Section 3 Structural Reform Raises Growth Rate

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Chapter 2

Problem of Non-Performing Loans and Strength of the Japanese Economy

Section 3 Structural Reform Raises Growth Rate

We have so far seen that the problem of non-performing loans dragged on the Japanese economy in the 1990s. In order to extricate the economy from 10 years of stagnation and put it on a sustainable recovery path, we must carry out drastic disposal of the "negative legacy" of non-performing loans and implement various structural reforms designed to realize a vigorous economy. From this standpoint, the government has been promoting economic structural reforms in line with the Basic Policies that was decided at a cabinet meeting in June 2001.

The average annual growth rate of the Japanese economy was only slightly above 1% in the past 10 years. Then, if the problem of non-performing loans is solved and structural reforms that would raise the growth potential of the Japanese economy are implemented, to what extent can the economy grow in the medium and long terms? In order to forecast a growth path over the next 10 years or so, it is necessary to analyze the "potential growth rate" of the Japanese economy. We will survey the future of the Japanese economy by assessing the growth potential from the analyses of productivity of the economy, accumulation of capital stock, and changes in labor force (See Column 2-4 "Sound Development of the Financial Sector Raises Economic Growth" ).

The following are summary of the results of the analyses: The potential growth rate of the Japanese economy is expected to decline to around 1% in the short term due to the effect of slow growth in the 1990s. However, if structural reforms are carried out and Japan' s resources, such as labor, management resources, and capital are shifted from low growth fields to high growth fields and the productivity of the economy as a whole is enhanced as a result, it is fully possible for the Japanese economy to post an average growth rate of 2% or higher in the medium and long term.

1 Decline in Potential Growth Rate

What is potential growth rate?

The potential economic growth rate of the Japanese economy means the rate of economic growth that the Japanese economy can potentially achieve. Actual economic growth rate does not necessarily correspond to potential economic growth rate. When the economy is depressed, the actual growth rate is lower than the potential growth rate. Conversely, when the economy overshoots, the actual growth rate is higher than the potential growth rate. In other words, potential growth rate is the rate of economic growth that can be achieved when capital stock, labor force, etc. are optimally utilized without accelerating inflation.

To what extent can the future potential growth rate of the Japanese economy be increased? In order to answer this question, given the current Japanese economic situation, it would be necessary to consider the potential growth rate for a relatively short period of 2~3 years and that for the medium and long terms separately. This is because the growth potential of the Japanese economy has declined due to the slow growth in the past 10 years and because the economy is believed to be unable to achieve growth exceeding its real strength over the next 2~3 years. However, if the strength of the Japanese economy (technology, quality of labor, high savings rate, etc.) is demonstrated through various structural reforms, the potential growth rate for the medium and long terms will exceed the low potential growth rate expected for the short term.

If slow growth continues for a long period of time, the short-term potential growth rate will decline because (1) the growth of capital stock slows down in line with a decline in corporations' expected growth rate (future growth rate forecast by corporations) and (2) the growth of the productivity of the economy as a whole (total factor productivity: TFP) declines.

Corporations assume a certain level of future economic growth rate when they determine how much business investment they will make. When the actual growth rate remains low, business investment becomes inactive as corporations' expected growth rate also declines, making it difficult to secure the growth of capital stock commensurate with the economic growth based on the economy' s real strength. And, as will be described later, if the economy remains stagnant, the growth of productivity of the economy as a whole (TFP) slackens. Therefore, the short-term potential growth rate of the Japanese economy, which has been stagnant for a long period of time, will be lower than the rate expected from the real strength of the economy.

Since the relationship between corporations' expected growth rate and potential growth rate has important policy implications on the future course of the Japanese economy, we will examine it a little more in detail.

Relationship between potential growth rate and corporations' expected growth rate

Figure 2-3-1 shows corporations' expected growth rates in Questionnaire Concerning Corporate Activities conducted by the Cabinet Office. It shows that expected growth rate has been declining almost consistently since the collapse of the bubble economy.

Actual growth rate and corporations' expected growth rate are mutually dependent on that (1) if actual economic growth rate rises, expected growth rate also rises and (2) if expected growth rate rises, it increases business investment and consumption, resulting in raising actual economic growth rate. In other words, expected growth rate has a "self-fulfilling" nature.

