Annual Report on the Japanese
Economy and Public Finance
- No Gains Without Reforms IV -
Government of Japan
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Section 4 Structural Reform to Draw Benefits from Globalization
As outlined above, the Japanese economy has developed this far riding the wave of globalization. However, there are still some aspects that are not sufficiently adapted to the globalization trends. The benefits of the global economy cannot be gained passively. A proactive approach by economic entities is required to bear fruits. To facilitate their efforts towards this end, the government should establish, through structural reform that takes into account global perspective, an environment that will enable Japan's economy to draw the maximum benefits of globalization.
In this section, the structural reforms in the fields of agriculture, direct inward investment, foreign workers and others is examined. Then, a review is made of the increase in employment costs, an important issue in maintaining the future international competitiveness of Japan, and finally, the competition policies will be outlined and their growing importance discussed against the backdrop of the deepening international economic integration.
1. Required Structural Reform in Agriculture
The modalities of domestic agricultural policies in the conditions of globalization are drawing significant attention in countries throughout the world. Since the 1990s, global liberalization has advanced through the WTO and FTA, and the trade of agricultural products has expanded. The benefits of globalization can be realized through the following two points: (i) consumers will be able to purchase inexpensive imported products that have a comparative advantage, and (ii) the principle of market mechanism will come into force and will stimulate improvement in the productivity of domestic agriculture. The improvement in productivity includes the safety orientation of consumers and the greater added value by increase in their income.
From the perspective of globalization trends, the kind of structural reform needed to be carried out in agriculture are explained here.
Initiatives that do not distort trade are global trade in agriculture as well
Firstly, the modalities of systems attuned to the advancing globalization are examined. With regard to modalities of agricultural policies, initiatives that do not distort trade are being advanced under the WTO system. In the Uruguay Round that was completed in 1993, the participants agreed to reduce not only "border measures" (tariffs and other), but also "domestic support" (domestic price support), and this resulted in an advancement, to a certain level, in liberalization of agricultural products. Based on this approach, the US and EU are currently implementing a shift from price support policies for individual goods to decoupling policies(32) such as direct income supports, and the concept that national protective policies should not block the mechanisms on the international market of agricultural products is gaining ground. Japan as well is exploring the possibilities for a shift from price and management security policies for each individual product to a system for concentrated support of human resources that encompasses various products.
Such initiatives to end price support will gradually bring domestic prices of agricultural products closer to international prices, and in order to facilitate them, it is necessary to improve productivity of agriculture and raise its international competitiveness.
Characteristics of agriculture in Japan compared with other advanced countries
Below, the current productivity of Japan's agriculture is examined, comparing it with that of other advanced countries.
A comparative examination in the changes in labor force and land, two major production resources in agriculture, that occurred in the 1990s in Japan and other advanced countries (23 countries including Japan)(33) will reveal the following facts (Figure 3-4-1). Firstly, labor force is on the downturn in most countries (except New Zealand). The reduction is most significant in Japan—about 40%. Secondly, in response to this trend, labor productivity is on the rise and Japan is also going through a similar trend(34). Thirdly, agricultural land is decreasing in most countries, although there are a few countries in which it is increasing. The decrease in agricultural land is most significant in Finland, followed by Japan. Fourthly, despite the decrease in agricultural land, land productivity(35) is on the upturn in many countries. However, Japan is witnessing a stagnation in land productivity.
This indicates that Japan's agriculture is facing the following issues: (i) significant decline in labor force, and (ii) decrease in agricultural land and stagnation in land productivity (efficient utilization of land is not advancing).
Next, the reasons behind and the impact of the decline in labor force and land, two important resources for agricultural production are explored.
Figure 3-4-1 Stagnation in Land Productivity in Japan's Agriculture (1990s)
Decline in labor force and land due to the aging of population
The advancement of the aging of the population engaged in agriculture and the deficiency of successors are two of the factors behind the significant decline in labor force. The number of core persons engaged in agriculture(36) dropped from 2.93 million people in 1990 to 2.26 million people in 2003. The ratio of people aged 60 years of age or above among the total number of core persons engaged in agriculture increased from 46% in 1990 to 68% in 2003 (Figure 3-4-2). Thus the aging of the population is advancing in both quantitative terms, as the number of people engaged in agriculture is falling, and qualitative terms, as highly-productive human resources are decreasing.
Furthermore, Japan's agriculture is still mainly a family-run business, making it difficult to separate labor force from land. Therefore aging of the population engaged in agriculture has an impact on land utilization as well. In other words, when elderly workers retire, if they cannot smoothly pass on their agricultural work to descendants or other workers, it is very difficult to continue the cultivation of the land. In 2000, 340,000 ha (approximately 7% of all arable land(37)) were lands on which cultivation was abandoned, and 14,000 ha, an area equivalent to one-fifth of Lake Biwa, were further abandoned in 2003 (Figure 3-4-3).
Figure 3-4-2 Advancement of Aging of Human Resources
Sources: Population Estimates, Ministry of Internal Affairs and Communications, World Census of Agriculture and Forestry and Survey of the Agricultural Structure and Movement, Ministry of Agriculture, Forestry and Fisheries.
