Japan’s Low Economic Productivity

Kiyoshi Matsumoto
Apr 23 · 14 min read
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A plummeting Japanese population and a belief that Japan’s GDP and living standards must be maintained at all costs dictate for Japan a dire need to increase productivity. Unfortunately there are significant cultural headwinds to gaining increases such as a corporate belief in consensus, a lack of focus on output and a labour force still psychologically connected to concepts of life time employment.

A workplace culture of long hours and rigid hierarchies that served the country well during its high growth years in the 1960s, 70s and 80s has become a thorn in its side. The country’s productivity statistics have languished at the bottom of the G7 and well below the Organization for Economic Cooperation and Development (OECD) average.

OECD data shows that in 2017, the Japanese created $46.2 in GDP for every hour worked, below the Group of Seven average of $61.7. Japan’s GDP per hour worked is the lowest in the G7, and lower than all major economies in the OECD except South Korea. Its productivity remains significantly lower than Germany at $72.2, the United States at $72, Switzerland at 71.3, Australia at $58.6 and roughly half that of top-ranked Ireland at $99.5.

Productivity — It’s the Magic Word

Japan’s future prosperity depends on maintaining or even increasing productivity. After all, economic growth is derived from the combination of growth in the population and growth in productivity. In Japan, since the population is spiralling down, all the hard lifting will have to come from productivity.

While Japan’s manufacturing sector has remained a clear global productivity leader, the domestic service and non-manufacturing sector has fallen behind. Non-manufacturing companies managed absolutely zero productivity growth in the past two decades. The contrast is shocking: between the year 2000 and 2017, manufacturing sector workers’ value added produced per hour (Endnote 1) surged from about 4,000 (US$36.84) to approximately 5,800 Japanese yen (US$53.42); but non-manufacturing sector workers’ value added per hour (Endnote 1) stayed absolutely flat-lined at about 4,600 Japanese yen (US$42.37) — no growth whatsoever.

This low service-sector productivity is the very core reason for Japan’s two-decade-long economic stagnation and global under-performance. Generally speaking, Japan’s industrial workers do work with the best machinery available while service sector workers, at best, with last-generation technology. Domestic service companies over-invested in the past and under-invested in the future.

Japan’s productivity growth has been hobbled by inadequate competitive pressure and a rigid labour market. Competition fuels productivity, as the most nimble and innovative companies win out over less efficient firms. However in Japan, highly indebted firms and even uncompetitive divisions of large conglomerates have often been kept alive in the interest of stability. As banks continue to roll over bad loans, and corporate headquarters continue to allocate funds to underperforming units, resources are diverted that could be put to better use elsewhere. This process of creative destruction is severely impeded. In addition, regulatory barriers make it difficult for new competitors to challenge incumbents in certain sectors. The presence of multinationals could provide additional competitive intensity, but Japan attracts very little foreign direct investment.

Japan’s long-standing lifetime employment model has also contributed to a certain degree of stasis. Today the legal strictures around lifetime employment have mostly been lifted, making the labour market more flexible in theory. But downsizing is viewed in a strongly negative light in practice, producing inefficient bureaucracies that lack agility. Workers, too, are reluctant to advance their careers by changing employers, which limits their incentive to develop new skills.

Japan has partially addressed the issue of the structural labour market by allowing firms to hire non-regular (temporary) workers, or haken. By 2013 more than one-third of workers were covered by these arrangements, which offer limited legal protections and no pensions. At the current rate of growth, haken could account for 50 percent of the workforce by 2030. Paradoxically, this has taken a toll on productivity: temporary workers have fewer incentives to excel, and employers do not invest in their development. At a boarder societal level, this situation has created a two-tiered workforce and contributed further to inequality.

