The High-Cost Structure of the Japanese Economy

No.013
April 1997
Fujitsu Research Institute
Japan Center for Economic Research

1. There are two historical cases where the high-cost structure of Japan's economy became a major problem, namely in the period following World War I and during the Korean War. The current problem with Japan's high-cost conditions is the result of a stronger yen accompanied by the cumulative surplus of its international trade balance, a characteristic that is similar to the earlier two cases. However, the current issues with Japan's high-cost structure differ from previous cases in that the high-cost structure is not a product of the aftermath of inflation. There are two major factors responsible for this difference: (1) fluctuations in asset prices have intensified while fluctuations in commodity prices have contracted; (2) the high-cost structure has been amplified by the use of the floating exchange rate regime.
2. Additionally, previous high-cost structure problems were manifested primarily in the heavy chemical and related domestic industries as a part of the export industry. In contrast to this, the current high-cost structure problems are centered on the home goods industry and the public sector. Other differences include the comparatively high land prices, wage levels, and other production factors, as well as problematic regulations, tax systems, and other systemic conditions that characterize the current structure. There are two major factors that are considered responsible for these differing characteristics. Firstly, the problem of high-cost export goods is no longer an issue, due to the fact that other industrialized nations have caught up with Japanese manufacturing technology. Secondly, it is no longer possible to ignore the influence of home goods and production factors in addition to the high-cost of export goods as a major factor in selecting investment destinations because international competition for industrial location has intensified in conjunction with increased volatility in capital flows.
3. Various methods were tried for relieving the high-cost structure problems in the previous two cases, with cutbacks in domestic industries and shifting to imports playing a part in both. Other measures that worked in one case but not in the other include: the retrenchment policy that succeeded during the Korean War but failed after World War I: the support of the yen rate that eased problems during the Korean War; and the yen devaluation plan that helped relieve high-cost problems after World War I. It is now necessary for Japan to firmly establish the proper path to handle the high-cost structure in the years to come.

More Informations

• Japanese
• Full text is not available in English for this report. Please let us know the serial number of this report (013) to submit a request for translation.