With regard to a rise in expected growth rate leading to a rise in actual growth rate (the (2) above), we estimated the function that explains the relationship between growth rate of business investment and expected growth rate. It shows that a 1% rise in expected growth rate increases business investment by 2~4% (See Appended Note 2-3). This corresponds to the relationship under which a 1% rise in expected growth rate increases actual growth rate by 0.3~0.7%.

Future economic growth rate forecast by households also has an effect on actual growth rate. A rise in households' expected growth rate is believed to increase personal consumption as it increases the average future income forecast by households (permanent income).

If the kind of problems that are generally believed to lower growth rate like the problem of non-performing loans happens, it is likely to lower the actual growth rate through a decline in expected growth rate, even if the problem is not actually a major drag on the economy. If actual growth rate remains sluggish, short-term potential growth rate, as was described earlier, will also decline. The Japanese economy in the 1990s was in such a situation. Conversely, if corporations and households believe that factors dragging on actual growth rate and/or short-term potential growth rate will be removed, then, actual growth rate will rise as expected growth rate increases. If it continues, the short-term potential growth rate of the economy will rise through an increase in capital stock, making it possible to achieve a high level of long-term potential growth rate.

Therefore, the government should not think that it is difficult to achieve growth rate that exceeds the economic growth rate forecast by corporations and households (expected growth rate) at present. Rather, it is extremely important for the government to present a policy plan to remove obstacles impeding economic growth and change expectations of corporations and households for the future, and thereby create a virtuous circle of improvement of expectations and a rise in private demand.

Estimation of Potential Growth Rate

Let' s measure short-term potential growth rate (to be simply called potential growth rate in this section) over the next 2~3 years by employing a growth accounting method. Growth accounting is calculation by assuming a production function consisting of three factors: "capital input" that is obtained by multiplying capital stock by operating rate, "labor input" that is obtained by multiplying the number of employees (to be calculated by using total labor force and unemployment rate) by hours worked, and "total factor productivity," to measure contribution of each factor to economic growth(21). As a result of this measurement, we can see that the potential growth rate over the next 2-3 years is about 1%.

Our interest is short-term potential growth rate in the future. But, we can also measure potential growth rates in the past and to what extent capital input, labor input and productivity each contributed to the potential growth rates. In the estimates below, we calculated potential growth rates by using such factors as the operating rate of capital stock under the condition that the perception of excessive capital stock has all but been dispelled, an estimated structural unemployment rate that excludes mismatch of employment (unemployment rate that excludes cyclical unemployment caused by economic fluctuations), and a potential productivity obtained by averaging productivity in each quarter (Figure 2-3-2, upper figure).

The potential growth rate was slightly over 3% in the first half of the 1980s (1981~1985) and well over 4% in the second half, or during the bubble economy (1986~1991). A breakdown of the potential growth rate shows that capital input contributed about 2% throughout the 1980s and productivity contributed slightly less than 1% in the first half and slightly less than 2% in the second half, but the contribution of labor input was relatively small at about 0.5% throughout the 1980s. Therefore, it can be said that the growth in the 1980s was mainly led by productivity and capital input (Figure 2-3-2, lower figure).

However, the potential growth rate in the 1990s, or after the collapse of the bubble economy, declined to slightly over 2% in the first half (1992~1995) and to slightly over 1% in the second half (1996~2000). What were the major causes for the declines? The contribution of capital input declined from around 2% in the 1980s to slightly over 1% in the 1990s due mainly to a sharp decrease in business investment in the first half of the 1990s. The contribution of productivity declined from slightly less than 1%~slightly less than 2% in the 1980s to well below 1%. The contribution of labor input was negative. Factors that reduced labor input and dragged down the economic growth in the 1990s were slower growth of total labor force caused by aging population with less children and an increase in structural unemployment caused by the expansion of employment mismatch, in addition to a decrease in regular working hours caused by promotion of shorter working hours(22).

Therefore, a rough comparison of growth patterns in the 1980s and 1990s shows that capital, labor, and productivity combined reduced economic growth rate by slightly less than 3%, with each reducing the rate by slightly less than 1%.