Work Style Reform to Cut Work Hours Shorter

Men in Japan work some of the longest hours in the world, according to OECD, with the average male working 8.9 hours a day, the highest of 26 countries surveyed after Mexico. That compares with 7.9 hours in the US and 7.3 hours in the UK, according to OECD. Domestically protected industries, which face limited competition from overseas, such as retailing and farming, are also proving barriers to improved productivity. Service sector productivity in Japan was about half that of the US from 2010 to 2012, according to data from the Japan Productivity Centre. “Some Japanese companies keep unprofitable businesses alive to maintain employment,” said Yasuhiro Kiuchi, the senior principal researcher at the Japan Productivity Centre in Tokyo. “It’s common to keep businesses going if they’re not making big losses.”

The service sector now employs more than two-thirds of the working population in Japan. Those companies in the non-manufacturing sector are also reluctant to make the investment in technology that would improve productivity and enable work-from-anywhere approaches. And it may be difficult to make major changes in work styles without first changing the legal infrastructure around employment. To discourage abusive practices such as requiring employees to work unpaid overtime, the government would need to step up its current lax enforcement of labour regulations, and there are no signs of that happening any time soon.

Many employees are highly sceptical of the hoopla around work style reform. In a recent survey of over 5,000 employees, 85.8% reported that work style reform was something they had heard about in the media or from other companies, but that their own firm was not doing anything about it. Moreover, employees are concerned that the efforts they do see are not hitting the mark. For example, many companies clamp down on overtime without doing anything to change the amount of work, which simply results in people showing up to work early, working through lunch, or surreptitiously taking work home in order to get their jobs done.

For work styles to truly change Japanese companies will have to address the inefficient work practices at the root of long hours and low productivity: too many meetings, too much paperwork and intense micromanagement from supervisors. These are the types of everyday working practices that can easily be seen as inevitable by those who have never operated in any other way.

Underlining Corporate Cultural Stigmas in Improving Productivity

In Japan the professional culture is input-based (full schedules of meetings, onerous paperwork and menial tasks) rather than output-based. Long hours and late nights are less of a means to accomplish tasks and more of a means of value-signalling, demonstrating devotion to the organization and commitment to the team members. That isn’t unique to Japan — any visitor to Washington DC will notice people boasting of their lifespan-shortening work regimens — but what’s unique to Japan is prioritizing the effort made over concrete results. There are two reasons why the problem is so pernicious.

The first is that the lifetime employment system and the habits that came with it arose hand-in-hand with the rise of the Liberal Democratic Party (LDP) which has ruled almost continuously since 1955. The relationship between the business sector and the LDP, along with the bureaucrats, formed the “iron triangle” which is often credited for Japan’s economic boom and political stability. This relationship makes the prospect for reform slim since the LDP is usually deferential to corporations on workplace policy — if companies say that reform is too impractical, the LDP will defer to their judgement.

This is why the recently-passed employment reform legislation ended up being predictably underwhelming. For one, the bill caps overtime at 100 hours per month — roughly the amount that led 24-year-old Dentsu employee Matsuri Takahashi to commit suicide as her only escape from long work hours. The loophole that exempts white-collar workers making over 10.75 million yen (US$100,000) from the overtime caps may be a double-edged sword — it could encourage the prioritization of performance-based compensation or it could provide a workaround that renders the legislation’s benefits to the overtime system moot.

The second is that Japan’s preference for seniority makes managers acutely unreceptive to change. Because they all endured the same trials during Japan’s post war boom years and came out of them successfully; they believe in their bones that the system works. ‘Old guard’ management also believes that Japanese’s universities are not keeping pace with the leading institutions overseas and their graduates are not up to scratch in terms of global standards, and thus unable to offer their corporations better solutions. (End Note 2) Additionally, because most employees spend their entire careers with the same company, opportunities for advancement result from complying with in-house norms rather than from innovation.

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Leaders at Business Lobbying Keidanren has long faced criticism that it has focused on preserving Japan’s business practices, despite the country’s decades of sluggish growth

Change will only come from a generational shift in attitudes. The generation whose professional careers grew during the bubble years of the 1970s and 1980s are retiring and the generation replacing them have more memories of the “lost decades” of stagnation than nostalgia for the habits that created the bubble. Their life experience has not been of “Japan as number one”, but of stagnating wages, reduced labour protections, and insecure employment prospects; all served up with the same crushing professional expectations. Young Japanese, especially those with international experience, are aware of alternatives that are both productive and more forgiving of a work-life balance. Carrying this experience with them as they climb the corporate ladder may be Japan’s best hope for breaking its corrosive workplace habits, but this will take some time if at all.

