What happens in Japanese Economy and Society

1
What happens in Japanese Economy and
Society? -Recent Trends and Movements from the
viewpoint of Anxiety-
Toshio Yamauchi Third Secretary, Embassy of
Japan May 17, 2006
2
1. Whats "PM KOIZUMI's Reform"? 2. Deflation,
anxiety and Japanese nationality 3. Where do
anxieties come from? Background of deflation
spiral 4. For the future What should Japan do
under indelible anxieties? The views
expressed herein are those of the presenter, not
representing the official opinions of the
Japanese government and the Embassy of Japan in
Poland all the responsibilities for this
presentation attribute to the presenter.
3
1. What's "PM KOIZUMI's Reform"?
4
1-1. Whats is PM Koizumis Reform ? (1/2)

• Mr. Junichiro KOIZUMI appointed Prime Minister
  since 2001.
• He consistently insists that the government
  should be as much downsized as possible so that
  it could not impede the market competition as
  well as impose a heavy financial burden on the
  private economy.

2005 PMs in Tokyo Mr. Belka and Mr. Koizumi
(Right)
(Source) Prime Minister of Japan and His Cabinet
Webpage
5
1-1. Whats is PM Koizumis Reform ? (2/2)

• Additionally, he requests the people and the
  private sector for the Self-responsibility and
  Independence of the government, which might
  sometimes bring Pain. (cf. Yokkakari by Dr.
  Kenichi Omae, previous president of Mckinsey
  Japan)
• These principles are executed under the slogan
  Structural Reform without Sanctuary.
• Sanctuary implies such sectors as construction,
  agriculture, defense, education, of which
  legislators work for the special interest.

6
1-2. Actions taken as the Reform

• His actions are
• - Reorganizing governmental institutions to
  Independent Administrative Organizations,
  including the merger of governmental finance and
  banking companies, privatization of postal
  services,
• - Setting the limit of new issuance value of
  national bonds (30 trillion yen),
• - Establishment of special zones for structural
  reform, e.g. special zone for education,
  agriculture, etc.
• - Reduction of the governmental expenditure
  (medical care, education, infrastructure
  development, etc.)
• - Trinity Reform package
• (1) the cut of a state subsidy to
  municipalities,
• (2) the shift from nation-oriented to
  municipality-oriented tax system,
• (3) the change of the system of tax money
  allocation to local governments.

7
1-3. Growth Rate, Nikkei 225, Inflation rate

• After Koizumi Shock, the economic recovery is
  modestly underway.

(Yen)
()
Unemployment rate
Nikkei 225
Real GDP Growth
Consumer Price Index
(Source) Ministry of Labor, Health and Welfare,
Ministry of Internal Affairs, Nikkei
8
2. Deflation, anxiety and Japanese nationality
9
2-1. Why has the deflation existed persistently
in Japans economy?

• Economists say that the deflation is derived
  from.
• - Accumulated bad loans
• - Huge amount of import of much less
  expensive goods from China
• - Diminishing growth potential of Japanese
  economy
• - Demand shortage

10
2-2. Anxiety for the future (1/4)

• However, we should also focus on the mixture
  of anxiety for the future.
• People face the real market competition under
  the Self-responsibility principle.
• More concretely, they are anxious about
• - decreasing (at lease not increasing)
  income,
• - higher risks of layoff the collapse of
  life-time employment system,
• - increasing tax and fees for social
  security, medical and educational
• expenditure,
• - reduction of retirement pension and health
  care benefits.

