Excessive Export Reliance Putting Japan in Danger

After 42 years, Japan in the second quarter lost its place as the world`s second-largest economy to China. So how is Tokyo assessing its shocking decline?

A report by the Japanese Economy, Trade and Industry Ministry exclusively obtained by The Dong-A Ilbo shows how deeply worried Japan is. The challenges facing Japan, however, have implications for the Korean economy, which has long sought to overtake Japan’s.

○ Three reasons for Japan’s decline

The ministry’s report said, “The Japanese economy is in a severe condition. This is not a temporary situation but a chronic one stemming from three structural problems.” The three are industrial structure, corporate business model and business infrastructure.

On industrial structure, the report said Japan depends excessively on global manufacturing, especially that for cars, to expand its overall economic pie. Between 2000 and 2007, Japan’s GDP grew just 2.5 percent, with cars contributing half of that figure with 1.1 percentage points.

“Export-oriented manufacturers are suffering from increasing price competition from emerging economies, which has led to a decline in jobs at these manufacturers. Japan can no longer depend much on global manufacturing for job creation,” it said.

“So many Japanese companies compete within the domestic market and are engaged in a costly war of attrition. In contrast, Korean companies, based on their firm domestic foothold, are increasingly promoting investment strategies in overseas markets.”

Major Japanese industries such as passenger cars, steel, mobile phones and electric power have a bigger domestic market than their Korean counterparts do in Korea, but the market value of a Korean company is 50 to 300 percent higher than that of a Japanese company.

The Japanese Trade Ministry said, “The problem is not the product but the business model.”

Japan conquered the world market through vertical integration in the 1970s, but following the bursting of its economic bubble in the 1990s, the country suffered from excess debts, facilities and jobs, which led to an industrial hollowing-out and a plunge in world market share.

Final product manufacturers failed to catch up with rapidly changing emerging economies. Parts makers grew exhausted because of production cost competition with emerging market companies and have been suffering from wage stagnation.

On business infrastructure, the report said, “Japan is rapidly losing competitiveness as the Asian regional hub in almost all sectors.”

A ministry survey conducted last year on American, European and Asian companies on their investment preferences showed that Japan was overtaken by China for the top spot in all seven categories, including the hub of Asia, manufacturing, R&D and logistics. Japan just two years earlier had ranked first as the hub of Asia and R&D.

○ Japan’s countermeasures and implications for Korea

Japan’s economic problems as described in the report could also serve as lessons for Korea. For starters, overseas investment by Japanese companies is increasing while domestic investment remains stagnant. The income gap between the cities and provinces is widening, and the economically productive population is plunging due to the low birth rate and rapidly aging society.

Korea will inevitably face the same difficulties if it pursues a catch-up strategy without studying Japan’s problems.

The Japanese Trade Ministry’s proposed countermeasures could also serve as invaluable advice for Korea. The report urged an end to Japan’s industrial strategy of dividing export-oriented manufacturing industries and domestic demand-driven ones and stressed that all industries should focus on emerging markets.

This means culture-related businesses such as fashion, food and beverages, tourism and animation should be nurtured into export industries in addition to domestic infrastructure business lines such as electric power, railways, energy and urban development.

The report also said the barrier between manufacturing and the service sector should be broken down.

Lee Ji-pyong, a Japan expert and head researcher at LG Economic Research Institute, says, “Taking lessons from Japan’s failure in post-industrialization reform, Korea need to break away from its existing paradigm and continuously innovate its industries. In particular, the country must absorb the spillover effects and value-added growth of emerging economies by stepping up trade with these countries and building plants there.”

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