Land of the Rising Robots

As already highlighted, higher productivity for Japan is critical to sustaining economic growth and living standards as Japan’s population shrinks.

Mitsubishi Heavy Industries Ltd. has cut the number of workers on its turbocharger production lines west of Tokyo by more than 80%, from a 20-person turbocharger line in Sagamihara to just three people as the lathes were automated to produce parts. Not only is the labour force being cut, and employees being deployed to other areas in the firm, significant productivity gain in units produced are being realised. Japanese manufactures, from carmakers to electronics producers, are pushing further into such automation. These advances explain why Japan’s factory productivity growth ranked highest among the Group of Seven nations over the two decades to 2017.

Unfortunately, most of gains are still limited to the large companies like Mitsubishi Heavy. However Japan’s manufacturing sector cannot do all the heavy lifting alone. Since the service sector now accounts for more than two-thirds of Japan’s economy, and that is sector was down in 2017 by 2%, Prime Minister Abe has set a target to double productivity growth in this area to 2% by 2020 and 3% by 2025. “In Japan, I think manufacturers are much more sensitive about productivity per hour than in the US and Europe,” said Koichiro Imano, a former professor of economics at Gakushuin University in Tokyo. “They are very strict and so productivity in factories is very high. But it’s completely different for white-collar workers.” Though Japan is socially isolationist, economically it needs capital inflows and strong export markets, and low productivity and the resultant drag on wages is undermining the central bank’s efforts to stoke much-needed inflation to circulate currency and keep pace internationally.

One forecast predicts that Japan’s current labour force of about 77 million could collapse by more than 40% by 2065. Automation is seen as the only viable alternative to maintain productivity and Japan’s current GDP. The rapid decline in the labour force and the limited influx of immigrants create a powerful incentive for automation, which makes the country a particularly useful laboratory for the study of the future landscape of work.

While automation will eliminate very few occupations entirely in the coming decades, it is likely to have impact on portions of almost all jobs to some degree. Automation has the potential to appear in a much broader range of activities than seen until now, and to redefine human labour and work style in services and other sectors. Japan is a leader in robot production and industrial use. The country exported some $1.6 billion worth of industrial robots in 2016, more than the next five biggest exporters (Germany, France, Italy, United State, South Korea) combined. Japan is also one of the most robot-integrated economies in the world in terms of “robot density” — measured as the number of robots relative to humans in manufacturing and industry.

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Land of the Rising Robots

Japan’s progress in automation, use of robots, integration of artificial intelligence with daily living is likely to move at a faster pace than in any other advanced economies. These are seen as solutions for Japan’s shrinking population and the more rapidly shrinking workforce, aging population and the decline of quality of services as a result of labour shortages. Already most critically affected are parcel delivery services, hospitals, restaurants, elementary and high schools, convenience stores and government services.

For policymakers, the first hurdle is to accept that change is coming. Like the introduction of the age of steam and the industrial revolution, the introduction of artificial intelligence, robotics and automation are just as seismic. The second hurdle may be to find ways to help the public prepare for and leverage this transformation to make lives better and income higher. Strong and effective social safety nets will be crucial since disruption of some traditional labour and social contracts is inevitable. However education and skills development will also be necessary to enable more people to take advantage of jobs in a high-tech world. And in Japan’s case, this also means a stronger effort to bring greater equality into the labour force between men and women, between regular and non-regular employees, and even across regions so that the benefits and risks can be more equally shared.