Figure 3-4-3 Trends in Arable and Ruined Land
Decline trend in productivity in land-intensive agriculture
The aging of population is causing a decline in production resources such as labor force and land, and it is possible that such developments might have a negative impact on productivity of agriculture. This negative impact is relatively clear in the trends of land-intensive agriculture(38), or agriculture highly dependent on land. Below, rice cultivation is examined as a representative example of land-intensive agriculture.
Rice is an important crop, which occupies one-fourth of the gross value of agricultural output, but looking at the share it holds in the value of output in 2000 by type of farm household(39), the rate of farm households that are engaged mainly in agriculture (business farm households(40)) is 36%, while the rate of other farm households (semi-business farm households(41) and side-business farm households(42)) is higher at 64%(43).
An examination of the trends in land productivity and total factor productivity (TFP)(44) for rice cultivation by prefecture shows that land productivity and TFP are lower in regions with high rice cultivation ratio (Figure 3-4-4). This indicates a possibility that land is not being effectively used in regions with high rice cultivation ratio. Also, the contribution of TFP to productivity is different from the contribution of capital or labor. Concretely, TFP contributes through improvement of technology systems, organizational configurations, and others. Thus, the fact that land productivity and TFP are lower in regions with high rice cultivation ratio could mean that agricultural management in those regions may not be efficient.
Therefore, it is likely that various structural improvements, such as efficient utilization of agricultural land and incorporation of agricultural management, could still raise the land productivity and TFP of land-intensive agriculture. From this perspective, it is important to enhance such reforms in the future.
Figure 3-4-4 Relationship between Rice Cultivation Ratio and Land Productivity as well as Total Factor Productivity
Necessity to foster motivated human resources and enable effective use of land
The declines in labor force and land, two essential resources for agriculture, have prompted a decline in agricultural productivity. Here an attempt is made to clarify strategies for curbing this decline and increasing the productivity of the remaining resources.
The first issue to discuss is the fostering of motivated human resources. In order to improve the productivity of Japan's agriculture, it is important that motivated human resources introduce innovative technological and management methods and that the expansion in the scale of operations is advanced further. Also, efficient and stable operations implemented by motivated human resources in regions where the population is aging and the lands in which cultivation is abandoned are increasing will help reduce the area of abandoned lands and will stimulate local agriculture. It is necessary to utilize the incorporation of agricultural management in order to foster diverse human resources, and also to concentrate and prioritize measures for such human resources.
The second issue is the effective use of agricultural land. The aging of the population is believed to generate a decline in production resources such as labor force and land. Under this concept, it is necessary to strive for effective utilization of these most fundamental for the agricultural productivity resources. Towards this end, it is important to (i) produce agricultural products that match consumer demand, and (ii) consolidate agricultural land in the hands of motivated human resources. It is pointed out that Japan's agriculture, and rice cultivation in particular, is falling behind in the consolidation of land. The proportion of part-time farm households(45) and the farm households earning income from other jobs (type II)(46) in particular increased after the war, and against this backdrop consolidation of agricultural land in the hands of full-time farm households(47), which had the motivation to expand the scope of their agricultural activities, made no progress. In the future, it is important to establish a framework that will enable the consolidation of agricultural land in the hands of human resources whose goal is development of large-scale operations.
Also, it is necessary to respond to the aging of population and other structural changes in agriculture and rural communities by appropriately maintaining regional production resources.
Anticipated role of special zones for structural reform
Utilizing the corporation of agricultural management in advancing the fostering of motivated human resources is also necessary for the promotion of efficient management. In the past, only joint stock companies that met the conditions for agricultural production corporations(48) were allowed to carry out agricultural activities, but food-producing joint stock companies, for instance, were not allowed to directly buy or rent agricultural land and carry out agricultural activities. These conditions were eased in the Law on Special Zones for Structural Reform enacted in April 2003 that stipulates alleviation of the special measures under the Agricultural Land Law for corporations other than agricultural production corporations, and it is now possible for joint stock companies and other entities to rent agricultural land and carry out agricultural activities in regions where problems such as insufficient human resources and abandoned or unused land are most serious.
Plans for 50 special zones for structural reform related to agriculture have been approved on a national scale as of June 2004. Apart from initiatives that are anticipated to enhance productivity, these plans indicate trends for promotion of regional revitalization centered on agriculture through efforts for strengthening the ties between agriculture and food industry and advancing exchange between cities and rural communities. In Aomori Prefecture, for instance, in addition to the academia-industry cooperation established between a local university and a food producing company, initiatives are being implemented that capitalize on the popularity of Aomori as Japan's major apple production region.
It is necessary to swiftly extend the measures adopted in special zones to a national scale, provided there are no particular problems.
Possibilities for adding high value to Japanese agriculture
The increase in productivity through efficient utilization of production resources, such as labor force and land, is very important for the improvement of the international competitiveness of Japan's agriculture. These efforts are likely to result in lower prices of agricultural products and more benefits for consumers. In addition, as consumers' tastes are diversifying and consumers are becoming increasingly conscious of the health and safety properties of the products they purchase, Japanese agriculture must continue its efforts to respond to the needs of consumers by providing them with products of even higher added value. In recent years, various initiatives to produce agriculture products with high added value have been witnessed. For example, initiatives to reduce the use of agricultural chemicals are being implemented to respond to the increased requirements for safe products. Also, efforts are being advanced to introduce traceability systems that enable tracking of products and information on each stage of their production, processing, and distribution, and acting upon such information. Consumers in Japan are now able to enjoy a wide variety of agricultural products from all over the world, but the provision of high added value domestic products undoubtedly expands their range of choices and enables them to choose products that are best suited to them. Thus, the production of high added value products has great benefits for consumers, and from the viewpoint of Japanese producers increases the competitiveness of domestic agricultural products to imported ones. Therefore, the production of high added value products is a very important task for Japanese agriculture.
