The Medium-Term Forecast for Japanese Industry
and the Challenges it Must Face:

Improving Japan's Quality of Life and Ensuring Full Employment Through Structural Economic Reform

4. Japan's Industrial Structure in the Year 2010

Keidanren conducted a trial calculation of a long-term macroeconomic model and compiled an inter-industry relations table in order to realistically envision Japan's economic and industrial structure in the year 2010. We conducted two calculations based on two different scenarios -- the first assumes progress in the structural reform of the Japanese economy based on assumption that corporations can adapt to the fast changing by climate, changes resulting from deregulation and from the expanding of the industrial infrastructure. The second scenario assumes that no progress is made in reform and the status quo is maintained.

  1. The Japanese Economy in 2010
  2. A) The Desirable Scenario Resulting From Progress in Structural Reform

    In this case, we assumed that the increase rate of total factor productivity (= rate of technological progress) had risen continuously by 1% as a result of deregulation and increased investment in industrial infrastructure. Under the same circumstance, it is assumed that the exchange rate is stable over the medium to long-term at approximately 100 yen to the dollar.

    Given these conditions, the Japanese economy (See Table 1), led by increased domestic demand, would be on a 3% growth orbit through 2000 and would continue to grow at slightly more than 3% through 2010. The surplus workforce resulting from the transfer of production overseas and other factors, would be absorbed by he development of new industries and businesses. Unemployment would drop from a high of the mid-3% range to around 2% in the medium to long-term. The current balance would contract in the long term to the desirable level of approximately 1% of GDP because expanded domestic demand would result in an increase in imports than in exports, leading to a balance in trade at an expanded level.

    B) The Status Quo Scenario In Which No Reforms Are Instituted and Hollowing-Out Accelerates

    In the event that deregulation is not undertaken and a new industrial infrastructure is not created, we envision that the expansion of imports would be minimal and there would be great potential for sharp appreciation of the yen. The transfer of production overseas would accelerate, leading to a deflationary impact that would cause the economic growth rate to stagnate at the 1% level. Despite the decrease in the workforce, due to the aging of the population, the unemployment rate would be increased by the hollowing-out of industry and would exceed 4% in the medium to long-term. The current balance would decrease rapidly and eventually turn from black to red. At this point, although the yen would start depreciating, this would not lead to an economic recovery since industry as a whole, especially the manufacturing sector, would have lost its vitality.

  3. Change in the Industrial Structure
  4. The anticipated changes in Japan's macroeconomic environment will have profound effects on our industrial structure. By forecasting the trend of change in the input coefficient of the inter-industry relations table, a trial calculation was made for the production value and share of each industrial category.

    A) The Desirable Scenario Resulting from Progress in Structural Reform

    In this case, where progress would have been made in structural reform in the manufacturing sector (See the middle column of Table 2), the processing industry would trend firmly and the drop in the materials industry would be small. The non-manufacturing or service sector's share would rise by the amount of the manufacturing industry's small amount of "slack". Growth would be in various services, including commerce (retail and wholesale) and telecommunications, thanks to deregulation, as well as in medical care and personal services. These service sectors would also be expected to significantly expand employment opportunities. Therefore, a balanced increase in the size of the service sector in coordination with deregulation and market liberalization could be a positive development.

    B) The Status Quo Scenario In Which No Reforms Are Instituted and Hollowing-Out Accelerates

    In this case where deregulation and other measures have not been accomplished (See the right column of Table 2), the shares of both the processing and materials industries in the manufacturing sector will decrease. For not achieving economic structural reforms, the decrease will be a much as 3.1%, compared with the progress expected under the benefits of structural reform. The materials industry's decrease will be particularly large and we can forecast that the share of service industries will expand without improving efficiency, while entire size of the Japanese industry will contract.

  5. Growth Sectors of the Future
  6. In terms of share of total production, the manufacturing industry will fall slightly, but it will continue to be the foundation of our nation's economy, due to corporations' increasing sophistication and value-added innovations resulting from management reform, technological development and expanded telecommunications networks. With the manufacturing industry serving as the economic foundation, ideally we can expect that there will be increased growth in the service industries, which in turn will generate still further growth in manufacturing.

    The sectors expected to grow significantly are commerce, transportation, telecommunication/broadcasting, education/research, medical care/social services and personal services. The forecast reflects changes in lifestyle, the advance in information/telecommunications, the aging of society/decrease in family size, shifting weight toward more stock-oriented investment, and the growing seriousness of the environmental problems we face. An unusual recent trend in growth is the increase in businesses and services that cannot be classified using conventional industrial categories and this trend is expected to continue.

    Among these new entries into the market, significant development is expected in the so-called "multi-media" industry which uses rapidly advancing telecommunications technology, in cyber-business which creates business and social networks on the Internet, and in the electronic stock trading and exchange of information. Changing lifestyles, which value such things as a family-centered life and outdoor-oriented recreation, could lead to growth of an entire new series of businesses, such as prepared take-out foods, household assistance (such as baby-sitting), travel, sports/fitness, arts/culture, continuing education and amusement services. And in response to the mounting consumer demand for lower prices, we expect that new discount retail businesses will soon become part of the distribution industry.

    With the aging of society, growth will also be experienced the areas of home medical services, nursing services, and retail health foods sales. The shift toward stock-oriented investment is expected in the areas of home remodeling and maintenance, to meet the growing demand for better quality housing. And in the arena of environmental businesses, growth is expected in conservation devices, waste disposal and recycling, as well as in a number of businesses related to environmental restoration.

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