Now, we will assess the potential growth rate over the next 2~3 years on the basis of the movement of potential growth rates in the past. In the second half of the 1990s, the contribution of capital input was about 1%, that of productivity was slightly positive, and that of labor input was slightly negative. Since the growth of capital stock and the growth of productivity do not fluctuate greatly in the short term and since regular working hours have been stable of late, the potential growth rate over the next 2~3 years is expected to be around 1%.

Why did potential growth rate decline?

Why did potential growth rate decline from the 1980s to 1990s? The decline in the contribution of labor input can be accounted for by structural factors, such as shorter working hours, and demographic factors, such as aging population with less children. But, why did the contribution of capital input and productivity (TFP) decline?

An increase in capital stock depends on the "level" of business investment, a major source of growth for capital stock. If the "level" of business investment is high, the growth of capital stock increases even when the growth of business investment declines (even when it is zero or minus), as the portion of fresh capital stock added is large. In order to see this point, let' s compare the growth of capital stock in 1991, when the "level" of business investment was high, with that in 2001. Even if the growth rates of business investment in the following years were zero, the growth of capital stock would be 6.9% in 1991 vs. 3.0% in 2001, meaning that the contribution of business investment to potential growth rate in 1991 was about 1.3% higher than in 2001(23). The magnitude of the decline in the level of business investment in the past 10 years can be exemplified by changes of the "business investment / capital stock" ratio. It stood at 12.2% in 1990 and 7.0% in 2000. The decline in the "business investment / capital stock" ratio is attributable to the following: a decline in expected growth rate caused by low economic growth in the 1990s, corporations' shift to lean management (increased cost consciousness and cutbacks on business investment with low profitability) and, as was analyzed in the preceding section, the slow growth of business investment caused by the problem of non-performing loans of banks and excessive debts of corporations.

The slowdown in the growth of the total factor productivity (TFP) is attributable to the fact that labor, management resources, and capital have remained unused in low-profit industries and corporations without being reallocated to fields of high profitability, due to structural problems such as the problem of non-performing loans. The structural problems here refer to, in addition to the problem of non-performing loans, government regulations that still remain in place despite a series of deregulation implemented in the 1990s, and systemic fatigue of private enterprises' management style and decision-making process.

Figure 2-3-3 shows to what extent a rise (decline) in industry-by-industry productivity contributed to a rise (decline) in productivity of the economy as a whole. It shows that the growth of the productivity of the manufacturing industry has not declined much since the 1980s but that the growth of the productivity of the non-manufacturing industry, which is believed to have been hard hit by the problem of non-performing loans, declined in the 1990s. In particular, the productivity of the three industries (construction, real estate, and wholesale and retail) that are closely related to the problem of non-performing loans was stagnant, dragging down the productivity of the non-manufacturing industry as a whole.

Although the slowdown in the growth of productivity is considered to be one factor behind slow growth in the 1990s, the opposite cause-effect relationship, that is, the slow growth of the economy causes a slowdown in the growth of productivity, can be pointed out. In other words, when the economy is buoyant, business activity becomes lively and capital stock and labor operate "densely" and since this enhances economic efficiency (for example, when business is active, a delivery truck can deliver goods efficiently at one time as its customer base increases), the growth of productivity that is calculated as a residual in growth accounting (actual economic growth rate minus the portion of contribution to growth made by capital input and labor input) tends to increase. On the other hand, when the economy is sluggish, there may occur excessive employment in the form of in-house unemployment and since the labor input does not decrease in such a case, the growth of productivity that is calculated as a residual decreases. Therefore, generally speaking, the growth of productivity tends to increase when the economy is buoyant and tends to decrease when the economy is sluggish. Normally such an increase (decrease) in productivity has no effect on the growth of medium- and long-term productivity, as it is smoothed out in a business cycle. However, when economic stagnation prolongs and the perception of excessive employment is at a high level, like in the 1990s, the growth of productivity to be calculated tends to be dragged down. In short, the decline of productivity in the 1990s in some respects was caused by the stagnant economy.

