Why Japan Slept

By Ichiro Suzuki In the October general election, stagnation of per capita income in Japan became one of the issues at long last. Over a past generation, income in Japan has barely changed while the rest of the world became richer. Prior to the pandemic, one of the factors that drew foreign tourists to Japan was price, in addition to the country’s history, food, etc. The size of the economy has not changed much since the early 1990s though some growth was restored in the 2010s up from negative growth. Population started declining slowly after ten years into the 21st century. This makes per capita income essentially unchanged. In the IMF’s latest statistics on per capita income, Japan is ranked No.31, way down from one of the top 3 at the turn of the century. How has the country got here? While so much has been already talked about over the last dozen years or so, it is still worth spending time on how it happened. 1. The internet and a paradigm shift The internet has obliterated the old way of doing business. While the ‘old economy’ was hit hard around the world, Japan suffered disproportionately heavy blows as the champion of the old economy manufacturing. The Japanese way was too geared toward producing hardware in large volumes, as opposed to responding to small needs meticulously that was made possible by the Internet. Being left behind in the new economy, Corporate Japan tried to hold onto its lead in the old economy of manufacturing, thus being dragged into fierce competition from up and coming Asian companies that were catching up fast. Being mired in price competition, Japanese manufacturers struggled to generate profits, being forced to cut costs aggressively. Labor became a major source of cuts, not surprisingly. Their low profits affected salaries and bonuses of their employees negatively, too. 2. Culture Team work, conformity to a group, revering seniors; they are all good attributes of the Japanese society. They have made the country succeed at the time of reconstruction from devastation after WWII. However, having been too perfect ingredients for the economy of mass-production, they became less fit in the world of new economy. While diversity has become a popular buzzwords in Corporate Japan in recent years and independent thinking is encouraged, Japanese schools continue to stress on good old virtues, even though perhaps less so than half a century ago. At corporations, not all organizations are genuinely receptive to independent thinkers, either. Another cultural aspect is propensity to avoid hard-landing, seeking soft-landing so as not to hurt larger than absolutely necessary number of people. Soft-landing, however, does not bring real changes, which can be made possible only at the sacrifice of a large percentage of population. Real changes can be delivered only with a hard-landing. Devastation by WWII proved to be a perfect reset of the country to start all over again. 3. Life time employment This is a derivative of culture. One enters a well established company at the time of college graduation and spends his (usually his) entire career there until retirement at 60. In fact, not too many people spend their entire career with one employer, and more people change jobs these days. Nonetheless, the system continues to be based on life time employment practices. Pay structure is a case in point. While being under-paid when young, employees receive greater amount as they become older, with peak salary at around 50 years old. Such a pay structure was designed when the vast majority of the workforce was Japanese men, who essentially were the system’s beneficiaries. Young foreign nationals often enter a Japanese company, with little intention of staying there for over 30 years. They would want a much quicker pay-back period than 30 years, and hence leave. Gifted young talents do the same, too. Corporate Japan is finding it increasingly difficult to retain talents. 4. Labor laws/ excessive regulations Labor regulations are very protective of workers/ employees. Once hired as full-time employees, they are very difficult to let go. Employers, therefore, try not to hire full-timers as much as possible, instead letting part-time workers do their jobs. Part-timers, who are paid less with fewer benefits, can be let go with ease. This move by employers suppresses salaries and wages, as the same jobs are done by part-timers who are paid less. Rigid labor regulations at the same time are the biggest stumbling block that stands in the way of greater flexibility in the economy. In the past, a few attempts were made to change labor laws to allow employers to fire people more easily. Not surprisingly, such attempts were fiercely opposed by the labor union and opposition politicians, and failed. On top of suppressing income overall, rigid labor regulations are preventing reallocation of human resources in response to shifting labor demand as a result of structural change of the economy. While emerging industries suffer chronic labor shortages, industries that have seen better days continue to be saddled with excess labor, thus contributing to low economic performances. In response to mega structural shifts that hit the Japanese economy in the 1990s and beyond, Corporate Japan, unable to lay off workers, aggressively axed labor costs to stay in business. As a result the unemployment rate never rose much above 5%, an enviable accomplishment on the surface from the perspectives of the rest of the world. The price Japan paid was vanished expectations of wage and salary hikes of any kind. The death of inflation expectations made raising prices a near impossible task for Corporate Japan, even amid higher material costs. Hiking the consumption tax by a tiny two percentage points became a big political event, immediately causing buyers’ strike. Thus deflationary expectation became a fixture in the economy. Draconian regulations in general have been eased, albeit slowly over decades in response to the changing world. However, problems of labor including employment practices stand out. Being deeply rooted in culture, they are unlikely to go away any time soon. No more debate is required to solve the problem. It has been done over and over again the last quarter century. What needs to be done is abundantly clear. Just do it (but can’t). About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.