Exports of high-quality Japanese agricultural products
The benefits of high added value products are not limited to the domestic markets only. In recent years, there have been precedents of Japanese agricultural products being exported overseas. The growth in the relative export unit price(49) and export volume of apples and strawberries indicates that despite their high prices as compared to imported products, these domestic products are being increasingly exported (Figure 3-4-5). The fact that Japanese agricultural products are being exported even though they are rather expensive by international standards means that they are highly evaluated by foreign consumers. Up until recently, it is pointed out that most Japanese producers were unaware of the possibility to export their products, but by increasing the added value through such implementations as quality control with regard to shape and taste, and the decreased use of agricultural chemicals, expansion of export can be expected(50). These developments have enabled Japanese producers to perceive international competition not only as rivalry between imported goods and domestic goods (the so-called "defensive" approach), but also as a chance to actively develop overseas markets for domestic goods (the so-called "offensive" approach).
Importance of structural reform in harmony with globalization
From the above, it is clear that the advancement of globalization offers numerous benefits and in order to take advantage of them, it is necessary to improve productivity through effective utilization of production resources, as well as to produce agricultural products with even higher added value. In the future, it is important to increase productivity and further expand areas that are specific for the Japanese agriculture. In order to achieve these tasks and to promote the tendency to increase the added value of agricultural products, it is necessary to advance structural reforms focused on workforce in agriculture and on agricultural land, taking into consideration the current status of Japan's agriculture (the delayed consolidation of land in the hands of workforce, etc.) and the strengthening of international regulations under the WTO and other structures.
Aware of this necessity, the government is exploring the possibilities for the fostering of a motivated workforce and for reforms in the agricultural land system, etc. However, it is necessary to keep in mind that agriculture has a wide variety of functions, including guaranteeing food security and conserving land and the environment, and advancing structural reform in harmony with the globalization trends, with the objective of improving the international competitiveness of Japan's agriculture and drawing the maximum benefits for consumers.
Figure 3-4-5 Growth in Relative Export Unit Prices and Export Volume
2. Need for Further Efforts Related to Foreign Direct Investment to JapanForeign direct investment stands for inflow of foreign capital. There are various channels for inflow of capital, including new establishment of an affiliate company, acquisition of shares of a company in that country, or corporate restructuring through merger and acquisition (buying out, capital participation, etc.). The inflow of foreign capital will not only bring additional funds, but will also enrich the economy and society of Japan through transfer of new technologies and know-how of management, as well as through supply of various goods and services. Here, the major issues pertaining to the current status of and challenges for foreign direct investment to Japan are outlined.
Relations between tax system and direct investment
3. Utilization of Foreign Work Force and Other Tasks
Securing free movement of capable human resources and capitalizing the benefits of free movement are important tasks against the backdrop of globalization and international flow of labor force. Efforts for proactive advancement of liberalization in cross-border movement of human resources are being observed in recent initiatives for economic partnership. In the negotiations for economic partnership that are currently being advanced by Japan, the partner countries demonstrate strong interest in the flow of human resources (in the fields of nursing, long-term care, etc.).
The number of foreign workers(54) in Japan is on the upturn in recent years. This trend triggered various problems in companies and communities, including issues that must be addressed in order to capitalize on the benefits of human resource flows. Below, an outline of the current situation and issues related to foreign workers in Japan is given and the tasks in acceptance of foreign workers are sorted.
Foreign work force in the world and Japan
Trade and investment are expanding, and international competition is more severe than ever. Against this backdrop, the cross-border movement of labor force is on the rise. People who move to another country to work are not simply a labor force, but also citizens of a nation, so complete liberalization of their movement in the manner of liberalizing the movement of goods for instance is impossible. However, advanced countries actively assess the benefits of human resource movement, and implement efforts to effectively accept foreign workers by determining the content of activities and terms of stay. These efforts bear the following specifics (Appended Table 3-3).
Firstly, advanced countries have systems for acceptance of specialized and technical workers. Such systems have been developed against the backdrop of social and economic structural changes common for advanced countries, such as (i) changes in the global trade and investment structure such as increase in the services trade, (ii) shift to knowledge intensive industries, and (iii) aging of population and decline in birthrates. In accepting foreign workers, advanced countries implement efforts to control the their quality and volume, by setting the content for activities, period of stay and quotas for acceptance, and by confirming the shortage in the workforce in the domestic labor market.
Secondly, with regard to immigration, efforts differ depending on the origin and history of each country. Unlike the above-mentioned acceptance approach that focuses on labor force, the approach on immigration focuses mainly on its human aspect, and the most common practice is not to set any particular restrictions on the types of occupation.
Thirdly, the norm in accepting immigrants is to require certain levels of linguistic ability.
In addition, advanced countries sometimes change their systems for acceptance of foreign workers or the operation of the systems. For instance, the US imposed a cap on the issuance of the H1-B Visa (visa for specialized and technical workers such as IT engineers, etc.) (2004), and Germany and France set a period of restriction on the inflow of workers from the new EU members.