Adverse effects of the decline in the productivity of non-manufacturing industries

A decline in the growth of the productivity of non-manufacturing industries leads to a rise in prices of various services provided by non-manufacturing industries and this, in turn, may lead to a rise in prices of products produced by manufacturing industries that use services provided by non-manufacturing industries, resulting in a decline in the profitability of manufacturing industries. In fact, the profitability of manufacturing industries declined sharply in the 1990s (Figure 2-3-4). As a result of the sharp decline in the labor productivity of non-manufacturing industries, the cost of manufacturing is estimated to have increased about 4% compared with a case where the labor productivity of non-manufacturing industries kept increasing at a high level of the average of the 1980s (a hypothetical case). If manufacturers did not pass on the increased cost to their products at all, their profitability (= ordinary profit / total assets: 3.9% in FY 2000) would decline by about 3 percentage points (For detailed estimation method, see Appended Note 2-5). Since a decline in profitability restricts growth of capital stock through a decline in business investment, the potential growth rate of the economy as a whole will also decline.

The above discussion shows that the sharp decline in the productivity of non-manufacturing industries in the 1990s not only directly lowered the potential growth rate of the Japanese economy in the 1990s, but also indirectly lowered the potential growth rate by undermining manufacturing industries (increase in cost, decline in profitability, and decrease in investment).

The current GDP gap is at the same level as in the 1997~98 recession

The difference between the actual level of GDP and "potential level of GDP" (the level of GDP when the economy grows at the potential growth rate: Hereinafter to be called potential GDP) is called GDP gap. It is an indicator that shows the level of demand against the supply capacity of the economy as a whole. Since the level of GDP gap differs greatly depending on the method used for computing potential GDP, we have to be careful in interpreting it, as will be described later. The significance of computing GDP gap is not to see its absolute size (x% of GDP), but to see its time-series changes (for example, how much is the current GDP gap larger than GDP gaps in the past).

In order to compute potential GDP, it is necessary to assume potential levels of (1) productivity (TFP), (2) operating rate of capital, and (3) unemployment rate. In the estimate here, we use the following for each: (1) smoothed-out time series of actual productivity, (2) operating rate judged as optimal by enterprises, and (3) structural unemployment rate that takes account of employment mismatch (For detail, see Appended Note 2-4).

According to our estimate, the GDP gap was about 3~4% as of 2001 (Figure 2-3-5). This exceeds the level of GDP gap in the first half of the 1990s and is on a par with the level of GDP gap in 1997~98, when the economy was in severe recession. But, despite the prolonged economic stagnation, the GDP gap did not expand much in the past 10 years.

Against this estimate, some would argue that since the capital stock has become "obsolete" due to the huge amount of wasteful investment made during the bubble economy, the GDP gap has been estimated excessively. If such is the case, estimated growth rate of productivity may be affected, but the size of GDP gap estimated here will not be affected. This is because, under the estimation method used here, while capital input will be overestimated by the amount of wasteful investment, the estimated growth rate of productivity declines (See Column 2-5 "Obsolescence of Capital and GDP Gap" )(24).

Incidentally, we have to be careful in interpreting estimated GDP gaps because they differ in the definition of GDP gap and preconditions. In our estimate here, we used a concept of operating rate close to the average level of the past in computing potential GDP. But there are other estimates that compute the maximum GDP that the economy can achieve at the time by using the largest operating rate in the past. In such an estimate, the potential GDP will be larger than the one we estimated.

Structural reforms likely to reduce economic growth in the short run

If structural reforms are to be pushed ahead over the next 2~3 years, it is highly likely that deflationary pressures, such as an increase in unemployment involved in the disposal of non-performing loans and a cutback on public works, will become tangible in the short run. What is even worse, if the recovery of the U.S. economy slackens due to the series of terrorist attacks in the U.S. in September 2001, it will inevitably drag on the Japanese economy. Therefore, the Japanese economy is likely to post a growth rate lower than its potential growth rate over the next 2~3 years. In such a case, the GDP gap is expected to expand slightly from the present level.

However, it is necessary to establish a solid foundation for medium- and long-term economic development during what can be called a period for intensive adjustment of the Japanese economy. Then, how fast can the Japanese economy grow if the foundation is in place? We will discuss this point in the next section.

