Economist: Japan as number three, watching China’s economy whizz by


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Hi Blog. Here’s the better of the latest Western-press articles, from The Economist London, showing China overtaking Japan to become the world’s number two economy.

Now, the reason why this is a issue:  The economic malaise that has affected this society for two decades and counting has had two cantilevering effects: 1) The need to bring in cheap labor from overseas to lower labor costs and increase export productivity; and 2) the jealousy and xenophobia that will rise towards those NJ brought here as a natural consequence — of seeing an economic rival usurp the position of Asia’s leader — and how a society seeing itself in decline may in fact become even more insular and closed-minded.

That’s where I’d like to see the discussion head here regarding this topic. Never mind disputing the economics in specific (that can be done elsewhere). Just assume that China will overtake Japan. What do people think that will do to Japan as a society vis-a-vis its treatment of NJ?

NB: I will be on the road for the next week or so, checking my blog only sporadically. So please be patient about having blog comments approved. I will put up a blog poll so people can voice their opinions in macro. Arudou Debito on holiday


Japan as number three
Watching China whizz by
Japan is now the world’s third-largest economy. Can its firms cope?
The Economist London, Aug 19th 2010 | TOKYO

Article plus two interesting charts at

FIVE years ago China’s economy was half as big as Japan’s. This year it will probably be bigger (see chart 1). Quarterly figures announced this week showed that China had overtaken its ancient rival. It had previously done so only in the quarter before Christmas, when Chinese GDP is always seasonally high.

Since China’s population is ten times greater than Japan’s, this moment always seemed destined to arrive. But it is surprising how quickly it came. For Japan, which only two decades ago aspired to be number one, the slip to third place is a gloomy milestone. Yet worse may follow.

Many of the features of Japanese capitalism that contributed to its long malaise still persist: the country is lucky if its economy grows by 1% a year. Although Japan has made substantial reforms in corporate governance, financial openness and deregulation, they are far from enough. Unless dramatic changes take place, Japan may suffer a third lost decade.

Of course, Japan still boasts some of the world’s most innovative firms. Carmakers such as Toyota and electronics firms such as Toshiba are in a class of their own. Japanese firms hold more than a 70% market share in 30 industries worth more than $1 billion in annual sales, from digital cameras to car-navigation devices, according to 2008 data. Whatever the brand on a digital gadget’s case, Japanese wares are stuffed inside or are essential for producing it.

Yet the success of Japan’s best firms masks wider weaknesses. Yoko Ishikura, a business professor at Hitotsubashi University, believes that Japanese bosses are complacent. “They are either too afraid to face the reality of the power shift,” she says, “or [they] want to stick to old, familiar models.” Yet the core problem is that Japan suffers from a gross misallocation of resources, both financial and human.

Japan has long kept the cost of capital low, to boost investment or help stragglers. Since the financial crisis began, bureaucratic organs such as the Innovation Network Corporation of Japan and the Enterprise Turnaround Initiative Corporation have been handed $25 billion to revitalise ailing companies. Among the latter agency’s first acts was to assist a dying wireless operator that bet on archaic technology.

Food for zombies

The system almost guarantees that fresh capital goes to the losers of yesteryear. Because struggling companies rarely die, new ones do not form. Japan’s bankruptcy rate is half of America’s; the rate at which it creates new firms is only a third as high. Japanese venture capitalists are few and far between. Japan’s bureaucratic allocation of credit seldom spurs animal spirits. Rather, it nourishes zombies.

Japan has also lost its knack for getting the best out of its human capital. Its people are superbly literate and numerate, but certain cultural traits are holding businesses back. Respect for seniority means that promotions go to the older, not the most able. Young executives with good ideas refrain from speaking up. Retiring presidents are kept on as chairmen or advisers, making it awkward for the new guy to undo his predecessor’s mistakes. A rising executive at a big trading house says he was counselled by his seniors to keep his views hidden if he wanted to get on.

Japanese salarymen, who were once regarded as modern-day samurai, are today known as soshoku-danshi (wussy, unambitious “grass-eating men”). Since 2003, the proportion of young Japanese entering the labour force who want to be entrepreneurs has halved, to 14%, while those who seek lifetime employment has nearly doubled, to 57% (see chart 2). Bosses grouse that the young eschew overseas posts; even a foreign-ministry official confides that Japanese diplomats prefer to stay at home.

