Japanese Economy- 6 -

Kozo UEDA

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Topic• Industrial Structure and Business

• Are Japan’s businesses still competitive?

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Contents• Structure by industry• Industrial production• Japanese firms

– Competitiveness of Japanese firms– Their strategy– Strength

• Non-manufacturers• Small and medium enterprises (SME)• Corporate governance

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Economic Structure by Industry

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1955 1970 1980 1990 2000 2010 (1) Agriculture ,forestry and fishing 19.9 6.1 3.7 2.5 1.7 1.1 (2) Mining 2.0 0.8 0.8 0.3 0.1 0.1 (3) Manufacturing 28.4 36.0 29.2 26.5 21.3 19.9 (4) Construction 4.5 7.7 9.4 9.3 7.1 5.7 (5) Electricity ,gas and water supply 2.4 2.1 2.7 2.5 2.6 1.9 (6) Wholesale and retail trade 10.7 14.4 15.3 13.2 13.5 14.1 (7) Finance and insurance 9.6 12.3 14.5 16.2 16.9 16.3 (8) Real estate and transport 7.3 6.9 6.2 6.6 6.7 10.6 (9) Service activities 10.1 3.6 11.7 16.1 19.6 19.0 (10) Government and non-profit services 8.7 7.3 10.3 9.2 10.5 11.2 Sum 100.0 100.0 100.0 100.0 100.0 100.0

Source: Komine and Murata (2012, Table 6-1) from Cabinet Office

• Low share of agriculture

• High share of manufacturing and service

• Manufacturing share decreases.

Manufacturing

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• Today’s talk starts with manufacturing.• Although its share is declining, it is still a main

driver of the Japanese economy.— Large spillover— High international competitiveness

• Look at Ministry of Economy, Trade and Industry, “Indices of Industrial Production”

• In what product, are Japanese firms highly competitive?

Production by sectors 1

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Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• Car and machinery production dropped, but are

stable recently.

Production by sectors 2

7Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• ICT equipment production drops. Raw material is

stable.

Production of individual goods 1

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Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• Final electric goods declined production drastically.

Production of individual goods 2

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Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• Increasing or robust production

Production of individual goods 3

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Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• Machinery is robust

Production of individual goods 4

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Source: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"

• Materials are gradually decreasing except for high-

skilled goods.

Niche products

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Source: METI (2013)

• In niche products, Japan’s firms occupy the markets.

Product Share Product Share

Glass for cars 75 Semicon sealing 91

Wire

Harness for

cars

58 Photosensitizer 77

TAC film for

LCD

100 Ball bearing 98

Glass for LCD 50 NC machine 72

Compass for

GPS

82 Rare earth

magnets

96

LED 60 Carbon fiber 68

Worldwide Market Share of Japanese-Affiliated Companies 1

13Source: Chart 35 in Bank of Japan (Apr 2012) “Outlook for Economic Activity and Prices”

• Share falls

Worldwide Market Share of Japanese-Affiliated Companies 2

14Source: Chart 35 in Bank of Japan (Apr 2012) “Outlook for Economic Activity and Prices”

• Still relatively competitive

International Competitiveness Coefficient 1

15Source: Chart 36 in Bank of Japan (Apr 2012) “Outlook for Economic Activity and Prices”

• Net export decreases.

International Competitiveness Coefficient 2

16Source: Chart 36 in Bank of Japan (Apr 2012) “Outlook for Economic Activity and Prices”

Issues• International competitiveness

– For the Japanese economy– For Japanese firms

• What differs?

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Overseas investment

18Source: METI (2012a)

• Active in overseas investment even for SME.

SME: Small and Medium Enterprises

Overseas investment

19Source: Japan Bank for International Cooperation (2014)

Ratio of overseas revenueRatio of overseas productionRatio of overseas profits

actual

prospect

Why not in Japan?

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• Six burdens

（六重苦）

– Strong yen– High tax– High wage– Strict eco policy– Inactive FTA– Fear of energy

supply shortage

• But they are changing.Source: Japan Bank for International Cooperation (2012)

The proportion of firms who would increasedomestic investment if the burden did not exist

Promising countries

21Source: Japan Bank for International Cooperation (2014)

• China dropped to the third. India is the first.

ChinaIndiaIndonesiaChinaThailandVietnamBrazilUSRussia

Why overseas? (to India)

22Source: Japan Bank for International Cooperation (2014)

Growth expectations

The size of current economy

Center of supply chain

Cheap labor

Skilled labor

Why overseas? (to China)

23Source: Japan Bank for International Cooperation (2014)

Growth expectations

The size of current economy

Center of supply chain

Cheap labor

Agglomeration

Problems in China

24Source: Japan Bank for International Cooperation (2014)

Increases in labor cost

Fierce competition

Ambiguous law enforcement

Concerns about securityand social situations

Regulation on foreign exchangeand transfer

Insufficient protection of intellectual property right

Processes considered to have high/low added value

25Source: METI (2012a)

• R&D valued. Assembly not valued.

R&D investment by firms

26Source: METI (2013)

China

Korea

US

Germany

Japan

• Japan stopped growing.

Non-manufacturing

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• What kinds of businesses are there?

• Classification

– Service for

• businesses

• Households

Non-manufacturing(GDP as of 2011)

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Tertiary sector share (%)

(5) Electricity, gas and water supply 3.2

a. Electricity supply 1.7

b. Gas and water supply 1.4

(6) Wholesale and retail trade 21.6

a. Wholesale trade 12.4

b. Retail trade 9.3

(7) Finance and insurance 9.0

(8) Real estate 19.3

a. Renting of dwellings 16.9

b. Other real estate 2.4

(9) Transport 7.6

(10) Information and communications 9.2

a. Communications 4.1

b. Broadcasting 0.5

c. Information services , Imageinformation,character information production anddistribution 4.7

(11) Service activities 30.2

a. Community and social service activities 9.0

b. Business activities 11.3

c. Personal service activities 9.8

Non-manufacturing

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• Omotenashi （おもてなし）

– Service, hospitality– Overseas investment

in tourism (hotel <ryokan>), restaurant, etc.

Sources: METI (2012)

Corporate governance 1

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• Characteristics in Japanese businesses– Aim

• Market share• Long-term• Opposed to rate of return, stock price and short-term

– Decision-making• Bottom-up opposed to top-down• Time (# of meeting)

– Long-term relationship• Continuing trade • Group (zaibatsu, supply chain)

Corporate governance 2

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– Main bank• Indirect finance

– Relationship with employees– Who holds stock?

• Main bank, related firms• Individual investors

– Surveillance by ministry

• What is its implication?

M&A

32Source: Figure 133-8 in Ministry of Economy, Trade and Industry (2014)

Number of M&As

Reference• Japan Bank for International Cooperation, “Survey Report on

Overseas Business Operations by Japanese Manufacturing Companies,” 2014.

• Ministry of Economy, Trade and Industry (METI), “White Paper on Manufacturing Industry (Monodzukuri),” 2012a.

• Ministry of Economy, Trade and Industry, “White Paper on International Economy and Trade,” 2012b.

• Ministry of Economy, Trade and Industry (METI), “White Paper on Manufacturing Industry (Monodzukuri),” 2013, but not yet published in English as for June 2013.

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