Annual Economic Report of RIALS for FY 1999-2000
Economic Rebirth with Security and Stability
I. Current Developments in the Japanese Economy
1. An Overview
(1) For the world economy in the 1990s, which characterized the rapid development in globalization of national economies, optimistic views dominated based on general confidence in the future of the market economy. However, as evidenced by the turmoil in the international financial market triggered by the Asian financial crisis in 1997, the world economy over the past couple of years has been faced to a series of crises. The statement from the Cologne Summit last year emphasized that "any economic development and reform must bring about benefits to all constituents of society", which indicated the retreat from the almighty market doctrine and the revival of a viewpoint that economy should serve society.
(2) The Japanese economy, slipped into recession in the spring of 1997, has experienced such business-stimulant policy effects as increases in public investment and improvements in housing investment since the turn to 1999, and now business ceases from further falling. This may confirm afresh the importance of macro-economic policy. Both consumer and business confidence, which got worsened significantly in the wake of the financial crisis, have been improved, too, since their anxieties have been alleviated by a series of measures taken by the government and monetary authorities to regain the stability of financial systems since the fall last year. In the overseas environment, too, recovery of Asian economies has begun to help resume a favorable circle in the domestic economy through trade with Asian economies.
(3) Against the government's economic policy aiming at boosting aggregate demand, some argue that reforms in the supply side are much more important to get through current recession. They point to the "three excessive factors", i.e. bad debt on the reverse side of the nonperforming loan issue, production capacity and employment. However, the current feeling for excess of production capacity and employment is not a hangover from the past economic bubble period, rather, the feeling for excess has developed as a result of insufficient demand under the policy-led recession since fiscal 1997 (the year ending March 1998), so that it is essential for the Japanese economy to return to its potential growth path through appropriate administration of the macro-economic policy.
(4) The challenge in fiscal 2000 should be not to fail in seizing upon the cues for economic recovery surfaced in fiscal 1999, realize autonomous economic recovery, and further link the expected recovery with improvements in employment. One of the concerns in the course of these developments is that, with widespread arguments for the "three excessive factors", the mood for restructuring deeply remains in industry, and some people still believe that regaining vitality of business corporations even at the cost of employment would lead to full-swing business recovery. In this meaning, the Japanese economy stands at the crossroads either it opts for creating a favorable circle in the entire economy through assuring a secured sentiment in households and thus expanding consumption expenditures, or bets on the vitality of business enterprises through restructuring without any prospect for an increase in consumption demand.
2. Economic Prospects based on Econometric Simulations
In Scenario A, with a clearly manifested effort to retain employment through sweeping reductions in working hours toward achieving annual 1,800 working hours, and by securing a 3% wage hike in every spring season, this scenario is aimed to improve the secured sentiment in households through developing expectations for leveling-off of the worsening employment and income environment. For fiscal policy, this scenario assumes that government spending commitments in the second supplementary budget and the fiscal 2000 budget remain at a level no less than those in fiscal 1999 in order not to make government spending become a factor of downward pressure on business. Also, it assumes that reductions in household financial burdens amounting to a \4 trillion equivalent are realized through increases in social benefits together with reductions in household financial burdens, including expanded child care benefits designed to relieve the middle class. In this case, it is anticipated that consumption expenditures increase steadily supported by the increase in household incomes, and that the expanded consuming demand leads to a corresponding increase in corporate plant and equipment investment. As a result, real economic growth in fiscal 2000 attains a 1.8% growth, which represents the return to the potential growth path. Also, it is anticipated that the employment situation heads toward improvements and the unemployment rate lowers to the low 4% range. If the new job creation measures centered on the public sector are fruitful, the return to the 3% range unemployment rate is conceivable.
In Scenario B, it is assumed that priority is given on corporate restructuring without any effort for retaining employment, and real wage plummets as demand for wage hikes, including regular pay rise, are contained to zero growth. Also, with an unsupported belief that the resuming corporate vitality brings about business recovery, basic support to business by fiscal policy is phased out, and the government capital outlays are assumed to decrease by 5%. In this scenario, consumption expenditures remain stagnant, and the weak consuming demand negates possible resumption of corporate plant and equipment investment. As a result, the economic growth rate is again reversed to negative growth and the unemployment rate rises to the middle of the 5% range.