The herbivores are markedly less “globalised” than their elders. Since 2000 the number of Chinese and Indians studying in America has doubled, whereas the number of Japanese has dropped by a third, to a fraction of the other Asian countries’ total. And despite years of mandatory English-language classes in secondary school, the Japanese score lowest among rich countries on English tests. This needn’t be a problem, except that as an export-dependent economy, Japan’s lifeblood is its relations with other countries, frets Takatoshi Ito, an economist at the University of Tokyo.

Half the nation’s talent is squandered. Only 8% of managers are female, compared with around 40% in America and about 20% in China. There are more women on corporate boards in Kuwait than Tokyo. Women are paid 60-70% as much as their male counterparts. A manager at one of Japan’s biggest conglomerates says that 70% of qualified job applicants are women, but fewer than 10% of new hires are, since the work may entail visits to factories or mines, where they might perspire in an unladylike way. Kirin, a brewer, seeks to double the number of its female managers by 2015—to a mere 6% of the total.

To get the economy moving, Japan Inc took a page from its industrial-policy playbook of yore. In June the trade ministry released a sweeping new “growth strategy” that identifies a score of vibrant sectors meriting government assistance, from overseas construction to attracting medical tourists. The project calls for hundreds of reforms, big and small. But the bureaucrats most intimately involved were shunted to other jobs in July, so who knows whether any will be implemented. Once again, the practices of old Japan scuttle the new. Richard Katz, editor of the Oriental Economist (no relation to us), believes Japan has trouble tackling its problems because they are all inter-related. “It is hard to fix one without fixing the others,” he says.

The local news media have played down Japan’s slip to third place. Alarmists fear that South Korea—which has a much smaller population—may overtake Japan, too. Is Japan willing to fight to keep its bronze medal for as long as possible?

Supporters say that the country always seems to shuffle its feet but then snaps into action when faced with a crisis. It did so in the 19th century, adopting modern ways to avoid being colonised, and again after the second world war. Japan was the world’s second-largest economy for 40 years. But the traits that made it an economic powerhouse in the 20th century—easy capital, big companies, rote learning, management by mandarins and stable jobs for male breadwinners—are ill-suited to the 21st. Today, Japan’s biggest obstacle is itself. Without dramatic reform, it will slip swiftly to number four, number five and beyond.


23 comments on “Economist: Japan as number three, watching China’s economy whizz by

  • I am pessimistic.

    Think about the Indonesians that come that want to be nurses in this country.
    Only 1% managed to pass the test last time. They aren`t being given a chance to succeed.
    Japan just gets cheap labor for a few years then they bring in new people.

    It is the same as the English teachers here – just a lot of new people coming over and over again, only to keep wages down.

    There are more elderly every year who need pensions and health care. I just don`t see how the government can afford it without immigration.

  • Anthony Fensom says:

    Re Japan as No. 3: My hope is that it will lead to a reappraisal and wide-reaching reform, socially, politically and economically. My fear is that as you say, Japan will become even more insular and fearful of the outside world. Does Japan want another “lost decade” with lost opportunities for its youth and people as a whole, or does it want to end the downward spiral and reassert itself on the international stage? These topics are too big for one blog post, but I’m still in the “cautiously optimistic” camp rather than the downright negative camp, as some of my Japanese friends seem to be.

  • I should hope that it wouldn’t result in scapegoating or some other form of negative treatment of, or negative attitude towards, foreigners. (…)

    I believe that as with most things economic, how it develops depends heavily on how people react to it. In a way, it’s a self-fulfilling prophecy. If the Japanese people, on average / in aggregate, decide that they’re doing just fine, that it’s okay to be #3, and that they’re not going to fall to #20 anytime soon, then everything will be fine. If, on the other hand, they think “woe is us. We’re doomed to become an economic backwater now that we’re no longer #2. All is lost,” then all will be lost.

    It’s like with the stock market. When the WTC was attacked on 9/11, people thought it should be terrible for the stock market, and so it was. When there was rioting in the streets of Bangkok half a year ago, the Thai stock market didn’t fall, in fact, it did better, because people chose not to let these kinds of events – disconnected from the actual economy itself, the riots not directly affecting whether people were buying or selling goods and services – affect the stock market.

    Knowing Japan, I think they’ll take the second option, and complain and worry and stress over how poorly their economy is doing – as they have been for the last ten or twenty years – rather than acknowledging how good it is to still be ahead of Britain, Germany, France, Italy, India, etc.

