. In June 2000, the LSRL was replaced by the Large Scale Retail Location Law (LSRLL). Under this law, new stores over 1,000 square meters need to obtain the approval of prefecture governments subject to their meeting social screening criteria, and, in practice, this legislation still appears to impede the entry of large retail stores into the market. The statutory period in which an application to establish such a store must be processed, at eight months, is also long. As a consequence of the restrictions placed on the entry and operations of establishments in the retail sector, Boylaud (2000) ranked Japan as having one of the most restricted retail distribution sectors among OECD countries.

25. Restrictions on large stores have been designed to protect small shops from competition, with the aim of safeguarding the employment and amenities they provide. As a consequence, the retail sector in Japan is dominated by small establishments (“mom-and-pop” stores) which account for 55 percent of retail employment, while the market share of the national retailers has remained almost unchanged since the mid-1980s compared to the significant increase that has been seen in the U.S. (McKinsey Global Institute, 2000). The restrictions placed on large-scale stores have a number of negative consequences: they limit the services that new retail formats can offer consumers; they slow down consolidation and modernization in the retail sector; and they reduce firms’ market power over suppliers and consequently have implications for efficiency further up the supply chain (Boylaud, 2000). As large retail firms, or firms with co-operative arrangements, are generally found to be more innovative than small independent firms (OECD, 1997) this market structure leads to a lack of investment in technology and advertising and weak merchandizing, which in turn hampers productivity. Indeed, McKinsey Global Institute (2000) estimate that productivity in the retail sector in Japan is only about one-half that in the U.S.

26. Another area is telecommunications, which has become one of the most important infrastructures for business operations in the modern economy, particularly given the increasing role of the IT sector. Telecommunications liberalization in Japan began quite early (in 1985), but the degree of competition that has been introduced varies significantly across different segments of the industry (Box III.1). While the cost of long distance and international calls and mobile phone services have declined rapidly since the liberalization in the respective sectors, competition in the local telephone remains limited. Despite the split of NTT into regional firms (and a long distance service provider) under a holding company in 1999, its size and large network have continued to sustain its dominance in the domestic local call market, and the cost of local telephone services, which include high connection fees and charges based on the duration of the call, are high by international standards. In turn, this affects the spread of new services, including internet access. A number of factors have constrained competition in this important sector of the market including: the lack of clear information to applicants on the minimum requirements to receive licenses, high interconnection charges, the lack of transferability of telephone numbers (which confers an advantage to the incumbent), and fragmented regulations on rights of way and facility sharing (OECD, 2000b).

Developments in Japan’s Telecommunications Industry

Japan was among the first countries to take steps toward deregulating its telecommunications industry. After over 30 years of segmented monopoly in domestic and international calls, competition in the Japanese telecommunications market was first introduced in 1985, with the entry of new common carriers (NCCs) in long-distance and international services, followed by the privatization of Nippon Telegraph and Telephone (NTT) in 1985. By comparison, in the United States, the liberalization of inter-state services took place in 1980, separation of regional operators from AT&T into regional monopolies in 1985, and liberalization of local markets in 1996. Liberalization in Japan’s mobile phone market took place in 1988. Boylaud and Nicoletti (2000) classify Japan under the most liberal group of countries in terms of the telecommunication regulation, along with Canada, the U.K., the U.S., Sweden and Australia.

Regulation of Entry, 1998

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Source: Boylaud and Nicoletti, 2000.

Initially a duopoly.

Duopoly 1984-91.

Deregulation has led to significant competition in some markets, and has resulted in a reduction in telephone service charges. Competition has been most notable in the mobile phone sector as a result of the deregulation, with the new carriers accounting for over 40 percent of mobile phone contracts by early 2001. The market share of the NCCs has also expanded substantially in the international and long distance sectors, to about 40 and 50 percent, respectively. Telephone charges in these markets have declined substantially during the 1990s, with cellular phone charges falling by over 60 percent and tariffs for international calls by one half.

uA03fig01

Telephone Charge in Japan

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications; Bank of Japan; and staff calculations.