Japan's measures for acceptance of foreign workers include enhancement and organization of the conditions for foreigners whose purpose of entry is work through amendments in the Immigration Control and Refugee Recognition Act (hereinafter referred to as "Immigration Control Law") of 1990, and granting the status of "long-term resident" to foreigners of Japanese origin. The main policy in accepting foreign workers in Japan is to actively accept specialized and technical workers (foreign workers whose residential status falls under categories 3 to 16 in Appended Table 3-4), as the utilization of their sophisticated knowledge and technical abilities will have a positive impact on Japan's economic development, and to address the issue of the so-called unskilled labor with sufficient caution, taking into consideration its impact on the domestic labor market(55).
Japan's system for acceptance of foreign workers differs from those of other advanced countries by the fact that Japan does not set any special quotas or restrictions on period of stay, and does not have any linguistic requirements.
As for the ratio of foreigners in the entire population in advanced countries, in immigrant nations such as Australia, Canada and the US, it is about 20% for the first two and about 11% in the last. On the other hand, the ratio is below 5% in the UK and Italy, and about 1% in Japan56.
The number of foreign workers in Japan has been on the upturn since the 1990s, and according to an estimate by the Ministry of Health, Labour and Welfare, there are 760,000 (Figure 3-4-9) foreign workers(57) as of 2002, and their share in the labor force population of Japan has reached 1.1%. The main elements in the composition of foreign workers are (i) specialized and technical workers, (ii) long-term residents, (iii) trainees, etc. (iv) foreign students, and others who carry out activities outside those permitted under their status of residence.
As seen above, there are various types of foreign workers and from this perspective the most recent trends in the situation of foreign labor in Japan is outlined.
Figure 3-4-9 Changes in Number of Foreign Workers
Current situation of specialized and technical workers
The whole idea of entering a country with the purpose of work is centered on the abilities of workers and envisions a chance to fully exercise those various abilities by transcending national borders.
According to the Immigration Bureau, Ministry of Justice, some 140,000 people entered Japan in 2002 with the purpose of working (flow base), which is an approximately 50% increase from 1997. Over 80% of the foreign workers are registered with the status of "entertainer," which indicates a bias in the number of foreign workers by status of residence. If these are excluded from the statistics, the number of foreign workers over the period of five years (1997-2002) in Japan with the status of "specialist in humanities/international services" or "engineer" remains unchanged at about 20,000 people (Figure 3-4-10 (a)).
On the other hand, the number of foreigners who reside in Japan (stock base) reached 180,000 people in 2002, which is an almost twofold increase over the period of five years (Figure 3-4-10(b)). This is believed to reflect the increase in the number of foreigners residing in Japan who renew their status to that of specialized and technical workers and extend their stay. Despite the marked increase in foreign workers with the status of "entertainer," workers with a different status of residence are also on the rise. By country, most foreign workers come from nearby countries such as the Philippines and China, and from advanced countries such as the US and UK.
From all described above, it can be concluded that the number of foreign workers in Japan is on the upturn. However, the pace of increase varies from industry to industry. For instance, the increase is relatively slow in areas related to the corporate service sector, and compared to immigrants to the US, the foreigners who enter Japan with the purpose of working, come from a relatively limited number of countries.
Figure 3-4-10 Changes in the Number of New Entrants and Residents by Purpose of Work
Current situation of foreigners of Japanese origin
Next, the current situation of foreigners who enter and stay in Japan with a non-working status visas, concretely, these include (i) foreigners of Japanese origin who enter Japan with the status of "long-term resident" pursuant to the previously mentioned amendments in the Immigration Control Law, (ii) trainees, who are accepted to Japan for a one or two-year period with an employment contract with the accepting organization to receive practical technical training as workers, (iii) foreign students who are allowed to work in certain industries, if they receive a permit to engage in activities outside the scope permitted by their status, and if their working time does not exceed 28 hours a week.
Looking back about a decade after the Immigration Control Law was amended in 1990, it can be seen that the increase in foreign workers who enter and work in Japan on a visa different from the entrance permits for specialized and technical workers is even more outstanding than the growth in specialized and technical workers that our country has proactively worked to attract. Most of these foreign workers are of Japanese origin, mainly nationals of Brazil and Peru, and their number has reached 230,000 people as of 2002. There is an increasing trend for these foreigners to settle in Japan.(58)
There are no restrictions on the types of work activities in which these foreigners can engage, so it is difficult to directly keep track of the format of their participation in the labor market. The Population Census (2000) of the Ministry of Internal Affairs and Communications gives information on the distribution of all foreigners by prefecture. According to the census, in some prefectures such as Gunma, Nagano and Shizuoka, there is a concentration of Brazilian and Peruvian nationals engaged in the manufacturing industries, and this distribution differs from the distribution in other prefectures(59). The ratio of Brazilian and Peruvian nationals of Japanese origin in those regions who enter Japan as long-term residents and find jobs in the manufacturing industry through indirect employment such as contracted work is considered high.
The number of technical interns and foreign students has been increasing in recent years, with the former reaching 46,000 people(60) and the latter 83,000 people in 2002. These two categories form a group which is different from specialized and technical workers.