  • As I have always stated, Japan knows what they have to do, they are just afraid to do it. I agree with and have seen evidence of almost all the points brought up in the article and would add that because of the socio-economic conditions that Japan itself has created, risk taking has given way to risk avoidance. I see on TV and read in articles all the time these “solutions” that can be summarized as “high reward, no risk” plans which we all know do not exist. Risk management no longer resides in this country, only a desire to benefit without sacrifice or change.

    I think this will be the way this country will attempt to handle the issues of NJ with regards to its future. They will resist the idea as much as possible, or come up with ways to not have to deal with it while trying to charge ahead to beat its neighbors or begrudgingly “acquiesce” with over-legislated policies that actually work against what it is meant to do.

    Sadly, I fear the country will become a bit more insular before any honest attempts at fixing itself will be made. By then, however, it might just be too late.

  • Giant Panda says:

    Interesting point about the “food for zombies”. I’ve seen it argued elsewhere that one of the most important reasons for Japan’s spectacular rise after the war was that there was a massive stripping away of the old entrenched interests and new ideas, companies and businesses were able to florish. It seems that these same businesses that once nourished the enconomy are now draining it of life (much like the baby boomer generation worked their butts off to power the Japanese machine, but now they are retiring, ailing and sucking the life out of the health care and pension systems). Japan is faced with the choice whether to change, and get a new chance at achieving greatness, or to stay put, and slowly edge into decline. They have faced change before and succeeded spectacularly (the Meiji restoration & after the second World War, although the latter change was forced upon them), and the election of the DPJ shows that they still have appetite for change. I do genuinely wish that they can pull it off again, but the pessimistic part of me sees an inevitable decline and a mass burying of heads in the sand.

  • What Japan will want to do is bury its head in the sand and ignore the fact that it has fallen behind China. Letting foreign workers into the country would prevent this, because it would be a tacit admission that the status quo is not good enough. So Japan will not allow more foreigners to work here, preferring to pretend that everything is okay as is.

  • Misallocation is quite and understatement. This article has Austrian Economic tones, even though I doubt they would admit such. It is a sad story for Japan, but nothing will be fixed until the government stops spend and the central bank stops creating their fiat currency.

  • China is ten times bigger in population than Japan. So the real mark would be when China’s economy is ten times bigger than Japan’s.

    What Japan should worry about is that if even 10% of Chinese want to nail Japan and/or get back at them for what Japan did in World War Two, it means there is one Chinese who wants that for every Japanese alive.

  • What still puzzles me as an economist is the fact that, in spite of all the buzz about Japan’s lost decades, the Japanese yen has been the strongest currency in the world, and it grows stronger every day against the Euro, the dollar, and everything else. This suggests to me that most of the world views Japan’s economy as most likely to honor its debts, cover its obligations, and thrive.

    So why are economists everywhere condemning Japan’s economic model with one hand and buying up yen with the other. To paraphrase Winston Churchill’s comment about democracy, maybe this is a case of Japan having “the worst form of economic system except all the others that have been tried.”

  • The Japanese economy got started back in the 70s by flooding the world with cheap products (calculators phones, radios, etc)
    Back then, everyone knew that “made in Japan” meant cheap stuff with fairly good quality.
    Once they’ve got the world’s attention, they did a very smart thing. They switched to more expensive high-quality products and the economy bloomed.
    They understood that people who buy cheap stuff eventually would have trusted them with the more expensive, high-quality items.
    Very soon, made in Japan was no longer associated with cheap stuff but with an increasing higher quality products reasonably priced.

    And that, forced US to rethink it’s business practices and be more innovative and competitive, which they did.

    Now, fast forward to this decade and you can see that China is doing the exact same thing Japan did in the 70s, and they haven’t even made the switch (yet) to the higher quality, more expensive products.

    Today Japan is in the same place US was back then.
    Will they be able to learn from history, to change and be more competitive? So far from what I’ve seen the answer is “not really” but I hope to be wrong though.

  • It seems that everyone has here has come to the same conclusion: “We hope not but probally will happen”

    I share the same sentiment and that scares me because I live here. We all hope things will get better but the grip continues to hold. Smothering media mind control, extreme inflexibility, and a lost new generation that hasnt a clue about the world I think is what is driving us all to the same conclusion.