2 Raising Potential Growth Rate by Promoting Structural Reforms

In this section, we will estimate medium- and long-term potential growth rate when the productivity of the economy as a whole has been increased thanks to progress in structural reforms that will facilitate reallocation of resources, such as labor, management resources, and capital, from sectors of low productivity to sectors of high productivity. We will also study in what way structural reforms are related to demand/supply in the economy as a whole, or concrete images of structural reforms that will lead to strengthening supply capacity and increasing demand.

Estimation of medium- and long-term potential growth rates

We will estimate to what extent the potential growth rate can be achieved in the next ten years or so by using the growth accounting method, while taking into account an interconnected relationship of factors, such as labor input and capital input.

Out estimate is preconditioned to structural reforms. Specifically, our estimate is preconditioned to progress in such fields as (1) policies to revive non-manufacturing industries' productivity that has been at a low level since the 1990s, including measures to solve the problem of non-performing loans and secure the efficiency of public works, (2) reforms to promote social participation of women and the elderly and creation of new jobs, and (3) rehabilitating industries by solving the problem of excessive debts of enterprises and securing sufficient growth of capital stock.

If such structural reforms are implemented, to what extent can the productivity (TFP) of the economy as a whole be increased? Although the productivity growth of manufacturing industries did not change much from the 1980s to the 1990s, the productivity of non-manufacturing industries turned negative in the 1990s, reducing the contribution of productivity of the economy as a whole to economic growth to about zero percent (Figure 2-3-3). The annual growth rate of productivity in OECD member countries was higher than that of Japan by 0.5~0.6% in the 1990s. It is fully possible to increase the medium- and long-term contribution of productivity to 0.5~1%, if the following conditions are met:

• (1) The productivity of manufacturing industries continues its current level of growth.
• (2) Structural problems, such as the problem of non-performing loans, are solved and non-manufacturing industries' productivity is revived.
• (3) Positive contribution of information technology (IT) to productivity is realized (See Column 2-6 "Does IT enhance potential growth rate?" ).

Next, as for growth in labor input, we believe it is possible to increase the medium- and long-term contribution of labor input to 0~0.5%, if the following conditions are met:

• (1) New jobs, such as those to be discussed below, will increase in the services industries.
• (2) In line with progress in service industries, such as child-care services, the female labor force participation rate (labor force / working-age people x 100) that follows an M-shaped pattern, which is peculiar to Japan, will be improved. And, the participation rate for elderly people in the labor force will increase thanks to improvement in employment environments.
• (3) The problem of mismatch in employment will be solved smoothly as a result of improvement of employment services and reinforcement of vocational training programs mainly in the private sector, and the number of workers will keep increasing.

Lastly, as for capital input, its contribution to economic growth is now about 1%, as the growth rate of capital stock has declined to a low level due to slow economic growth in the 1990s. If the contribution of productivity and labor input is increased to about 0.5~1% and about 0~0.5%, respectively, we believe that the contribution of capital input will increase to about 1.5%. One of the reasons why we believe so is that, as we have discussed earlier, the growth of capital input depends on potential growth rate. In the past, the growth of capital stock was about 2% higher than potential growth rate(25). If the relationship between the growth of capital input and potential growth rate is maintained, the growth rate of capital stock that takes into account the growth of productivity and the contribution of labor input comes to about 4~5%. In that case, the contribution of capital input comes to about 1.5%. Another reason is per-capita capital stock (capital equipment ratio) that has been increasing steadily. If this trend is extended on the assumption that service employment will increase its share in the structure of occupation, the contribution of capital input to growth again comes to about 1.5%(26).

Given the above, it would be possible to increase the potential growth rate of the Japanese economy, now at about 1%, to about 2% in the medium and long run(27). Depending on the progress of structural reforms, higher growth rate would be possible. In the case of the potential rate of growth being 2%, the contribution of productivity to growth is expected to be about 0.5%, that of labor input 0% or slightly above 0%, and that of capital input about 1.5% (Figure 2-3-6).

Per-capital GDP growth was 3.5% in the 1980s, when the economy grew 4.1%, and about 1% in the 1990s, when the economy grew 1.3%. However, economic growth rate will correspond to per-capita growth rate over the next 10 years. Therefore, if the Japanese economy achieves an annual growth rate of 2%, given a decline in population growth rate, it would correspond to an annual growth rate of about 2.5% in the 1980s in terms of per capita growth.