11
2-2. Anxiety for the future (2/4)
Q) Do you have any anxiety for your daily life?
()
(Source) Cabinet Office, Public Opinion Survey
on National Life, June 2005
12
2-2. Anxiety for the future (3/4)
Q) How do you think your life will be in the
future?
()
(Source) Cabinet Office, Public Opinion Survey
on National Life, June 2005
13
2-2. Anxiety for the future (4/4)
Q) Do you feel anxious about.?
Aging society
Social security system
(Source) Public opinion polls by Mainichi Press,
January 2005
14
2-3. Anxiety and Japanese nationality (1/2)

• In addition, Japanese nationality tends to
  become relatively pessimistic, especially in the
  case that some worse symptom, if any trivia,
  appears.
• The stereotype (negative) images are
  exaggeratedly shown by media.
• Those mental factors aggravate such anxiousness.

15
2-3. Anxiety and Japanese nationality (2/2)
Q) Do you expect.?
()
(Source) Chugoku Press and Gallup, Comparative
Opinion Survey on the World in the 21st century,
January 2000
16
2-4. Anxiety and expenses cutting (1/5)

• The anxieties have driven Japanese save more
  expenses.
• What is worse, the younger generations (20s and
  30s generally with the higher propensity to
  savings) has lost the positive attitude towards
  consumption and hold the intentions to curtail
  the expenses.
• Public Opinion Survey on Financial Assets of
  the Household by Central Council for Financial
  Services Information shows about 90 of the
  younger generations feel anxious about the life
  in their old age.
• Indeed, they dont believe their income growth,
  social security system, while they are afraid of
  tax and premiums increases.

17
2-4. Anxiety and expenses cutting (2/5)

• The population ratio of the younger generations
  to the aged (with the lower propensity to
  savings) has declined.
• In short terms, the aged could boost up the
  economy but in long terms, the source for
  expenses could be exhausted. Actually, Japanese
  savings rate is declining year-by-year (14.6 in
  1991?6.9 in 2001 the Annual Report on the
  Japanese Economy and Public Finance 2003)
• This trend could erode the Japanese economy as
  much as irreparable.

18
2-4. Anxiety and expenses cutting (3/5)

• Q) Has your income increased or decreased,
  compared in the last year?
• Q) Do you think your income will increase or
  decrease in a year?

(Source) Bank of Japan, Opinion survey on the
General Publics Mindset and Behavior, August
2005
19
2-4. Anxiety and expenses cutting (4/5)

• Q) Have you increased or decreased the daily
  expenses, compared to those in the last year?
• Q) Will you increase or decrease the daily
  expenses in a year?

(Source) Bank of Japan, Opinion survey on the
General Publics Mindset and Behavior, August
2005
20
2-4. Anxiety and expenses cutting (5/5)
Q) Why will you decrease the daily expenses?
Note Multiple-choice question. (Source) Bank
of Japan, Opinion survey on the General Publics
Mindset and Behavior, August 2005
Cabinet Office, Public Opinion Survey on
Attitude of Younger Generation, January 2003
21
3. Where do anxieties come from? Background of
deflation spiral
22
3-1. Image of Deflation Spiral
Tax, insurance premiums, medical costs recently up
Less expense
Less disposable income
Less sales
Bursting Bubble in 1991 Stock market slump in
2001
More Intensive retail competition during late
1990s
Less assets value
Lower Price
Less income
Lowering base wage, life-time employment
collapsed, increasing no. of layoff after 2000s
More cost cuts
More shift to China during late 1990s
23
3-2. Bubble and its burst-out (1/4)

• Plaza Accord of 1985 led JPY to highly
  appreciation against USD.
• Money influx to Japan drove up the prices of
  stocks and real estates which were at that time
  viewed as attractive price level, compared with
  those of other markets.
• In 1989, the most famous stock index, Nikkei 225,
  recorded its highest value, 38,915 JPY.
• In 1990, officially published land prices reached
  the peak.
• Those higher prices brought the companies so
  called latent gains, on which they relied to
  borrow (the banks drove them to borrow) money.

