Thoughts on the Hollowing-out of Japan's Industry

SUZUKI Seiji
Vice Chairman
Keidanren


A great deal of discussion these days is being focused on the "hollowing-out" of Japanese industry. This shift of production overseas has been attributed to a number of factors, including the sharp appreciation of the yen, deflationary pressures like the ongoing "revolution" in consumer pricing, and the excessive regulation built into Japanese society. It is my belief, however, that the phenomenon being observed in today's Japan is somewhat different from what we saw in the United States in the 1980s. Specifically, I believe that excessive government regulation and Japan's postwar tradition as a heavily-regulated society have promoted a kind of hollowing-out that is undesirable in terms of the effective utilization of available resources.

Analysis by Keidanren suggests that deregulation would boost productivity in the affected sectors and help to narrow the gap in prices between Japan and the rest of the world. Given a 20% correction in prices over the period FY1995-2000, the regulation would add 177 trillion yen to Japan's nominal GDP and create 740,000 jobs. Arguments against deregulation focus on the frictions and unemployment that would result from the weeding-out of weak industries protected by regulation. Continued emphasis of these negative effects, however, threatens a scenario in which highly competitive industries are forced to shift production abroad, thereby accelerating the hollowing of Japan's infrastructure and leaving only protected, low-productivity sectors.

U.S. companies during the 1980s saw their ratio of overseas production grow while imports of manufactured goods rose. However, in key sectors like aerospace, electronics equipment, chemical industry, and automobiles, the United States succeeded in raising domestic productivity through restructuring and reengineering activities while shifting production offshore. At the same time, liberalization of the financial markets and the introduction of new financial instruments like derivatives opened up a variety of new avenues for companies to procure needed capital.

Japan, meanwhile, is heading in the exact opposite direction. There is a high likelihood that the hollowing of the highly-regulated financial sector, including securities markets, will nip many of Japan's new industries and start-ups in the bud. Most problematic of all is the fact that , while the economies of Asia, Europe, and the United States are achieving unprecedentedly high growth, Japan is trudging forward at an annual growth rate of only about two percent. The offshore flight of manufacturing may be an evil rooted in the structure of Japanese politics, society, and individual values. If so, it's time for some drastic surgery.


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