II. The Basic Conditions for Medium- and Long-Term Economic Development
(1) In the debates on re-birth of the Japanese economy, the term "competitiveness" is often cited. Looking at the report from the Young Committee of the United States, which is said to be the model for the Congress on Industrial Competitiveness of Japan, the starting point of committee considerations was how to achieve any sustainable advancement in American living standard, and in a sense its intention is similar to the high-road approach pursuing higher productivity and higher wages. Attention to technology and human resources which form the ground for the improvement in productivity has led to re-birth of American economy in these days.
(2) To maintain any sustainable economic growth, it is essential to achieve continuous technological progress. In comparison with the United States and European countries, research and technological development programs in Japan characterize smaller weight in basic research, smaller contributions to research and development by the non-manufacturing industries, less significant investment by venture capital which provides funds for the technology development type enterprises, smaller portion of government funds in overall R&D expenditures, and the inadequacy in coordination between industry and others, and with international partners. Major challenges to the government in this area are to carry basic research and development which the private sector would not do satisfactorily, and develop a R&D infrastructure, as well as to structure a financial system to smoothly provide risk money for R&D ventures. Other challenges to the government include nurturing an innovation-oriented culture, facilitating proliferation of venture businesses specialized in networking and technological development, promoting partnership and exchange between the government, industry and academy, managing global coordination in research and technological development, and achieving harmonization between science & technology, as well as people & society.
(3) The long-term employment practice featured as one of the characteristics of the Japanese-specific employment system has been deepened rather than weakened, as evidenced by statistics of average service years and labor turnover. The long-term employment system provides a merit to facilitate human capital formation (competence development), which has long succeeded in supporting developments of the Japanese economy. The longer is average service years in an industry, the higher is its productivity increase, and this relationship between the service year and productivity growth has not much changed in the 1990s as compared with the first half of the 1980s, so that it can be reasonably concluded that the merit of long-term employment for human capital formation has not been waned at all.
III. New Dimensions in Employment and Social Security Policy
(1) The Need for More Active Labor Market Policy
During the period from 1998 to the early months of 1999, the already worsening employment situation further deepened. In the April-to-June quarter of 1999, the seasonally adjusted complete unemployment rate stood at 4.8% (5.0% for men, and 4.4% for women), a level close to the 5% mark, or the worst level in the post-war history. The rise in the unemployment rate was essentially attributed to the substantial decline in demand for labor due to the worsening corporate performance and the intensifying uncertainties of business in the future. Also, when closely looking to recent unemployment, the jobless rate of the head of household, or the major income earner in a family, was higher than ever. Unemployment not only deprives workers of means of their living and opportunities to accomplish their self-fulfillment, but also generates various social costs such as adverse effects on both demand and supply sides of macro-economy, loss of opportunities to accumulate skills over long-term, and the worsening budget deficit. Addressing the fact that these social costs have been growing more than ever under current recession, implementation of a comprehensive package of employment security measures, including job creation, is required. Compared to international levels, Japanese public spending on employment policy programs remains at a very low level. In order to carry a substantial and active labor market policy designed to successfully manage the difficult economic situation at present, an expansion of public policy programs is strongly sought for right now.
(2) Seeking the Japanese Model of Stakeholders Corporation
In recent years, under the rapidly evolving globalization of economies and the getting-fiercer competition, there have been growing arguments for the necessity of reviewing corporate governance to put corporate management under discipline supervised by representatives of shareholders from the viewpoint that "a business corporation belongs to its shareholders". Not remaining as mere arguments, but, there evolve specific developments in revising the Commercial Code. But, stakeholders of a business corporation are not limited to shareholders alone. The way of decision making in corporate management exerts significant impacts on its employees, trade unions, consumers, creditors, suppliers, local communities and other various interests, too. One of the influential arguments in these days is that the objective of corporate governance is to facilitate "prosperity of a business corporation", while taking into consideration diverse interests of these stakeholders. In this regard, in Japan nowadays those managers who believe that "the company is owned by shareholders, and its employees are one of the mere production factors" are very few, and an overwhelming majority of managers think that "as stakeholders of a company are not limited to its shareholders, the management is required to reflect appropriately intentions of these multiple stakeholders in their decision-making". Regarding employment of workers, the management is expected in general to maintain essentially long-term, stable employment. In the future, however, many companies are anticipated to promote brave internal reforms aiming at achieving "business prosperity", while retaining the frame of the Japanese-specific corporate system. In particular, in the area of employment, more emphasis will be placed on fortification of the performance principle for wages and treatments, as well as the individualized personnel administration, and in this regard personnel management practice shows a sign at Japanese corporations to shift from collective industrial relations with trade unions to the individualized labor/management relations between the management and individual employees. Challenges to Japanese trade unions are to what extent unions are able to carry out interests of employees, and how they can fortify and develop the institutional framework of workers' participation into corporate decision making as a prerequisite for materializing interests of employees, under these internal reforms evolved at business corporations. Through the practice tackling these challenges, it is requested to find a Japanese model of human-centered corporate model.