Issues arising parallel to the increase in the number of foreign workers
By entering companies that are keen on utilizing diverse human resources, foreign workers undertake a critical role in supporting Japan's economy. On the other hand, in order to fully utilize the abilities of such foreign workers, it is necessary to solve several important issues.
The issues that arise parallel to the increase in the number of foreign workers can be classified into issues in the corporate field, those in the economic field, and social issues.
One of the issues in the corporate field is the inter-cultural communication problem. According to a questionnaire survey carried out by the Japan Business Federation (Nippon Keidanren), companies that employ foreigners cite problematic points such as "differences in culture and traditions" and "communication at the workplace." This indicates that most issues are related to culture, language, and awareness.
Impact on the labor market
Secondly, in the economic field, the increase in the number of foreign workers is supposed to have a negative impact on the domestic labor market. There have been indications of concerns, mainly in the advanced countries, that the acceptance of foreign workers is carried out at the cost of employment opportunities for the country's citizens. That is why advanced countries accept foreign workers after estimating their impact on the domestic market through labor market tests, etc.(61) From this perspective, looking at the foreigners ratio and unemployment in the OECD countries, it can be seen that there is no clear correlation between them such that unemployment is high in countries where there are many foreign workers (see Figure 3-4-11).
Figure 3-4-11 Relationship between Foreigners Ratio and Unemployment in OECD Countries
In general, it is believed that the impact of the acceptance of foreign workers on the labor market depends on the comparative balance between the technologies and knowledge possessed by foreign workers and the technologies and knowledge possessed by the country's own citizens. In other words, the negative impact on the domestic labor market will be low when the accepted foreign workers possess advanced technological skills and knowledge. This impact will increase when the accepted foreigners are unskilled workers, and the employment of such workers will be unstable. Also, it has been pointed out that, for foreign workers who are employed as part-time or contract workers or other work formats that are vulnerable to changes in the economic fluctuation, the employment instability that will arise in the event of a downturn in the economy could lead to various social life-related problems.
Problems in the regional communities
Thirdly, in the social field as well, various problems come to the fore as foreigners of Japanese origin become long-term residents of Japan and foreign workers and their families join local communities. Concretely, such problems can be classified as follows: (i) employment-related problems, such as re-employment difficulties, lifestyle instability, and others, which occur when foreigners who do not speak Japanese lose their jobs, (ii) problems related to the education of school-age children that arise from their insufficient Japanese language proficiency, (iii) problems that arise when foreigners do not enroll in social security systems such as the health insurance system and the employment insurance scheme, as there are foreign workers eager to increase their net earnings even minimally and employers who attempt to reduce the burden on their businesses, and (iv) problems caused by cultural and lifestyle-related frictions between foreigners and local communities in regions with a concentrated presence of foreigners. Such regions are already trying to come up with measures for resolving the various problems that arise parallel to the higher concentrations of foreign residents(62).
The status of distribution of foreigners in municipalities as seen in the population census indicates that there is no correlation between foreign residents and the scale of the municipalities and in only 1.6% of all municipalities (3,230) there are no foreign residents. It is believed that the problems related to foreign residents are not relevant only to some municipalities, but are gradually turning into issues that need to be dealt with on a broader scale by local communities.
Examination of various issues in a positive and comprehensive manner
In recent years, the number of foreign workers in Japan has been on the upturn. However, the rapid increase in long-term residents such as foreigners of Japanese origin in particular is not matched by a system for acceptance of foreign workers and this is a source of various problems. The present challenge is how these foreign workers can integrate into society and lead their lives.
It has been pointed out that Japan's acceptance system does not ensure that relevant institutions in charge of immigration control, labor, children education and community life share information and work in cooperation to solve the various problems outlined above. In order to improve this situation, it is necessary to first explore in a comprehensive manner the various problems related to the acceptance of foreign workers.
In recent years, a wide range of proposals regarding the acceptance of foreign workers have been made from various quarters(63). The acceptance of foreign workers and the various issues that arise in the course of this process need to be comprehensively examined from the following perspectives: (i) what measures must be implemented in order to sustain economic vitality against the backdrop of advancing globalization and to improve the life of the people, and (ii) what policies are necessary to deal with the shortage of labor force issue that will arise from the decline in the birthrates and the aging of the population when even instating female and aged workers will not be sufficient to compensate the shortage.
Also, it is necessary to advance examinations on the modalities of specific systems and policies for acceptance of foreign workers after considering the impact on the acceptance on Japan's economy and society, keeping in mind the fact that foreign workers are not simply workers but people who live in Japan. In doing so, it is necessary to enhance examination of various issues in a positive and comprehensive manner, taking into consideration the opinion of the public and with the objective of facilitating the acceptance of high-skilled foreign workers and solving the issues that arise in the course of accepting foreign workers. The development of an acceptance system is increasing its importance from the viewpoint of drawing the maximum benefits of globalization with regard to labor.
4. Concerns over Rising Labor Costs and its Impact on International Competitiveness
It is estimated that insurance premiums will rise in order to maintain sustainable pension, medical and other social security systems in Japan's aging society with a declining birthrate. It is pointed out that this causes concern that labor costs will rise and international competitiveness will decline in Japan. These issues are explored below.