24
3-2. Bubble and its burst-out (2/4)

• Recognizing this situation as bubble, the
  government introduced the regulation on the total
  lending volume for the real estates in April
  1990.
• Banks were forced to strictly limit their new
  lending, which resulted in tightening cash flow
  of the borrowers and shrinking the prospect of
  the higher prices.
• It is the starting point of bubble bursting.
• Bank of Japan raised the interest rate five times
  during 1989 to 1990.
• Oil prices skyrocketed, due to Gulf War in Iraq
  in August 1990. It urged massive decline of the
  asset prices.

25
3-2. Bubble and its burst-out (3/4)

• The government lifted the regulation mentioned
  above in 1992, but the falling of the real estate
  prices couldnt be stopped.
• Only a year after, Nikkei 225 went down to the
  half of the peak in value.
• However, these market collapse didnt soon affect
  all the company performance, much less the
  general consumer.
• First symptoms of the performance worsening were
  found in real estate companies, developers and
  non-bank lenders. These sectors experienced the
  bankruptcies at the earliest in 1992.
• In 1997, Asian Currency Crisis befell Japanese
  companies which actively operated in those
  countries.

26
3-2. Bubble and its burst-out (4/4)

• In addition to these deteriorating environment,
  defaulted loans reached the unmanageably high
  level to damage the financial institutions.
• Some of them failed Yamaichi Securities and
  Hokkaido Takushoku Bank in 1997 Long-Term Credit
  Bank of Japan and Nippon Credit Bank in 1998.
• What is worse, owing to the possible introduction
  of International Accounting Standards and the
  appliance of BIS ROE rule, Japans largest
  banks restrained themselves from their business
  it caused the operating companies, especially
  small- and medium-sized companies to suffer from
  money shortage.

27
3-3. Conservative consumers and cost cutting (1/5)

• Diminishing of disposal income rendered the
  Japanese become gradually conservative in
  expenditure (as shown in Section 2).
• Under this consumption conservatism, the
  competition among retailers grew too intensified.
  The wholesalers, convenience stores and Category
  Killers which succeeded in grasping the
  consumers needs and cutting total costs gained
  larger market share (e.g. Seven Eleven Japan,
  Yamada Denki).
• In contrast, traditional departments,
  merchandizes and small-sized retailers lost their
  position, some of which eventuated to be bankrupt
  or totally rehabilitated (e.g. Sogo in 2000,
  Daiei in 2004)

28
3-3. Conservative consumers and cost cutting (2/5)

• Successful retailers, holding buying power,
  insistently asked makers to lower the prices. At
  the same time, they also made every effort to cut
  their own manageable costs.
• Indeed, makers must drastically reduce the costs
  if they cant produce anything with higher value
  addition.
• Their targeted cost to cut is personnel
  expenditure.

29
3-3. Conservative consumers and cost cutting (3/5)

• Japanese wages are incomparably higher than those
  of other Asian countries.
• Manufacturers shifted their production site from
  Japan to those countries, specially to China.

Comparison of Personnel Costs
Note Figures show the wage index in a case when
that in Yokohama is evaluated as 100. (Source)
Japan External Trade Organization, JETRO
sensor, April 2004.
30
3-3. Conservative consumers and cost cutting (4/5)

• Japanese have enjoyed the growing income, even if
  the pace has been slowdown after Bursting of
  Bubble.
• However, the wage showed gradual decline during
  the late 1990s and 2000s the growth rate has
  remained below CPI until 2004.

()
Consumer Price Index
Wage Growth Rate
(Source) Japan External Trade Organization,
JETRO sensor, April 2004.
Ministry of Health, Labour and Welfare, Monthly
Labour Survey
31
3-3. Conservative consumers and cost cutting (5/5)

• For further cost cut, the employers prefer
  part-time to full-time jobs, while they take into
  consideration the possibility to execute the
  layoffs.
• Hourly earnings of part-time jobs are much less
  (about the quarter to half of the earnings of
  full-time jobs).