(3) Sustainable "Flexibility" in Labor Market
Globalization of economies and the progress in innovations on information technology have forced important changes to corporate behavior and have encouraged modifications in production systems, which have brought about major changes in the arena of employment and labor. "A production system able to produce keeping abreast with speed of selling", that is instantly addressing daily fluctuations in the marketplace, is being aimed at. The "flexibility" for instantly meeting changes is surfaced as the keyword in every aspect of business. However, the problem here is what kind of "flexibility" should be acquired. How to acquire a "sustainable flexibility" in labor market without causing stagnation in real wage, the inequality, and the instability of employment, as well as without damaging social integration has become a central concern among policy-makers in many countries. In the recent "Job Summit" talks, such a concern was increasingly articulated by political leaders. The Japanese employment system has realized the compatibility between stable employment and the flexibility through combining human capital formation by intra-company professional competence development with the flexible labor allocation function within the internal labor market and the quasi-internal labor market (a group of companies). Basically, this function remains without waning. In order to make this function sustainable, it is essential to enrich public policy programs addressed employment. In this sense, Japan is urgently required to restructure its "active labor market policy".
(4) How to Deal with the National Anxiety for the Future
Under the reform of fiscal structure started from 1996, social security policy of Japan has been faced to a major backlash. That is, instead of arguing how a "sustainable social security" system should be structured against the rapid changes heading toward a Japanese society with a declining birth rate and an aging population, the decade-old argument revives to the front, which claims the responsibility and financial burden for people's living and employment life-long should be reduced to "isolated individuals" and market principles from society and public systems. The Congress on Economic Strategy has chalked up a proposal to privatize the corporate/employee pension on the strange plea that "Japan is a society of perverted equality". In this proposal some may find the attitude of giving priority to the capital and financial markets, rather than respecting the logic of secured living. In the government's new economic plan, the position of social security policy is regressed to a passive one such as the safety net for the failed and socially vulnerable people. But, the "public's anxiety" developed through such a series of policy changes has further aggravated current recession. In order to dispel this "public's anxiety" and resume social confidence in the social security system, it is necessary to clearly define a vision of social security and its principles in order to reach a national consensus in this particular area. On this occasion, it is essential to position social welfare in people's living on the whole and relate it to employment and the working.
(5) Toward a Welfare Driven Growth Path
One of the major elements causing excess savings in the Japanese economy is Japanese people's concern about their living in the future. Given the fact that the cause for many socio-economic problems in these days does not lie in excess of welfare, but in the insufficiency of a reliable welfare system, it is important to transform or guide such an inadequacy into effective demand. A systematic implementation of policy programs to this end is the key to put the Japanese economy on the next growth path. This means policy conversion from conventional public investment policy, industrial policy and regional development policy, which are biased in favor of constructing roads, ports and harbors, and buildings, to the development of the information infrastructure and information networks, human resources development and life-long education, social and welfare services, including health care and nursing care, and the development of conditions to save the global environment and realizing a "recycling-type economy". This is a conversion to a growth pattern which will have a broadly defined "social sector" as its leading sector. In this growth pattern, it is essential to make full use of the creativity of municipalities thanks to decentralization, and expand people's participation and responsibility. Also, freedom and equality must be assured in good balance. This growth pattern also requires entrepreneurship demonstrated by smaller and petty capitalists, as well as partnership between NPOs and the public and private sectors. Such social consumption and investment must be combined with expanded consumption expenditures of individuals to achieve the return to a stable growth path. It is decisively required for the Japanese economy to have strategies for industrial structure conversion and job creation heading toward this direction.