Micro Considerations When Considering Japan’s Low Productivity

It is certainly true that the Japanese have a reputation for being sticklers for punctuality. But there is one thing about the Japanese attitude to time that still strikes foreigners as strange, almost contradictory. There seems to be a wide gap between an almost obsessive attitude to starting on time and a very relaxed attitude to when things end. Meetings frequently drag on far past their scheduled finish time, and the official end of office hours is so widely ignored that many people barely seem to be aware of it at all. So if you’re even one minute late for work, this counts as being late. This seems reasonable, and no one should act surprised to be rebuked or reprimanded for failing to be on time. This much we can understand.

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Japanese Punctuality

It is a universal characteristic of human societies that people do not generally show their “true” selves to others, but rather behave in such a way as to convey the impression they wish to shape how others see them. In social psychology, this is called “self-presentation.” It’s a tendency that is particularly pronounced in Japan.

This “impression management” means that when a meeting is starting, people do everything they can to arrive on time to avoid giving a bad impression or damaging their reputation with the rest of their group, and such behaviour has deep roots in Japanese society. However, when it comes to ending the meeting, content and respect for everybody’s input is more important than the resultant output and time taken.

For the US worker the idea of time is most valuable. Their time is linear. One hour at the dentist, lawyer costs a huge amount of money, and to fully take advantage of all the benefits, one has to move faster — it is a profit-oriented society where time is money! For an American ‘now’ is the time to take action and make a decision. While Americans sanctify time-keeping, this does not apply to all cultures. In Asian societies time is a given, you cannot run out of time because it is cyclic. This is where decision making clashes between the two ways of thinking. Americans want a decision to be made now, because not having a decision at this very moment would be a waste of time. For Asian people time passing by is not a waste, and decisions are viewed always in the long term and not as a quick fix.

The Japanese are not concerned with how long something takes to happen, but with how that time is going to be allocated, with different stages and phases. For example, a meeting usually begins with an exchange of business cards so that seniority and status can be recognised and thus the degree of decision-making authority determined. In Japan, form and symbols are more important than content.

Big and traditional companies will rarely promote you based on your achievements, because the amount of time spent within the company and thus seniority is highly valued. It goes hand-in-hand with the Japanese life time employment system, the higher they climb the company ladder the less they do, but the more pressure they put on their subordinates, and the less efficient they become in terms of productivity. In comparison Japan’s small to medium companies, especially those with young CEOs, are changing and tend to be more open. Time management is becoming a key concept in these firms and they value output, rewarding achievement.

A challenging Path to Tread

Japan is faced with a huge task to maintain a lifestyle based upon increased productivity due to its rapidly shrinking workforce. Its antiquated work practices stemming from cultural norms have created poor productivity when decisions need to be made swiftly, time needs to be seen as a valuable commodity and output needs to be the key objective, not input. To achieve Japan is now rethinking the whole concept of work with an objective to become the world leader in robotics where employees will work with and alongside artificial intelligence on a daily basis. This will be a fascinating chapter in Japan’s evolution, but a dangerous path to be trod. The last warning of the scientific genius Stephen Hawking before his death was that “the greatest threat to humanity is not climate change but AI”!

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Endnote 1

Value added produced per hour is a measurement to assess productivity per hour for manufacturing sector whilst value added per hour is a one to assess productivity per hour for non-manufacturing sector.

Endnote 2

It remains true that teaching and research at Japan’s universities does not match the standards of the best universities in Britain and the United States. it is noticeable that Japan does particularly poorly on ratings for factors connected to “international outlook,” especially with regards to the proportion of international faculty and students. This is widely acknowledged as a major factor dragging down Japan’s scores.

In order to become more competitive with universities in other countries, Japan needs to open up its universities and work positively to welcome greater numbers and more talented researchers and students from overseas. It also needs to increase the number of courses available in English, the de facto global lingua franca. At the same time, it needs to send more Japanese researchers and students overseas to stimulate their research and improve standards. In the past, Japan’s universities have been successful in following a policy of indigenization. But today, it is probably true to say that they are facing a third major period of “opening up” or kaikoku — a pressing need to open the country to the outside world similar to previous moments of crisis in the early Meiji era and immediately after World War II.

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