Overcoming the High-Cost Structure of the Japanese Economy

ABSTRACT

Following the collapse of the bubble, demands for pressing forward in the structural reform of the Japanese economy have been answered to a certain degree, but opinions regarding one concrete method of these reforms-that the high-cost structure of intermediate goods should be corrected-are growing increasingly stronger. Foreign procurement, transferring production overseas, and use of other forms of the global network are a way to avoid the high cost of intermediate goods domestically, but these invite the hollowing-out of domestic industry. The essence of the current high-cost problem lies here.

Within intermediate goods, the high-cost structure has been preserved by the practice of driving up prices to cover the portion of productivity that has not improved within the industrial infrastructures of transportation, communications, oil and petroleum products, electricity, and other sectors. Barriers to entry and exclusivity in trading customs that have been protected in these sectors have led to a situation where it is easy to raise prices. Recently, however, the movement to procure intermediate goods abroad at bargain prices has started to spread, and there is growing pressure for prices to move in line with international levels. If Japan is to continue to support the buildup of industry domestically, various regulations must be abolished in one swift motion-a sort of Big Bang in industrial infrastructure-in order to secure the international competitiveness of Japan's industries.

The disparity of land prices amongst various foreign countries can be explained as stemming from differences in certain fundamentals, specifically in characteristics such as the level of land productivity and the effective tax rate of landholding taxes. In the future, however, there is a strong possibility that this disparity will shrink as a result of changes in the demand-supply structure and pressure for conforming to international levels stemming from the transfer of production overseas. From a policy perspective it is critical to bring land prices closer to international levels by maintaining the effective rate of landholding taxes at a commensurate level.

From the perspective of Japan's labor force, it is clear that the promotion of a strong yen dating back to 1985 has spawned the current high-cost structure. Until now, however, the growth of imports of low added-value goods from East Asian countries has not become a source of pressure to pull down wages in Japan's manufacturing industry. This is because Japan has been able to address high wages through improved productivity. In the years to come, however, there is no guarantee that Japan will be able to continue to handle high wages through such increases in productivity, and the possibility that wages will decline cannot be dismissed. In order to prevent this, it is imperative to transform the current industrial structure into one that can absorb a high-cost labor force.