  • The biggest capital China has is its population. Rich people are some 0.002% of the whole population(my personal calculation, based on this article
    and wikipedia’s data on world population. I mentioned before about the discrepancy between fact that China is No2 economy and the fact that still hundreds of Chinese come to Japan on trainee visas and work like slaves, because the miserable wages they receive here are 10 times bigger than the money they get in their country. You can add to this the numerous students from different provinces who flock every year to second and third-rate universities and language schools and work like slaves to pay their tuition with the hope that eventually they’ll land a job in Japan.
    I don’t feel sorry or sympathetic to the fact that Japan had slid down in the world economical ranking and US is to follow. They totally deserve it, because it is them who supported China’s economical success by transfering their factories to China or making OEM with Chinese companies in order to use China’s cheap labor and leaving its own people without jobs, hope or future. Japanese companies prefer to import Chinese goods although their quality isn’t that good as the goods made in EU, for example-but they are cheap. The Japanese companies went as far as to forge suspicious Chinese goods (mainly food) as made in Japan, only for profit, and I won’t forget what one of the merchants said , when he was caught:” みんなはやっているけど、俺はたまたま捕まっただけ。”
    Japan is steadily going down, and it is entirely their own fault.

  • @Giuseppe

    And carrying through to the 2000’s Japan made the mistake of pushing for manufacturing the highest quality possible. In the semiconductor industry, for example, it cost them a lot because manufacturers who buy semiconductors as parts for their products don’t necessarily need the highest quality and usually opt for the cheaper products from places outside Japan.

  • Apples and oranges to make comparisons based on GDP, the difference in population size is huge and we all know higher GDP does not mean higher quality of life.
    If I were Japanese I would not worry too much about this news, it is inevitable that a country with a population as large as China’s will develop a massive GDP given the right conditions.

    What I would be worried about is what the role of Japan in is the future, what does it have to offer the world and how will it maintain a good quality of life for it’s people.
    Although I am not resident in Japan, it is always a shame to hear about companies lack of dynamism, flexibility, creativity and eagerness to get out into the world and make some money!

    I disagree that opening up the borders will fix any of this, however an awareness of and openness to the outside world is critical if Japan is to stand any chance of staying relevant.

  • Japan will continue to slide, this is not the end of it.

    However, what Japan needs to do is:

    1) A major revamp of the housing market. The current rules/regulations and building methods are tied up between a handfull of companies and are all providng cheap shoddy houses with a life span of 20~30 years. Shocking!

    Earthquake proof houses (which is their ahh,.. well things are different here bollocks) built form more than bits of paper have been done the world over…but the strangle hold of the big companies (coupled with their politician) prevents such changes to open up the domestic market for a proper change and value for money.

    Also provide major grants to older houses to bring thme “up to date”; just as most of Europe did in the 50s/60s. All this simulates local/domestic companies.

    2)Reform the tax laws. Gifts, capital gians etc etc…get ride of this paying tax on any gift lark….out dated and the reaosn why money no longer moves about in Japan. My in-laws are faced with a crippling 1Billion Yen plus tax bill, because their grand parents had a lot of land and an old house. They had 7 kids, non of whom want the house/land…can’t afford it. They can’t afford to even keep it, nor even sell it as the pay tax twice…catch 22.

    3) Provide proper equality laws for females, and proper employment laws and enforce them. No matter where one is from. NJs are such a minority in Japan, who cares if NJs are included?

    And that is just for starters…

    Opening up the market wont help anyone coming into Japan, as Japan is rotten to the core. There needs to be a “root and branch” change to Japan and the way business/money flows. But sadly, non of this will happen, certainly not over nigth as is really needed.

  • Japan’s central economic challenge is the bizarre massive internal gov’t debt.

    Japanese are known as a nation of savers but all this savings is in their own debt! Deferred taxation is not savings!

    Japan Inc still has a healthy trade surplus even with the return of painful endaka. This trade surplus is why the yen is strong and my gut says we’ll see 50 before parity with the USD.

    With Chinese *skilled* wages at 2.5万 a *month* it makes no sense to import labor to build stuff in Japan. Just build the stuff in China and export it from there.

    I for one see the population decline as a good thing overall. With less people there will be more economic opportunity and Japan will be consuming less resources. Japan has $800B of US treasuries, they can use the interest from that to hire the Filipinas and Chinese to do the menial nursing jobs that are going to be needed.

