As an undergrad in Economics, I was introduced to Gary Becker’s ‘Rotten Kid Theorem’ which argued that a benevolent figurehead could transfer utility to his children because they recognized that it was in everyone’s interest to maximize total welfare, even if one happened to be a ‘rotten kid’. Because of the expectation of future wealth transfers, family members adjusted their expectations in certain periods so that they could maximize their utility over time.
I was fascinated how one could apply this analysis to the theory of employment in Japan in contrast to the West. Employee loyalty to their firms was enhanced by promising a degree of long-term employment, in exchange firms could afford to invest in their employees, rotate them between divisions to get a better understanding of how the entire firm worked, and when they approached their mid-late thirties, both firm and employee would theoretically start to see a higher payoff.
In contrast, Western firms which often focused on developing experts, with limited reciprocal obligations between firm and employee, were forced to deal with their ‘rotten kids’ (sic employees) by offering them instant gratification with high wages and bonuses lest they move on to the next highest bidder. The drawback being, that Western firms would be afraid to invest too much in their employees (lest they move on to their competitors) limiting the overall potential utility curves or ‘pareto optimality’ that the collective firm could achieve.
Being the early ‘80’s, business literature was obsessed with analyzing the Japan miracle, with books such as ‘Kaisha, The Enigma of Japanese Power, and Japan as #1’ must reads. Japan’s growth translated into per capita income growth that was driven by growth in high value auto and electronics and the real estate bubble.
By 1990 Japan had one of the world’s highest per capita GDP along with the US and Sweden as manufacturing reached 25% of GDP. Today manufacturing has fallen to 18.2%, which doesn’t seem so bad when one thinks that the US is only 12% manufacturing. But, unlike the US, it has been unable to develop a financial services, IT and software sector that can export on a global scale. Worse however, Japan’s per capita income has now fallen below many of its OECD counterparts.
…….though it doesn’t look as bad in purchasing power parity (PPP) terms because deflation has generally supported real purchasing power (below).
Source: OECD, Custom Products
Source: Bloomberg, Economist, Custom Products
At least if you have to live off a diet of Big Macs and fries, you are still relatively better off in Japan. Japan's relative purchasing power is actually much more compelling where typical Asian cuisine is considered.
Japan, however, is no longer dominant in many technologies that it pioneered, such as LCD, solar, lithium ion batteries, memory, smart phones and high speed trains; much of which have largely passed on to Asia.
Though there are, no doubt, many burgeoning technologies waiting for the light of day, venture capital in Japan is still nascent with $1bn invested last year compared to $50bn in the US. Sure, one could say that this would provide infinite opportunities for overseas venture capital investing in Japan, but the reality is that these firms are far more interested in duplicating successful global models in Japan rather than trying to adapt Japan’s Galapagos technology worldwide.
The days have passed when most department stores had their elevator girls and train stations had their confetti bag laiden ticket clippers waiting at the exits. But Japan, if anything, is moving further towards a service Economy. Unfortunately, the labour productivity gains over the last 20yrs have come almost exclusively from the manufacturing sector, with retail, transport, restaurants, hotels and business services falling well below their global peers for productivity. At least the service is still great!
Significant revisions to the labour personnel dispatch laws in ’95 and ’99 made it much easier to employ irregular and subcontract workers, and hence began a dumbing-down of the workforce since less time was spent on education and training in general (putting Japanese workers in more direct competition with their Asian neighbors). Average monthly wages (including overtime, bonus and social welfare deductions) have generally been flat over the last 5 years, though increased 0.3% in 2015 due to overtime and bonuses, but management is reticent to add to fixed costs with wage increases as it would rather maintain flexibility through higher bonuses. Legally mandated social welfare costs, mainly paid by employers, have risen at a compound rate of 1.39% pa over the last 20 years while nominal wages have only increased 0.27% pa, such that social welfare costs have risen from 10.4% to 14.8% of wages during this time (Keidanren December 2015).
Ministry of Health, Labour and Welfare
Ministry of Health, Labour and Welfare
In many ways, Japan has fallen prey to the Asian deflation which has forced it to compete with its Asian neighbor in the technologies that it once dominated. No longer are companies, like SONY, able to command a premium for products such as they enjoyed with the Trinitron TV in the seventies. It is now largely a question of price as the gaps in quality have gradually disappeared. So we now buy LED or OLED screens rather than looking for a particular brand TV. When was the last time you heard the salesman say ‘it’s made at Kamiyama (previously Sharp’s showcase factory and sign of quality)?
