Global Economy / Broad reform needed to boost productivity

By Tatsuya Sasaki / Yomiuri Shimbun Senior WriterThe need to improve productivity as a growth driver has come under the spotlight. Although this is a task shared by the global economy, Japan's productivity is relatively low — leaving plenty of room for improvement. Structural problems are revealed when looking at why.

The Liberal Democratic Party's pledges for the House of Representatives election said, "We will realize a 'productivity revolution' through newly created advanced technologies."

Kibo no To (Party of Hope) is advocating a similar idea, saying, "We will promote lifestyle reforms and boost labor productivity."

Why is productivity in the spotlight to the extent that major political parties are incorporating it into their election platforms?

Productivity is the efficiency with which workers create added value (see below) for society. It is often measured by an indicator called labor productivity (see below).

Corporate profits rise when productivity increases, and this can be expected to translate into wage hikes — an issue left unresolved by the Abenomics economic policy package.

Increasing productivity renders economic growth possible even amid a declining population. It also goes hand in hand with rectifying long working hours — a goal of the government's work style reforms. Raising productivity has the potential to become the ace card that accelerates Abenomics.

Japan low among OECD members

Japan's labor productivity is relatively low, at $42.1 (about ¥4,700) per hour in 2015 — the worst among the seven major industrialized nations, according to the Japan Productivity Center. Japan is also low among the 35 member nations of the Organization for Economic Cooperation and Development (OECD), remaining in 20th place (see chart 1).

First-ranked Luxembourg has attracted world-renowned companies by reducing corporate taxes. The ratio of high-productivity industries such as finance and real estate is high in that nation. Second-ranked Ireland has also attracted many multinational corporations through low corporate tax rates.

Comparing Japan with these two countries is difficult. However, when comparing Japan with the United States by industry, several trends are revealed.

Japanese and U.S. labor productivity have been compared in various industries, with baseline U.S. productivity set at 100 (figures average of 2010-12). Japan overwhelms the United States in the chemical field, a sector in the manufacturing industry. However, it falls short of the United States in many of the service industries such as information and communications industry and the finance industry (see chart 2). Japan's figure for the entire service sector is roughly 50 percent of that of the United States in relative terms.

In Japan, the manufacturing sector tends to grab attention, despite the service sector accounting for 70 percent of gross domestic product (see chart 3). Increasing productivity in the service industry holds the key to boosting the economy as a whole.

Deflation taking its toll

Regarding the information and telecommunications industry, there are few innovative services or global firms in Japan. But in the United States, firms such as Google and Facebook have grown rapidly.

In the finance sector, the United States is centered on investment banks and funds that are structured to produce profits with low head counts. In comparison, Japan has a larger number of commercial banks with large networks of branches — resulting in more employees.

On the other hand, observers point out that Japan's low productivity does not reflect the quality of service available in the nation.

In spring, the Japan Productivity Center asked people who have stayed in both Japan and the United States to compare the two countries by saying how much extra they would be prepared to pay for services in each nation.

The results, conveyed numerically, showed that Japan was rated higher in many fields, including parcel delivery, taxis, and barber and beauty shops.

Japan's service sector is known for its omotenashi hospitality, such as polite and sincere customer service, but this requires more human resources and time. The results indicated that there is a discrepancy in Japan between the quality of service and the remuneration they receive.

The main cause of this is likely prolonged deflation. Companies have persisted with grueling low-price strategies, prioritizing beating rivals over increasing profits.

In the parcel delivery industry such a strain has surfaced in a short period of time. The industry launched a series of convenient services — including designated time slots, refrigerated or frozen deliveries, and even same-day deliveries for online shopping. However, home delivery firms have struggled to maintain these services due to their inability to command fair prices, which has also been compounded by manpower shortages.

On Oct. 1, industry leader Yamato Transport Co. raised its basic delivery fees for individuals by ¥140 to ¥180 — its first hike in 27 years. The company is currently negotiating over prices with major clients such as Amazon Japan G.K.

Yamato will be able to improve its productivity if its efforts lead to fairer prices for its various services.

There is a deep-rooted perception in Japan that "services are available for free." But the time has come for society as a whole to consider the proper value of high-quality services.

Investing in innovation vital

Technological innovation has also proven to be indispensable.

Kagaya, one of the nation's leading Japanese-style inns, located at the Wakura hot spring resort in Ishikawa Prefecture, introduced a robot food-delivery system in the 1980s. This reduced the amount of labor involved in carrying dishes, meaning room service staff could focus on other customer services. The move earned Kagaya praise for quality of service.

The POS (point of sale) management system that was introduced at convenience store chains and other shops has contributed to greater efficiency in store management. POS systems read product information via bar codes to improve product lineups and stock control.

However, it is primarily only big firms that are capable of making large investments. Small and medium-sized businesses comprise the majority of Japan's service sector, meaning it will be difficult to increase efficiency in the industry as a whole.

Moving forward, hopes are being pinned on information technology and robots. In the logistics field, deliveries using self-driving trucks and drones are expected. In terms of distribution, the introduction of customer self-service pay systems is anticipated. Measures to expand the investment base for technological innovation are needed.

Painful reforms unavoidable

Restructuring industries, and also increasing employment mobility, presents challenges. Sweden, ranked second after Switzerland in terms of labor productivity in the manufacturing industry in 2014, does not bail out companies with financial troubles. Following the financial crisis triggered by the 2008 collapse of Lehman Brothers, Saab Automobile went bankrupt, while Volvo Cars was bought out by a Chinese firm.

Instead of bailouts, Sweden provides generous job training to those who lose their jobs — encouraging the movement of manpower to growing fields.

In Japan, there have been cases of financially ailing major companies being rescued under the pretext of preserving jobs. Permitting inefficiency to prioritize employment negatively impacts productivity. At the same time, dealing with companies like Sweden does, reevaluating lifetime employment, and reforming the labor market could bring pain for the public.

Another serious issue that needs to be tackled is the mindset of companies and individuals, such as workplace practices that depend on overtime and long working hours. To achieve genuine "productivity revolution," the determination of the public to have structural reforms and mindset changes will also be tested.

■ Added value

New value created by companies and other entities through production activities. Added value is calculated by deducting costs such as raw materials and purchases from the sales of products and services. It is equivalent to the sum of profits, personnel expenses, interests and others. GDP is the total amount of added value generated in a country during a fixed period.

■ Labor productivity

Calculated by dividing GDP by the number of workers, total hours worked, and other factors. Labor productivity serves as a barometer for the efficiency of production. However, according to the Japan Productivity Center, it can often be higher than actual conditions in countries where unemployment has risen more than GDP has fallen due to employment adjustments, or in countries where illegal employment of immigrants is high.

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