Japanese companies sensitive about labor costs
According to the Annual Survey of Corporate Behavior (2004), the share of companies that answered that their international competitiveness had dropped in the past three years has reached 20% of all companies engaged in the manufacturing industries. More than 30% of the companies have enhanced their competitiveness, so the competitiveness of the manufacturing industries as a whole has not declined. The most frequently cited factor for the decline in competitiveness by more than 40% of companies whose competitiveness has declined is the superior efforts of their rivals in cutting costs.
This indicates that the costs are an important factor with regard to the Japanese companies' awareness of competitiveness. The cost of products is determined by raw material costs, wage costs, non-wage costs, rate of profit and other factors. Below non-wage costs are examined as part of the costs related to workforce.
The social insurance contribution rate of an average salaried worker (including the portion contributed by the employers, against the salaried worker's annual income) is 23.68% (pension 13.58%, medical care 7.7%, employment 1.4%, long-term care 1.0%) as of April 2004, but it is estimated to reach 31.7% in 2025. Of those 31.7%, pension insurance premiums (18.3%) and medical care insurance premiums (9.9%) account for a large share of the percentage. The question is what impact an increase in non-wage costs that incorporate such an increase in social insurance premiums will have on the international competitiveness of Japanese companies.
International competitiveness and the so-called "tax wedge"
One of the important factors that determine Japan's international competitiveness is the labor cost per value-added unit (unit labor cost). If unit labor cost is higher than that of the trading partner, and stays on a rising trend over a long period of time, international competitiveness is likely to decline.
There are several formulas to calculate unit labor costs, but in general per capita employment compensation divided by labor productivity is used. The numerator in this formula, per capita employment compensation, is the net amount and includes social insurance premiums (contributed by employees and employers). The portion after taxes and social insurance premiums are withheld is the employee's disposable income or the final take-home pay. Tax wedge is defined as percentage share to the total labor costs (net wage + social insurance premiums contributed by employers) of the sum of income tax and social insurance premiums contributed by employees and employers. It is called "wedge" because it is the portion of the employment compensation paid by the employer (the company, etc.) to the employee (worker) that does not remain in the take-home pay of the employee.
The rise of taxes and social insurance premiums will increase the wedge, and if employment compensations are not increased, the take-home pay will decrease. If in order to prevent such a decrease, the employer were to pay additional amounts to the employment compensation, the increase in the wedge could squeeze corporate profits or undermine the company's incentive to maintain and create employment. Furthermore, from the perspective of choices in establishing business, companies are likely to avoid establishing businesses in countries with high tax wedge.
There are concerns that an increase in the tax wedge will discourage workers and deteriorate the unemployment situation by weakening creation of employment, and therefore, combined with other factors, it might have a negative impact on the overall economy. Furthermore, an increase in labor costs is likely to reduce international competitiveness.
Tax wedge in Japan is still low
Every year, the OECD measures and publicly announces tax wedge of surveyed countries (the percentage share to the total labor costs of the sum of individual income tax and social insurance premium contributions). With regard to Japan, the OECD pointed out the following specifics. Firstly, Japan's tax wedge is the eighth smallest among the 22 countries covered by the OECD survey (for 2002, the case of a married person with an average salary employed in the production sector with two children). Secondly, the wedge has been increasing in Japan since 1995, and an important factor that underpins the increase is the rise in pension insurance premiums implemented along with population aging and despite the gradual reduction of the tax burden carried out in consideration of the economic condition (Figure 3-4-12).
Factors that impact on international competitiveness
Below, the "international competitiveness index" calculated by the OECD is used as an indicator of international competitiveness, and will explore what kind of factors govern its fluctuations.
This index measures whether the unit labor cost of a country are increasing or decreasing more than those of the country's trading partners. In other words, it highlights the relative changes in labor costs in manufacturing industries trade, and implies that when labor costs are increasing, the international competitiveness of the country is decreasing.
As for the trends in Japan from 1990 onwards, in the first half of the 1990s international competitiveness dropped, but since then it has been fluctuating (Figure 3-4-13). The OECD has been disclosing the competitiveness index for 26 countries since 1990, and according to the OECD findings, the international competitiveness for the same period has increased in 10 countries (including Sweden and Ireland), decreased in eight countries (including Japan and the UK), and remained almost flat in the remaining eight countries.
Changes in real competitiveness are affected by changes in the labor costs in the trading partner country, and therefore the OECD competitiveness index responds not only to factors in the country itself, but also to the changes in the labor costs in the trading partner country as well. Here, factors for changes in the competitiveness index are examined, under the premise that there are no changes in labor costs in the trading partner country, and focusing on the following four types of domestic factors: (i) labor productivity, (ii) per capita compensation of employees (after taxes), (iii) wedge (in this case, the actual value of individual income tax and social insurance premium), and (iv) nominal effective exchange rate. Concretely, a panel analysis was carried out on competitiveness of 21 OECD member countries over the period from 1987 to 2002, using the rates of change in the above-mentioned four factors (year-on-year basis) as explanatory variables and the rates of change in the competitiveness index as dependent variables (Figure 3-4-14).
Figure 3-4-12 International Comparison of Tax Wedge
Figure 3-4-13 Trends in International Competitiveness Index
Table 3-4-14 Factor Analysis of Competitiveness Index
The results of the estimates found that all four variables have a significant impact on the competitiveness index. The following changes have an effect equivalent to a 1% decrease in the competitiveness index: (i) an approximately 1.0% increase in the nominal effective exchange rate, (ii) an approximately 1.9% drop in the growth rate of labor productivity, (iii) an approximately 2.5% increase in per capita compensation of employees (after taxes), and (iv) an approximately 60% increase in the wedge (actual amount).