Competition in local telephone services is, however, still very limited as deregulation has fallen far short of that in other markets. NTT has retained its virtual dominance in the local telephone market even after it was split into two regional and one long distance operators in 1999.1 While network connection charges have fallen by over one third since 1995, the price of local phone calls (mostly charged on the duration of calls) have not fallen as fast as for cellular and other services—in Tokyo, the price remained some 50 percent higher than that in other major foreign cities in 1999 (MOPT, 2000)—and the setup costs to acquire a telephone number have stayed high. Consequently, the number of mobile phone subscriptions exceeded that of fixed phone lines in late 2000.

1Although varying in extent, this feature of the local market lagging behind other markets in the development of competition is shared in other countries—in the U.S., the local market was liberalized in 1996, but new entrants’ sales remained below 4 percent of the total in 1998.

27. To promote greater competition, recent legislation has, for example, prohibited dominant operators from unreasonably discriminating against other operators and required them to create firewalls between companies within their corporate group. NTT companies have also been permitted to expand their operations into other sectors of the telecommunications market.8 A carrier pre-selection system was also introduced in May 2001. Although the network connection charges to NTT will be reduced by 22½ percent by 2003 (from the 2000 level), the resulting costs will remain high by international standards, In addition, further regulatory reform to keep pace with industry developments (such as interconnection with the CATV network and innovations in the IT sector) will be needed.

28. Vigorous enforcement of the competition policy framework is also required. The basic competition law in Japan—the Antimonopoly Act (AMA)—prohibits unreasonable restraints of trade, monopolies, unfair practices, and anti-competitive mergers, and provides a generally sound legal basis for competition policy. Exemptions to the Act have, however, undermined its role, although these have been greatly reduced in recent years (for example, exemptions previously given to the electricity, gas, and railway industries were removed in June 2000). However, although legal enforcement by the Fair Trade Commission (FTC)—which is attached to the Ministry of Public Management, Home Affairs, Posts, and Telecommunications (MPHPT)—is becoming more vigorous, it remains limited (OECD, 1999b). The CEFP’s reform blueprint emphasizes that a more effective competition policy is needed to advance the role of market forces in the economy, and highlights the importance of strengthening the role of the FTC, including by expediting investigations and improving transparency. To do this, the FTC needs to have adequate resources and the appropriate structure to give it the independence and neutrality to carry out its mandate.

29. In some key sectors—including telecommunications, electricity, and gas—there is no clear separation of the government’s regulatory and policy functions. For example, MPHPT is the regulator and policy maker in the communications field, while the Ministry of Economy, Trade, and Industry (METI) plays a similar role in the gas and electricity sectors. This is in contrast to many other OECD countries where independent regulators have been established.

D. The Role of the Information Technology Sector

30. The significant contribution that the IT sector has made to growth in a number of industrial countries in recent years has been well documented. The IT sector has also been an important engine of growth in Japan during the second half of the 1990s, contributing significantly to exports, production, and investment. Japan is the second largest IT producer in the world, accounting for around one-quarter of total production in 1997 (OECD, 2000a), with a particular concentration in consumer audio/video and office equipment, electronic components, and mobile phones. Investment in IT-related goods has increased significantly in recent years. Shinozaki (2000a, 2000b) estimates that the share of IT investment in business capital expenditure was 15 percent in 1997—broadly in line with estimates by Daveri (2000)—almost double the level in 1993. METI, using a broader definition of IT investment, estimate that the share of IT expenditure in business investment doubled between 1993 and 2000 to 28¾ percent.9 The share of expenditure on IT-related goods and services in private consumption rose from 5–51/2 percent before 1994 to 6½ percent in 1999 (DBJ, 2000), while the penetration of PCs and the number of people with access to the internet increased sharply during 1998–2000, the latter partly due to increased access via mobile phone.