Share of Part-time Jobs
()
(Source) Ministry of Health, Labour and Welfare,
Labour Force Survey
32
3-4. Dynamic change of personnel management
system (1/4)

• Japanese companies had adopted two employment
  principles Life-time Employment and Seniority
  Order Wage.
• The principles secured the stability of the
  employees daily life, so that they could
  concentrate on his/her own business.
• This system effectively and efficiently supported
  the growth of the welfare of employees, companies
  and the nation.
• However, as the aging has advanced, this
  inflexible system could rather discourage the
  youth, add much to the personnel cost, and
  finally weaken the companies and national
  economic competitiveness.

33
3-4. Dynamic change of personnel management
system (2/4)

• Japanese companies have started adopting two new
  employment principles Diversification of
  employment and work-style and Results-based
  Wage since the late 1990s.
• The principles are introduced to encourage the
  employees with greater motivation, especially the
  youth.
• In practice, these principles are generally
  accepted in favor.

34
3-4. Dynamic change of personnel management
system (3/4)

• But the system often urges the people to focus
  only on the results it means that it could raise
  such problems as struggle for profit share,
  fraudulent practices (sometimes with the order of
  his/her boss) etc.
• Some point out as if the traditional Japanese
  Wa spirit (harmony among people), which is the
  source of competitiveness of Japanese economy,
  past away.
• What is worse, such relentless system might
  increase the number of depressives and suicides.

35
3-4. Dynamic change of personnel management
system (4/4)
Number of Suicide
(person)
Jobless
Employee
Self-Employed
Employer
(Source) National Police Agency
36
3-5. Heavier burden of social security (1/5)

• The aging of population advancing the birthrate
  dwindling.
• The share of the aged people (over 65 years old)
  to the total population has been increasing.
• Birthrate recorded all-time low, 1.29 in 2004.
• The youth dont hope to have any / more children.
  The reasons are various, but the anxieties for
  the future have remained a major factor.
• National population survey in 2005 shows the
  total population turns the first decrease after
  the Word War II.

37
3-5. Heavier burden of social security (2/5)
Share of the aged people (over 65 years old) to
the total population
(Source) Ministry of Internal Affairs, Monthly
Report on Current Population Estimates
38
3-5. Heavier burden of social security (3/5)
Ratio of the people at the age of 20 to 49 who
want to have more children
()
(Source) Cabinet Office, International Public
Opinion Survey on Children Decrease, December
2005
39
3-5. Heavier burden of social security (4/5)

• The aging has made heavier the burden of social
  security on the people.
• The ratio of national medical expense to national
  income grew double during 30 years (about 4 in
  1970s, 6 in 1980-90s to 8.5 in 2003 (31
  trillion yen)).
• Pension system exposes the serious generation gap
  of the payable and receivable between the younger
  and the senior.
• As to the Employee Pension Insurance, although
  those at the age of 50 in 1999 pay 38 mil. yen to
  receive 57 mil. yen (19 mil. yen is surplus),
  those at the age of 20 in 1999 pay 61 mil. yen to
  receive 49 mil. yen (12 mil. yen is deficit).
• Repeated changes of the estimates by the
  government on birthrate, premiums and benefits,
  with less transparent and inconsistent
  explanation, causes the people to have an
  embedded distrust.

40
3-5. Heavier burden of social security (5/5)

• The government has taken various countermeasures
• - Reduction of the aid to medical expense from
  national budget,
• - Lowering pharmaceutical prices,
• - Reduction of the benefits of the pension,
• - Raising the starting age of providing the
  pension,
• - Promoting the employment of the elderly.
• It also tries to work out the solutions to
  children decreasing problems.

41
4. For the future What should Japan do under
indelible anxieties?
42
4-1. Economic recovery? (1/2)

• Recent statistics depict Japans economy has been
  undergoing a revival.
• Nikkei 225 had jumped up to expect the future
  growth.
• Real estate prices also turn upward, esp. those
  in the center of Tokyo.