In the late 90s, both Japan and Korea were trying to penetrate the Chinese market, Korean manufacturers made a conscious effort to go for share by reducing prices for their key high growth products. Japanese manufacturers, on the other hand, thought they could command a premium for their products. As demand fell behind, Japanese manufacturers started lowering prices in an effort to gain market share. This brought the once proud showcase factories in Kamiyama, for sharp, and Yokkaiichi for Toshiba into direct competition with their Korean, Taiwanese, and Chinese rivals. Japan tried to compete by using relaxed labour laws for contracts employees which served to suppress wages. In the end, many of these lines were transferred elsewhere in Asia.
Japan has seen a sharp downturn in terms of trade (output prices divided by input costs) since 2000, hurting wages and profitability.
Japan has also seen its white goods industry slowly losing its advantage to LG, Haier, Daewoo , and TCL or Seiki in the case of LCD TVs. Sanyo has been absorbed into Haier, and Sharp may soon go to Foxcon.
In 2000, the UN calculated that Japan would have to accept 381,000 immigrants annually if Japan was to maintain her peak 2005 population of 127.5mn. The same study forecast that Japan would need to accept 608,000 immigrants annually to keep its peak working population.
10 years ago, the Japanese labour dispatch company Fullcast made a presentation to a Diet committee claiming that Japan needed 5 million foreign workers, including 500,000 in health and elderly home workers, if she was to grow over the next 10 years. Several years later, the first group of 50 Indonesians who had managed to pass the rigorous Japanese nurse helper’ exam came, but it seems that it was never more than a trickle.
For more than 20 years, the warnings of the shrinking of Japan’s population have gone unheeded and have rather been met with a tacit acquiescence, an eery resignation to ones fate, as if nothing could be done to stem the problem. Only now the government is starting to pay lip service to this crisis by trying to promote increased labour participation and childcare services with its ‘ichioku sokatsuyaku shakai’ plan (‘100 million actively participating society in 50 years’).
Last year, Mr. Abe introduced the second act to his ‘Three Arrows Plan’ with the slogan ‘Y600trn GDP and 100mn active population’ as the pillar of his growth plan. At current trends, Japan’s population which peaked at 128mn in 2008 will fall to 86.7mn by 2060. The new plan focuses on 3 key areas for its success: holding the line on population decline to 100mn by 2065 by lifting the birthrate from 1.4 to 1.8 per 100, increasing the labour participation rate of the 9.5mn unemployed and underemployed and lifting wages, particularly for irregular workers. The math is simple enough, 3% annual wage increases (1% real) gets you to ¥600bn in 5 years. But the plan falls short on details.
IMF Working Papers 2012
Japan’s birthrate would be higher if childcare was better, allowing for a higher labour participation rate (above). Household income for low wage earners also doesn’t really support a second child (below), while female workers who try to supplement the household income are further disadvantaged.
Source:IMF Working Papers 2012
Ministry of Health, Labour and Welfare
Unfortunately, I am pessimistic that any significant real income growth is likely over the next decade. Japan has been undergoing de-industrialization over the last 25 years as manufacturing has fallen from 25% of GDP in 1990 to 18.2% last year. Manufacturing jobs enjoy about 15% higher incomes than those in the service sector (Min of Health, Labour & Welfare). Demographics hurt too, because the average Japanese is now 47yrs old, which coincides with peak productivity. Labour participation rates have fallen from 62% to 59.5% since 2000 but part-time participation has doubled from 14.5% to 30.5% since 1995. Labour productivity is still down sharply from peak in March 2007 (101.4 vs 119.1, Japan Productivity Center).
Few of the 1980's revisionists could have envisioned Japan’s current predicament; low wages and low growth. And many new graduates who would have subscribed to the 'rotten kid theorem' as new recruits in the 80's under lifetime employment, may have had second thoughts. Japan faces the prospect of becoming another Italy, which might not be too bad, depending on your perspective.
 EU KLEMS data
 IMF Working Papers 2012, Who Can Boost Female Labour Force participation, Yuko Kinoshita, Fang Guo