31. Recent studies have found that the contribution of IT capital deepening to labor productivity growth has increased in recent years. EPA (2000) find that the contribution during 1996-99 was ¾ of a percentage point per annum, compared to zero during the first half of the 1990s, while METI (2001) estimate the contribution at ½ a percentage point during 1995–2000. Goldman Sachs (2000) estimate a larger impact of 1 percentage point during 1996-99, compared to ½ percentage point during 1990-95. They also find a significant spillover from IT capital to TFP, although the contribution has not increased in recent years. Further, Shinozaki (2000a) estimates that IT investment has raised potential growth in Japan by ¼ of a percentage point (although this is less than half of the estimated impact in the U.S.).

32. Despite this growth in IT usage and its increasing importance to productivity growth, there are grounds for believing that the role of the IT sector could increase further in the future. On most measures, IT usage in Japan remains lower than in the U.S., U.K., and Australia, although above that in the Euro area (Table III.6). For example, despite the near doubling of IT expenditure as a share of business investment in Japan between 1993 and 1997, it remained below the rates in the U.S., U.K., and Australia (Daveri, 2000). Further, the share of IT capital in the total private capital stock in Japan was only 8 percent in 1996, compared to 19 percent in the U.S. in 1994 (Shinozaki, 2000a). IT usage by consumers is also still comparatively low. Despite the strong rise in recent years, internet penetration and access to PCs considerably lags that in the U.S. and Australia, while internet access for educational purposes remains low. The use of electronic commerce in Japan is also minimal, whereas in the U.S. it has become a significant alternative means of shopping. Further, despite the increased contribution of IT capital deepening to labor productivity growth in Japan in recent years, this contribution remains somewhat below that in the U.S. and Australia (although on par with the U.K. and Europe) (Table III.7).

Table III.6.

Selected Indicators on IT Production and Penetration

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Source: OECD; International Telecommunication Union; Lehman Brothers; and Japanese authorities.

In percent of world production, as of 1997 (OECD, 2000).

In percent of total business investment, as of 1997 (Daveri, 2000). Figures in brackets are estimates by Shinozaki (2000a) as of 1997.

In percent of total private capital stock (Shinozaki, 2000a). 1996 for Japan and 1994 for the U.S.

As of 1998 (Shinozaki, 2000b).

As of 2000 (ITU). Figures in brackets indicate percentages in 1998.

As of 2000 (Japanese authorities for Japan, U.S., Australia and U.K., and ITU for Germany and France). Figures in brackets indicate percentages in 1998.

As of 1999 (Japanese authorities).

In percent of total transactions, as of 2000.

As of 2000 (Lehman Brothers, 2000).

Table III.7.

Contribution of IT Sector to Labor Productivity Growth

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Sources: Japanese authorities; Oliner and Sichel; Goldman Sachs; and IMF.

EPA (2000) for 1990-95 and 1996-99, and METI (2001) for 1995 2000.

33. A number of studies have reached similar conclusions on the factors that are preventing the further spread of IT. These include:

  • The limitations of the existing network, with the relatively high cost of IT usage and slow data transmission speeds. While internet access costs in Japan are similar to those in the U.S., high telecommunications charges push total access costs to 2–3 times the level in the U.S. (Figure III.5). Meanwhile, Japan’s internet is commonly built on ordinary voice lines, and the penetration of high-speed internet connection services using CATV lines, DSL, or optical fiber cables, is minimal (Figure III.6).

  • Acceptance of the benefits of IT may only be slowly developing. An international corporate survey conducted by METI (2001) found that IT investment in Japan tends to be targeted at improving the efficiency of existing operations and transactions, rather than at more far-reaching changes in the corporate structure and operations. For example, while Japanese firms were found to invest more in software that helps product design than their counterparts in other industrial countries, their investments in the areas of resource planning, supply chain management, and customer relations were less. The METI report also identified a lack of awareness of the potential benefits of IT among top management as a factor holding back greater usage. In Japan, more firms use private lines than the internet for business-to-business e-commerce, suggesting that a significant proportion of transactions are taking place within corporate groups rather than with external clients.

