CHAPTER THIRTY-THREE
Japan’s Economic Policy Turn
JAPAN IS FACING THE MOST SERIOUS challenges to its traditional social and employment practices since World War II, if not since the 1920s. The reasons are neither politics nor economics but demographics.
The nation is only slowly climbing out of its worst recession in more than thirty years and the worst is yet ahead for the already bleak unemployment picture. And yet the Japanese business leaders, bankers, government and labor leaders with whom I met on my most recent visit to their country were fully as concerned with tomorrow’s looming labor shortage as with today’s traumatic unemployment.
Japan faces an almost total drying up of the labor supply on which the economic expansion of the twenty-five years after 1950 had been based: manufacturing workers. The problem may radically affect Japan’s position in international trade and its export and import policies. It will challenge the nation’s fundamental social beliefs and practices and will call for a rethinking of basic economic policy.
The number of young people reaching working age in Japan each year during the next twenty years will be 40 to 45 percent lower than it was during the sixties. Then half of the country’s young people went to work after finishing junior high school.
Today practically everyone goes to high school and a full third of the high school graduates of both sexes (one half of the men) go on to college, against one eighth twenty-five years ago.
The Japanese rarely do things by halves and the swings there are much greater than in the United States. The Japanese postwar “baby boom” not only was sharper than in the United States but it was over much sooner, in the early 1950s. And then it was followed by a far more pronounced “baby bust”—a drop in the birthrate of over 40 percent, compared with a U.S. figure of 25 percent. Moreover, the economic and social consequences of these demographic trends are quite different in Japan and far greater.
One reason is the Japanese custom, almost amounting to sacred tradition, of tying wages and benefits to seniority. Over the course of thirty years of employment, the Japanese, whether working as machine tender, bookkeeper, or executive, triples his cash wage income. Fringe benefits such as housing allowances go up even faster. The employee with thirty years of seniority therefore costs the Japanese employer roughly four times as much as the newly hired young man or woman. The young people, in other words, subsidize the older people.
They also heavily subsidize the Japanese economy. Without any increase in wage rates, the labor costs of a Japanese organization, whether business, university, or government agency, go up automatically and sharply as employees get older. The more young people a company can hire, therefore, the lower will its labor costs be—and the more credit-worthy it will become in the eyes of Japanese banks. During the fifties and sixties the supply of young people was plentiful—partly from “baby boom” effects and partly because young people left the farms and streamed into the cities. At the end of World War II more than half of Japan’s population was still on the farm; that figure is now down to 10 percent or 12 percent, and it is primarily young people, of course, who have left.
With Japan’s traditional structure of labor costs, this meant steady improvement in competitive position for Japanese business and the Japanese economy. Indeed, something like half of the much-vaunted increases in the productivity of Japanese industry probably was not really “productivity increase.” It was simply the labor force getting younger for twenty years.
But from now on, the labor force will, of necessity, get older. Labor costs will therefore rise sharply and labor productivity will fall or at least sharply slow its increase.
The second reason why the demographic shift is more of a problem to Japan than to any Western country is the tradition which rigidly ties job level and opportunity to education. Only junior high school graduates are supposed to go into manual jobs, and especially into manufacturing jobs. High school graduates become clerks and office workers. University graduates become managers and professionals. There has always been some, though not very much, upward mobility in this otherwise rigid classification of the human race by school certificate.
Downgrading, that is taking a job beneath one’s final degree, is, however, almost unthinkable. There are plenty of high school graduates eligible for office and sales jobs. There is a surplus of people with college degrees and eligible for managerial and professional jobs. But the three kinds of employment—manual work, clerical work, managerial work—are separate labor pools which do not communicate with each other no matter what the demand and supply. And junior high school graduates, i.e., young people eligible for manual work, have all but disappeared.
Finally, the Japanese system makes it very difficult to utilize existing labor surplus in one industry or trade for job opportunities in other areas. There is, in absolute terms, no labor shortage in Japan—even of people eligible by educational status for manual work. In fact, by American standards, Japan would be considered a country with substantial labor surpluses. For there is still a substantial preindustrial sector in Japanese manufacturing, a sector of small workshops producing the traditional goods of “old Japan”—pottery or bedding, for instance. And there, labor as a rule is quite inefficiently used, though today it is anything but cheap. There are also large labor surpluses of industrial workers in old industries, such as the textile or the clothing industry.
But these pools of surplus labor do not help much. They cannot be tapped because of the seniority-wage system in which wage corresponds to length of service. A thirty-year-old industrial worker who is being hired for the first time by an employer would have to be paid a starting wage—that is the wage of a sixteen- or seventeen-year-old—and yet he is thirty. He can neither, in effect, be paid the wage befitting his age nor the wage befitting his seniority—and this makes him almost unemployable. At the very least, it creates tremendous obstacles against job change and job mobility. This also explains why unemployment is such a terrible threat to the Japanese—a laid-off man can find work only as a temporary employee at a very much lower income and with little chance ever to become a permanent employee again.