On the basis of the above growth accounting analyses, we can say that, if effective structural reforms are not achieved and an increase in productivity is not realized, the medium- and long-term potential growth rate of the Japanese economy would remain stagnant at about 1%.

Do structural reforms increase deflationary pressures?

The slow economic growth that has lasted for as long as 10 years is mainly due to a decline in potential growth rate. In order to raise the medium- and long-term growth rate of the Japanese economy, it is necessary to raise the potential rate of growth, or supply capacity. Therefore, structural reforms that will increase the productivity and enhance the supply capacity of the Japanese economy are required.

However, there are concerns about structural reforms. In a case where the economy grows at its potential growth rate, the realizable level of GDP corresponds to total supply, while actual GDP corresponds to total demand. The concerns are that, since structural reforms increase only total supply, they may further accelerate deflation under the current economic conditions where total demand is lacking.

However, if the following points were taken into account, it would be possible both to increase supply capacity and to create new private demand on a sustainable basis.

• (1) Measures to promote private investment in new fields are expected to be highly effective in increasing supply capacity through an increase in capital stock. In the short run, however, investment generated by such measures is more effective in increasing total demand as one of the demand components than in increasing supply capacity.
• (2) Creating new demand/new employment is also one of the major objectives of structural reforms. Take new products, such as mobile phones, as an example. The emergence of mobile phones is a technological innovation that has provided products that were not provided before and in itself expansion of supply capacity. At the same time, it is also expansion of demand as it has created new demand. As a result of increasing labor force participation by the elderly and women, the demand structure has undergone a drastic change, as exemplified by rising demand for nursing home care and housekeeping services. With the demand structure expected to change further in the future, efforts to make such potential new demand tangible have increased their importance. In order to make potential demand tangible, it is important to remove obstacles to smooth production and supply.
• (3) If structural reforms, including reform of social security schemes, open future prospects for households, it is expected to improve consumer confidence and expand consumption on a sustainable basis.

Images of new industry/new business

In the above, we mentioned the possibility of an emergence of a new industry that will create new demand/employment and increase the productivity of the economy as a whole. What kind of industry is it that will create new demand and employment? Here, we will take a look at specific images of new industry/new business from several angles, rather than drawing an overall industrial structure in the future. We will study from the following three angles: (1) response to the consumer demand that will enhance the quality of life, (2) overcoming growth constraints, such as the aging of the population and environmental problems, (3) new technologies, such as IT and life science.

• (1) Although the growth of the Japanese economy has slowed down, Japan' s living standard is already at a very high level. Therefore, the proportion of consumption that is essential for life will decrease. Instead, the proportion of more selective consumption that will enhance the quality of life is expected to increase, such as for example, consumption for self-development, for better living environment, and for creating free time. The following industries that will provide such consumption goods and services are expected to expand:
  • Education-related services that meet growing demand for life-long learning, such as business schools for workers
  • Services related to sports, amusement, and health
  • Housing-related services, such as reform of existing homes for better living environment
  • Individual services, such as child-care service and housekeeping service
• (2) Such problems as environment and aging population are considered to be growth constraining factors. However, if we take such factors as offering new business chances, development of the following businesses will be possible:
  • Businesses targeting the elderly, such as care business, medical-care business, and barrier-free housing business
  • Environment business and recycle business, such as low-emission vehicles like hybrid cars and natural-gas cars, and new energies
  • Businesses that deal with huge amounts of non-performing loans, such as credit transaction business, securitization business, and corporate rehabilitation
• (3) New technology, including such IT-related products as mobile phones and the Internet, has played a leading role in economic growth. New technology is expected to continue to play a leading role. The following industries/markets are expected to expand:
  • Various services that utilize broadband and digital broadcasting, and development of software and production of contents that are ancillary to such services
  • IT education-related services to train personnel for IT
  • Life science-related industries, such as development of medicines by using genome information, regenerative medical treatment, such as production of artificial organs, and medical treatment suitable to each person' s constitution (tailor-made medical treatment)
  • Utilization of new technologies in such fields as nanotechnology, new materials, etc. It is first and foremost the role of the private sector to create new industries. The government, for its part, must strive to eliminate regulations that hinder smooth growth of new industries, establish various systems that are neutral in their effects on labor mobility, such as portable corporate pension systems, and provide a financial system framework to supply necessary funds to new industries.