    Outside of health care, the elderly don’t need much, just fish, rice, and vegetables, all that can be produced domestically, and also imported from the rest of Asia when it’s cheaper.

    I think Japan’s looking OK this century. The outlying areas are going to depopulate, and the nation needs to start getting serious about senior care and moving the elderly into centralized care centers when they need it.

    With the depopulation, unemployment will be tricky. Any job related to youth will become overcrowded and have high unemployment, but balanced by that will be more opportunities to slipstream behind the baby boom echo, which is turning 40 in 2010-15.

    There are 10M people in this 35-39 deme now, and only 6M each in the 5-9, 10-14, 15-19 demes, so overall I think this demographic shrinkage portends a tightening of the labor market (higher wages), not a collapse.

    I’d rather have Japan’s problems than the US’s or China’s.

  • I suddenly found that the premiums for 健康保険 (kenko hoken),厚生年金料 (kosei nenkin) & 社会保険料(Shakai Hoken) have shot up sharply, over the last few months and we have no alternative options. The Govt looks inclined to increase the premiums at their whim and fancy and force everyone to comply. Japan’s social insurence schemes, instead of providing an increased sense of security are looking like more and more oppressive burdens by the day.

    For those in the workforce right now, the future looks increasingly bleak, with prospects of pay raises and bonuses only a distant dream, as the Yen goes on an upward spiral, making exports from Japan less competitive.

    And let me point out the fact, that by moving the manufacturing abroad, the profits from abroad remain only in the hands of a wealthy few and do little to improve the quality of life of an average hard working person inside Japan.

  • This adds to what I’ve written above. How low!

    Planned labor rules in South China worry Japanese-affiliated companies
    Sunday 05th September, 2010

    Newly planned labor regulations that would grant the right of collective bargaining to workers in the southern Chinese industrial city of Shenzhen are causing concern among Japanese-affiliated companies in the special economic zone.

    The impending rules, which could trigger demand for massive wage increases of over 70 percent, have prompted the Guangzhou office of the Japan External Trade Organization, a Japanese government trade promoting agency, to file a petition with local authorities to reconsider the plan.

    Shenzhen, the booming industrial city adjacent to Hong Kong, has been hit since May by a string of strikes by local workers seeking higher wages.

    The new labor rules made public by Shenzhen are apparently aimed at avoiding further labor unrest in the city teeming with factory workers, many of them hailing from outside the province of Guangdong.

    According to the draft, factory workers would have the right to seek collective bargaining with management if the wages of a majority of workers are less than half the average pay in the city.

    The rule, if implemented, would become a powerful legal weapon for low-paid factory workers in the city to get higher wages.

    According to Shenzhen government data, the average monthly salary of factory workers in the city is about 3,900 yuan, or $560.

    The monthly pay at small Japanese-affiliated businesses, most of them in the manufacturing sector, ranges from 1,100 yuan to 1,500 yuan.

    This means that workers at these Japanese-affiliated firms can demand hikes of more than 70 percent just to bring their pay up to half the average wage in the city.

    The planned labor rules in Shenzhen would also allow factory workers to demand collective bargaining with management as often as needed.

    Behind this move in Shenzhen to legislate new labor rules lies a new state economic policy seeking to lessen the weight of exports on the national economy by boosting domestic demand through greater consumer spending power.

    As part of this turnaround in economic policy, many Chinese local authorities have raised the workers’ minimum wages.

    ‘‘If you (a foreign enterprise) cannot afford higher wages, then get out (of China),’’ one Guangdong provincial official said.

    ‘‘It would be a big blow for us if the labor rules are enforced without change. People may have to think hard whether to pull out,’’ said the manager of a Japanese-affiliated electronics factory in Shenzhen.

  • ‘‘If you (a foreign enterprise) cannot afford higher wages, then get out (of China),’’ one Guangdong provincial official said.

    What a great quote. I can’t argue with the sentiment. China is coming into its own…

  • Japan may be the first nation to opt for a no growth, steady state economy.

    By the middle of this year, as the stack of urgent reports concerning Japan’s stagnant economy, political paralyses, fading competitiveness, so-called Galápagos syndrome isolationism, emerging social strains amid widening income gaps, diminished labor pools and a rapidly aging population piled high, Renhō’s rhetorical query seemed to cut to the core of Japan’s mounting troubles.


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