Structural impact of tax wedge
The results of this analysis help clarify the factors behind the decline in Japan's competitiveness in the 1990s. The competitiveness dropped by 43% between 1990 and 2002, and the appreciation of the yen is responsible for approximately 80% of the decline, while the slow-down in the rate of labor productivity growth is to be blamed for approximately 20% of the decline. The increase in the wedge (actual amount) remains responsible for only 2% of the decline.
Therefore, the increase in the wedge (actual amount) causes a decline in competitiveness, but the extent of its direct effect is small, and from the viewpoint of labor costs, it is possible that it can be fully neutralized by increasing productivity.
Here, changes in competitiveness triggered by the direct impact of the wedge on labor costs are measured. As stated above, since the wedge could weaken employment creation and undermine labor motivation, there are concerns that it might result in an increase in structural unemployment (unemployment caused by factors other than cyclical changes of the economy). An increase in structural employment is feared to result in an insufficient utilization of human capital and subsequent bottleneck in the accumulation of specialized skills. This could reduce the economic viability and weaken the competitiveness of the country. An international comparative study(64) identifies as factors for structural unemployment issues in the labor market (mismatch in types of occupation, etc., insufficient flexibility in wages, etc.), labor-management relations (extent of collaboration between labor and management, policies in wage negotiations, proportion of labor union membership, etc.), and the existence of minimum wage, and points out that the increase in the tax wedge as well is not unrelated to the rise in structural unemployment. There is a positive correlation between the increase in the wedge and the rise in structural unemployment (Figure 3-4-15).
That is why some countries, mainly those in which the tax wedge is higher than in Japan, are implementing initiatives to curb and reduce the wedge. An increase in the wedge is envisioned in the future in Japan as well against the backdrop of the steep decline in birthrates and the rapid aging of society. Therefore, it is important to explore the relationship between benefits and burdens, and to establish sustainable public finance and social security systems, as well as to further advance structural reform toward revitalizing the entire economy.
Figure 3-4-15 Relationship between Structural Unemployment and Tax Wedge (Changes Between 1991 and 2001)
5. Globalization and Competition Policies
Structural reform increases the importance of competition policies
Competition policies consist of elimination and easing of regulations that restrict competition and employment of the Antimonopoly Law to prevent corporate activities that restrict competition.
Promotion of creative ingenuity in individuals and companies and elimination of regulations that restrict competition among companies are important measures for revitalizing the economy. On the other hand, the importance of the Antimonopoly Law increases proportionally to the expansion of areas in which government regulations are alleviated through structural reform. This is because in areas where government regulations are eased, companies will strive to grow by providing products of higher quality at lower prices; but on the other hand they will be tempted to carry out deals that will limit each other's competition so that profit can be realized without much effort. Therefore, in order to put into effect the principles of market economy, it is necessary to prevent corporate activities that attempt to increase profits by restricting competition.
Reduction of government regulations, advancement of structural reforms, and promotion of economic liberalization have become a global trend since the 1980s. Against this backdrop, the importance of the role of competition policies focused on employment of the Antimonopoly Law is also increasing. In other words, it can be said that enhancement and reinforcement of competition policies are increasing in importance as part of the structural reform.
International harmonization of competition policies is necessary for globalization of corporate activities
As tariff rates are reduced as a result of trade liberalizations, and companies intensify their international activities, domestic anticompetitive behavior is increasingly perceived as a major obstacle to trade. For instance, if among Japan, the US and EU, Japan alone tolerates the practice of domestic bid-rigging, participation by foreign companies in the Japanese market will be obstructed, while Japanese companies will be able to freely participate in foreign markets. If no measures are taken to prevent such developments, international competitiveness will take on the characteristics of unfairness and the development of a sound market economy will be disrupted. That is why the impact that modalities of competition policies implemented by the government of various countries have on international activities has come to the fore(65).
Against this backdrop, there has been an increasing number of cases in which competition authorities in different countries apply antimonopoly laws across national borders. In such cases, it is highly possible that competition policies of a foreign country will be applied not only to companies that carry out foreign direct investment, but also to companies which simply export their products. That is why corporate activities are now strongly affected not just by the modalities of competition policies of separate countries, but by the trends in international competition policies(66). However, proactive extraterritorial application of competition policies could cause major political frictions. Furthermore, in terms of their practical application, it is very difficult to actually enforce competition laws for extraterritorial corporate activities.
On the other hand, contrary to such cases of proactive application of competition policies, since export cartels and other similar organizations do not have any impact on the market in the respective country, there are many countries that exempt them from the application of competition laws or simply do not apply competition laws to export cartels. This is because competition laws of each country are generally designed to protect domestic consumers. However, strengthening of initiatives to tighten control on acts by cartels and other that interfere with the international competition environment through harmonization and coordination among the countries is also an important task from the perspective of promoting trade and competition.
Also, as corporate activities expand internationally, the number of mergers that affect markets of multiple countries is on the rise. In the event of such international mergers, numerous relevant notifications must be submitted and approvals obtained, and if such procedures place excessive burden on companies, they might obstruct their smooth international expansion.