Nikkei 225 during 1995 to 2006
43
4-1. Economic recovery? (2/2)

• But it may be long before the general perception
  on the economic trend become stable..

Economic Conditions Diffusion Index (D.I.)
Better
?
Next year the conditions will be...
Compared with last year, this years conditions
is
Worse
Note D.I. is calculated in the way to subtract
the share of the answer WORSE from that of
BETTER. (Source) Bank of Japan, Opinion survey
on the General Publics Mindset and Behavior,
April 2006
44
4-2. Widening income gap? (1/5)

• Recent Japanese mass media often refer to
  widening income gap (with half-jokingly citing
  the remarks, lifestyle or behaviors of
  Celebrities). The books writing about income
  gap and social strata remain sold well.
• It is certain that the income gap has expanded
  (Gini coefficient changed from 0.4049 in 1987 to
  0.4983 in 2002 (source MLHW)).

45
4-2. Widening income gap? (2/5)

• But income redistribution effects through tax and
  social security system curve the gap (0.3546 in
  1987 0.3812 in 2002).
• Additionally, the gap expansion can mostly
  attribute to that in the elder. The senior
  generation embraces both those receiving high
  salary and those doing only public pension. A
  growing number of the aged generation appears to
  quicken the pace of expansion.
• Moreover, in 2003, Dr. Isagami, Japan Institute
  of Labor, revealed the facts that the past OECD
  statistics on household income, which described
  Japanese society as with high equality in income,
  didnt take into the consideration the household
  without families and of farmers.
• International comparison on Gini Coefficient also
  testifies that the income gap in Japan stays
  relatively smaller.

46
4-2. Widening income gap? (3/5)
Changing Trend of Gini Coefficient
Original Income
Income after redistribution (tax and social
security payment)
(Source) Ministry of Health, Labor and Welfare,
Survey on Income Redistribution, 1999 and 2002
47
4-2. Widening income gap? (4/5)
International Comparison on Gini Coefficient
USA
Australia
France
Canada
Japan
Belgium
Germany
Sweden
(Source) Ministry of Internal Affairs, Website
48
4-2. Widening income gap? (5/5)

• Despite these studies, the image of greater
  income gap is built in the mass mind.
• Prof. Otake of Osaka Univ. and Mr. Tomioka of
  Japan Center for Economic Research indicated in
  the report Who feels the income gap? (2005)
  that
• - 75 of the 1928 respondents foresaw that
  income gap would widen in the next five years.
• - Those (1) with higher academic background, (2)
  without job, (3) female with job or (4)
  risk-averse show the tendency to expect the
  expansion.
• - Those at the age of sixties more recognize the
  expansion than of twenties.

49
4-3. What should Japan do? (1/2)

• The basic causes of anxieties should be minimized
  and cleared away, while the anxieties-resistant
  mindset should be built in the peoples mind.
• The government / statespersons should..
• - Take steps to deal with the basic causes,
  above all, reforming social security system,
• - Keep the policy and its explanation more
  transparent and consistent.
• Japanese people should..
• - Recognize the reality and control the risks
  better,
• - Focus on self-reliance to improve their own
  lives,
• - Think more of the improvement of quality of
  life under the limited resources (c.f. LOHAS),
• - Accept diversified ways of life, life-cycle,
• - Have a mindset of straightforward
  communication.

50
4-3. What should Japan do? (2/2)

• Nationality couldnt be changed easily the
  proverb says The child is the father to the
  man.
• However, unless the conventional code of conduct
  could be altered, the anxieties will not decrease
  at all.
• The future recovery of Japanese economy depends
  on to what extent Japanese adjust their mindset
  as mentioned before.

51
Please contact Toshio Yamauchi, Third
Secretary of Embassy of Japan in Poland ul.
Szwolezerow 8, Warszawa 00-464, Poland Tel
022-696-5033 / E-mail t.yamauchi_at_emb-japan.pl or
yamautty_at_hotmail.com