  • Structural rigidities may also constrain companies from realizing the full benefits of IT. The lack of competitive pressures in some segments of the economy are likely to reduce the need for companies to innovate and become more efficient, while inflexible labor markets constrain the productivity benefits of introducing new technology. Meanwhile, impediments to new business start-ups may limit technological innovation. Social infrastructure, including education, the judicial system, and the government’s own operations may also be constraints. For example, the lack of IT education programs has resulted in a shortfall of IT professionals. Further, the small number of judicial professionals has limited the ability to deal with legal issues related to e-commerce, while the continued reliance of the government on paper-based operations discourage firms from changing their way of business administration.

Figure III.5.
Figure III.5.

Internet Utilization Charges 1/

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Source: Ministry of Economy, Trade and Industry (2001).1/ Charges for connecting through dial-ups.2/ Figures for countries charging by the number of calls (U.S., Australia, and Finland) are calculated by assuming 30 calls in 20 hours per month and 50 calls in 40 hours per month.3/ Flat-rate Internet services for Germany and the U.K.
Figure III.6.
Figure III.6.

High-Speed Internet Connection Dissemination Rates 1/

Citation: IMF Staff Country Reports 2001, 220; 10.5089/9781451820607.002.A003

Source: Ministry of Economy, Trade and Industry (2001).1/The ratio of high-speed Internet users to total Internet users.2/Includes nascent high-speed media--i.e., wireless, satellite and fiber-optic cable systems--wherever data are available.

34. If such impediments were removed, IT investment could have a substantial impact on the medium term performance of the economy. Shinozaki (2001b) estimates that IT investment in Japan stimulates production by a factor of 2.3, compared to 1.9 for total private nonresidential investment, while ¥1 trillion of IT investment creates—both directly and indirectly—an additional 80,000 new jobs. Assuming IT investment of ¥10 trillion over the next ten years, broadly in line with that in the U.S. during 1992–2000, 800,000 new jobs would be created, sufficient to reduce the unemployment rate by 1 percentage point.

35. Recognizing the critical role of the IT sector in the economy, the government formulated the “e-Japan Priority Policy Program” in March 2001. The goals of the program are to create an international best standard information and communications network, upgrade education and training in IT-related fields, promote e-commerce, establish an “e-government,” and secure safety and public confidence in the network. The program also identifies the policies to meet these goals, including greater competition in the telecommunications industry and the reform of e-commerce regulations.

E. Conclusions

36. The decline in productivity growth has been an important factor behind Japan’s poor economic performance during the 1990s. Further, productivity growth in Japan has lagged that in faster growing industrial countries, while estimates suggest that productivity levels in the domestically-oriented sectors of the economy are well below those in the U.S. Consequently, there would appear to be substantial scope for structural reforms to raise productivity and boost growth potential over the medium-term.

37. The blueprint of the CEFP contains a bold and broad-ranging reform agenda that will need to be implemented if the full potential of the economy is to be unlocked. However, there are a number of areas where the payoffs to reform could be particularly significant:

  • Labor market. A flexible labor market is an important component of a dynamic economy, being necessary to aid the reallocation of resources from declining sectors to the new areas of the economy on which Japan’s future growth will increasingly depend. However, at present, there are a number of impediments to the movement of labor, including the strict interpretation of existing employment legislation and the continued prevalence of the “lifetime employment” and seniority-based wage systems. Reforms in these areas, as well as other measures to improve the functioning of the labor market, will be important to increase labor mobility.

  • New business formation. Creating the climate and conditions whereby new firms are able to enter existing markets and establish new ones is an important aspect of a more competitive and efficient economy. However, the rate of new business formation in Japan has declined and is low by international standards, suggesting that this aspect of the growth process is lacking. Reforms have already been undertaken to encourage new start-ups, including the development of equity markets for new firms, but the limited availability of venture capital, substantial administrative burdens, and rigidities elsewhere in the economy remain important disincentives.