One should never underrate the Japanese ability for social innovation. Throughout their history the Japanese have been exceptionally gifted at finding solutions to new social problems while still maintaining traditional Japanese values. And they are at it again. I ran, for instance, into a very simple and yet highly ingenious solution to the conundrum of how to pay a man who moves to a new employer after ten or twelve years of service with an old one. He does not quit his old company; he joins the new one on permanent loan from the old employer. This makes it possible to pay him the wage befitting his age without violating the principle that wage be paid according to length of service. Still, the demographic and educational shifts under way will challenge social beliefs and customs that most Japanese consider sacred.
The economic impacts of the demographic shift will be at least as great as the social ones. Labor costs will go up fast, even if rates rise only slowly or not at all. The escalation of labor costs with length of services—wages as well as benefits—is far too deeply entrenched in Japanese society to be eliminated or even greatly modified. Worse still, manual labor for new industries or for expansion of old ones will not be available at all. For a hundred years the Japanese economy has been based upon the exchange of the products of Japanese hands for foodstuffs and raw materials from the outside world. The demographic shifts will not affect Japan’s dependence on food, petroleum, iron ore, or wood pulp. But they will make it increasingly difficult for Japan to pay for them through the exports of the manufactured goods with which Japan has been paying for its imports. And so Japan is beginning to reassess its economic policies at home and especially in the world market.
One response is a new emphasis on automation. In the United States the talk of the automated factory, so common fifteen or twenty years ago, largely died down in the seventies. In Japan, work on the automated factory is going on at full speed and in dead earnest. Government and industry, with the unions acquiescing, are jointly developing the first totally automated large manufacturing plant—a highly flexible and diversified machine-tool plant. It will not have a single worker on the production floor. Most of the processes needed for this plant have been designed and tested and are in the pilot stage. The entire plant is expected to be in full commercial production by 1983.
Several large manufacturers—in fields ranging from chemicals to shoes—told me that their objective was to be able to produce, ten years hence, either double their present output with the same number of manufacturing workers or 30 to 40 percent more with half the present manual labor force. This, of course, will mean greatly increased employment of university-trained people, especially of engineers. But these the Japanese educational system provides in increasing quantities.
Another response is a deliberate shift, again with government and business working together to change the export mix. Increasingly, Japan expects to shift from exporting commodities, even those with high-technology content, to exporting entire plants and industries. The first export priority MITI, the powerful Ministry of International Trade and Industry, announced recently will be the exportation of entire factories. In 1975 exports of factories amounted to $6 billion. The target for 1976 is double that. And by 1980 some Japanese planners hope to meet a $50 billion export target for complete factories [1981 note: which they almost hit]. With this, however, will also go a shift in the direction of Japanese trade. For the market for complete factories is, of course, not primarily the developed countries but the developing ones: the oil-rich countries, especially Saudi Arabia; the raw material and food-producing countries of Latin America; and perhaps most important, mainland China with its promise of a rapidly expanding petroleum production [1981 note: which did not materialize].
And finally, what Japan imports is likely to change—though politically this will be the most difficult of all the changes ahead. To export enough to provide a raw-material-poor, food-deficient, and energy-poor Japan with the foundations of modern economic life must remain the first priority of Japanese business policy. But increasingly Japan will have to export to pay for consumer goods from labor-surplus countries, consumer goods which its own labor-short economy can no longer produce. The shoe factory which a Japanese company is now building, for instance, in one of the countries of Southeast Asia will be paid for out of its own output—with 10 percent or 20 percent of its production turned over at cost for twenty years to the Japanese who financed and built the factory. This, on the one hand, makes possible building a plant that has economies of scale beyond the absorptive capacity of the small country in which it will be located. It creates, on the other hand, a source of consumer goods based on abundant labor supply and fairly low labor costs for the Japanese home market and for the Japanese consumer.
Whether such a policy shift can actually work is by no means certain yet. In Japan it will be opposed bitterly by the labor unions, but also by the exceedingly numerous and powerful small businesses. It requires a complete about-face on the part of the Japanese Government, and especially of the Ministry of International Trade and Industry. For it is still axiomatic at MITI that anything that Japan is technically capable of producing must be produced in Japan and must not be brought in from the outside. And MITI reflects deeply held national convictions that go back almost four hundred years.
Outside of Japan there are also formidable obstacles. While Japan would offer developing countries a chance to speed up their own industrialization, it would make them heavily dependent on Japan; a small Southeast Asian country would, in effect, become a Japanese satellite. But, as a highly placed Japanese observed to me, “What alternative do we have, considering our population trend? And what alternative do the developing countries—especially small, poor, and overpopulated ones—have, considering their population dynamics?”
Whichever way Japanese economic policy finally goes, demographics—both in respect to the number of people and to their education—will increasingly become a key factor, if not the controlling factor, in the Japanese economy and in Japan’s position in, and policy toward, the world economy.
(1976)