In order to address such issues, it is necessary to ensure that each country's notification submission and screening procedures for corporate mergers will not place unnecessary burden on companies, and to carry out international efforts, including improvement and convergence of standards, in order to promote harmonization and coordination of merger investigations among countries.
In summary, (i) if competition policies differ from country to country, it is possible that international competition will adopt some unfair practices, (ii) in some cases, unfair competition practices by international companies cannot be accurately eliminated by the competition authorities of one country only, and (iii) for companies, common standards for competition policies are indispensable for the promotion of smooth international activities. These facts create the necessity of determining the modalities of international competition policies, etc. through cooperation among countries.
Movement for establishment of an international enforcement cooperation syste
As for international initiatives on the competition policies described above, since the 1970s, bilateral efforts have been intensified mainly with the US, focused on exchange of information and other forms of cooperation with regard to antimonopoly laws, and Japan also concluded the Japan-US Antimonopoly Cooperation Agreement in 1999. However, few bilateral agreements have been concluded so far, and their range of application is limited, as one country could only request its partner country to launch an investigation on enforcement of the agreement. Further efforts are necessary in this regard in the future.
In addition to the movement for bilateral agreements, deliberations are being advanced at international fora. For instance, in the World Trade Organization (WTO) discussions on desirable relations between promotion of free trade and competition policies have been carried out since the 1996 Singapore Ministerial Meeting. Such fora explore methods to ban anticompetitive practices such as price cartels and bid rigging, etc. and modalities for voluntary cooperation on competition policies among countries(67), and discuss the transparency, principles of non-discrimination and procedural fairness(68), which are the core of multifaceted trade systems.
In the course of responding to this international trend for improving the competitive environment, in order to draw vitality from overseas and extract the maximum benefits from domestic economic viability, Japan needs not only to actively participate in international activities such as the ones outlined above, but also to enhance competition policies that comply with transparency, principles of non-discrimination and procedural fairness. Greater transparency in examinations of mergers in particular is essential for revitalization of the Japanese economy not only through mergers and acquisitions (M&A) among Japanese companies, but also through direct investment that will enter Japan through M&A with overseas companies, etc.
Necessity of domestic structural reforms and competition policies tailored to globalization
In the 1990s, Japan advanced regulatory reforms in regulated industrial sectors such as transportation, finance, telecommunications and energy, etc. Restructuring of many regulations such as entry regulations and others was required, and certain results were achieved. Such regulatory reforms are implemented with the objective of improving efficiency through introduction and promotion of competition, and maximizing consumers' benefits through reducing the gap between domestic and external prices. As such, it will be correct to say that regulatory reforms follow the principles outlined in the Antimonopoly Law and the competition policies. However, in regulated sectors that have come to tolerate legal monopoly, it is essential to carry out not just simple deregulation, but regulatory reform that incorporates improvement of competition conditions and assured enforcement of the Antimonopoly Law.
In addition, it is being increasingly recognized that utilization of market functions in areas that in the past were considered unrelated to competition, such as medical care, welfare, education, labor market and law, could enable provision of diverse and efficient services by various individuals and companies. Trading partners in FTA negotiations have called for deregulation in those areas, and local governments have submitted various requests for deregulation as part of their initiatives for special zones for structural reform. Against this backdrop, a variety of discussions have been under way on regulation modalities, including Japan's initiatives for globalization, such as FTA, and initiatives for structural reform.
Japan is now in a transition period of coexistence of new regulatory policies and competition policies, when competition policy rules are being applied in an integrated manner with regulatory reforms in areas that traditionally were not considered as targets for such competition policies. Further efforts are required to establish a harmonious relationship between these two types of policies.
Summary of Chapter 3
Surplus reduction effects in balance on payments for goods and services have been increasing since the 1990s due to the appreciation of the yen. It is believed that such developments are related to micro-economic level changes in corporate activities. Such changes include (i) the expansion of business operations of export companies abroad with a focus on the Asian region in order to avoid the negative impact of yen appreciation on corporate profits, and (ii) the change in the added value structure of Japanese imports and exports due to the expansion of overseas operations of Japanese companies and the creation of vertical intra-industry trade in the Asian region, which were brought on by the Asian currency crisis and the collapse of the IT bubble, as well as the stagnation of the Japanese economy and the corporate restructuring and integration, etc.
On the other hand, such changes brought some benefits, such as increase in low-price imports and in disposal income of household budgets. However, it is considered that the changes in the industrial and trade structure have had some negative impact on employment and wages in some industries.
These developments suggest that Japan needs sustainable growth led by the private sector. At the same time, determining the position of Japan's economy in the international network of corporate activities will be important in establishing the foundation of sustainable economic growth against the backdrop of advancing globalization. This is because corporate activities are a source of income generation, and even if low-priced imports become possible, Japan will not be able to enjoy the benefits of low-priced imports over the long term provided that the economic infrastructure is not reinforced. Enhancement of the economic infrastructure has a major role to play in structural reforms.
Therefore structural reforms are an important issue not only from the perspective of revitalizing Japan's economy, but also from the viewpoint of drawing benefits from globalization. Economic revitalization will become possible only after Japan finds its place in the international network of corporate activities, and therefore it is important to promote economic partnerships and inward direct investment. Structural reforms that take into consideration the international aspects of the economy require advancement of domestic competition policies, as well as establishment of an effective international cooperation system.
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