  • The regulatory environment. Impediments to competition remain in a number of key sectors. Regulations governing large scale stores limit the scope for economies of scale and efficiency gains in the retail sector, while in the telecommunications sector the lack of competition in the local market means that call charges remain high by international standards. The enforcement of existing competition policy also needs to be strengthened to advance the role of market forces in the economy.

38. The further development of the information technology sector over the medium-term will be important. While IT usage in Japan has expanded quite rapidly in recent years, there appears to be scope for further increases, although this will both depend on addressing some of the structural impediments highlighted above—including more flexible labor markets to encourage firms to introduce labor saving technical innovations and greater competition in telecommunications to lower connection costs and improve data transmission speeds—and developing a greater acceptance of the benefits of IT among corporate management. The government’s recently released “e-Japan Priority Policy Program” is an important step toward the further development of the IT sector.

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1

Prepared by Tim Callen (ext. 38873) and Takashi Nagaoka (ext. 37613).

2

See Council on Economic and Fiscal Policy, “Structural Reform of the Japanese Economy: Basic Policies for Macroeconomic Management.” The report was endorsed by the Cabinet on June 26.

3

The structural unemployment rate is estimated to have risen from around 2 percent in the early 1990s to 3¾-4 percent in 2000 (Ministry of Health, Labour, and Welfare).

4

The term “lifetime employment,” which describes the “implicit long-term employment contract for the regular workforce” (Kato, 2001a), may be misleading as most workers leave firms before reaching legal retirement age (Genda and Rebick, 2000).

5

Genda and Rebick (2000) argue that change has been gradual and that the traditional employment system will endure, while, Kato (2001b) endorses the notion that an increasing number of firms are introducing performance-based wage system to replace parts of the seniority-based system.

6

The rate of business failure is also lower in Japan than in the U.S., although it has picked-up in recent years reflecting the change in the economic environment and the introduction of the Civil Rehabilitation Law in April 2000 which provided a court led debtor-in-possession corporate reorganization process similar to the U.S. Chapter 11 procedure. However, while in the U.S. the rate of new business formation has always exceeded the rate of business failures, in Japan the opposite has been the case in the 1990s.

7

The exemptions include: the relaxation of restrictions on the distribution of stock options (the ceiling was raised from 10 percent to 33 1/3 percent of outstanding shares) and the potential recipients expanded to include outsiders such as consultants and programmers in addition to company executives and employees; and greater flexibility for issuing non-voting equity (the ceiling for such issues was raised from 1/3 to 1/2 of outstanding shares) and the grace period during which the absence of a dividend payment does not result in the conversion of the shares to common stock was extended from 1 year to 3 years.

8

The maximum foreign ownership of NTT stocks was also increased from 20 percent to 33 percent. An advisory board to the former Ministry of Post and Telecommunications recommended in late 2000 that consideration be given to reducing the NTT holding company’s stake in the NTT group of companies (100 percent of NTT Communications, 64 percent of NTT DoCoMo, and 54 percent of NTT Data, as of end March 2001) if greater competition was not seen after two years following the enforcement of the law. While this provision was not included in the legislation, the Minister in charge has requested that NTT reduce its ownership of these companies, improve its efficiency, and open up its networks to competitors who do not have their own lines.

9

Calculations by the Research and Statistics Department of METI.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Japan: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2001: Issue 220
Publisher:
International Monetary Fund
ISBN:
9781451820607
ISSN:
1934-7685
Pages:
119
DOI:
https://doi.org/10.5089/9781451820607.002

Product Market Regulation and Per Capital Real GDP Growth in OECD Countries

Japan: Developments in Structural Unemployment

Japan: Labor Sufficiency 1/

Business Formation and Dissolution 1/

Telephone Charge in Japan

Internet Utilization Charges 1/

High-Speed Internet Connection Dissemination Rates 1/