Employment in the service sector to increase

Lastly, we will study in which field employment will increase, once the Japanese economy is put on a growth path. It is expected that employment will increase in various fields of services. A report prepared by a task force of the Council on Economic and Fiscal Policy (May 2001) maintains that it is possible to create 5 million new jobs, mainly in the service sector, in the next five years. The gist of the report is as follows:

The Japanese service industry created 6.5 million new jobs in the 1980s but created only 4 million new jobs in the 1990s. The Japanese tertiary industry has much room to grow, as the ratio of workers in the tertiary industry to total workforce in Japan is 60% against 71% in the U.S., 67% in the U.K., and 64% in France. Therefore, by promoting structural reforms, it is possible to create 5 million new jobs and increase the number of workers, including women and the elderly, in the next five years.

Incidentally, does the movement of workers to the service industry, whose average level of labor productivity (per-worker production) is believed to be low, raise the labor productivity of the Japanese economy as a whole? In studying this issue, what is important is not average productivity, but the productivity of the workers who newly obtain jobs, that is to say, marginal productivity. If the marginal productivity in the fields of the service industry that create new demand and employment is higher than that of the inefficient, low-productive industries from which workforce moves, an expansion of new employment in the service industry will raise the labor productivity.

As examples of the service fields that are expected to create new demand and employment, let' s take a look at (1) worker dispatching business and (2) nursing and child-care services.

The Worker Dispatching Law that went into effect in 1985 originally limited to 13 types of work (those requiring special knowledge, skill, or experience) to which private dispatching agencies can send workers, from the standpoint of preventing such workers from replacing regular workers. Later, the regulation was gradually dismantled and the worker dispatching business was liberalized in principle in 1999. In December 2000, a new system was introduced on the dispatching system, under which workers are dispatched to corporations with a plan to introduce them to a job at the corporations after the expiration of the dispatched period. At present, further deregulation, such as extension of the dispatched period, is under consideration.

As a result of the deregulation, the number of dispatched workers has increased year by year, with the ratio of dispatched workers to total workforce standing at about 2% (1.07 million in FY 1999). The number is expected to increase further in the years to come. The increase in the number of dispatched workers is expected to be effective in (1) creating new jobs, mainly for women, as it offers flexible employment patterns and (2) lowering the structural unemployment rate, as it solve the problem of mismatch in employment.

Care services (for the elderly) and child-care services are also expected to expand in the years to come. As for care services for the elderly, special nursing homes for the aged are providing services to about 650,000 elderly persons. But, such homes are relatively in short supply in urban areas. The number of workers engaged in the fields of health and welfare for the elderly, including special nursing homes for the aged, is expected to increase to about 1 million in FY 2004 from about 600,000 in FY 1999 (an estimate based on the "Gold Plan 21," a report that sets the direction of health and welfare measures for the aged). As one of the measures to expand and improve care services at care houses, deregulation to promote establishment of care houses by the private sector by utilizing the PFI system is now under consideration. As for child-care services, although the number of children is on the decrease, the number of children enrolled in nursery centers, especially children of 0~2 years old, has increased to 1.8 million, as a growing number of women have entered the workforce. In 2000, the number of children required for the establishment of nursery centers was reduced. The government aims to increase the number of children to be accepted to nursery schools by 150,000 by FY 2004 and reduce to zero the number of children on the waiting list ( "Support measures for the harmonization of work and child raising" (a cabinet decision in July 2001)).

The expansion of such services for families with children will be effective in (1) increasing employment in the fields related to nursing and child-care and (2) facilitating the participation of women relieved from nursing and child-care in the labor market. For example, although 30~40% of mothers not in labor force now want to work, most of them do not seek jobs (withdrawing from the labor force). The biggest reason for this is child-care. Therefore, the expansion of child-care services is expected to be effective in increasing employment (Figure 2-3-7)(28).

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