Natural Resources Overview

Although readers of the earlier section of this chapter as well as chapter 2 are familiar with the term ‘‘economic miracle,’’ which describes Japan’s high-growth years (mid-1950s–early 1970s), in some ways the real miracle is that the Japanese were able to become the second-richest major nation on earth despite the fact that they have almost no natural resources when compared with most of the rest of the world. In Asia, only Singapore could lay claim to having fewer natural resources than Japan. Japan’s natural resources predicament and its economic effects will become clearer in what follows. Those who are particularly interested in this subject should also read chapter 1.

Primary Resources: Agriculture, Timber, Mining, and Fishing

Food supply is the most critical resource for any economy, and 2004 Japanese government statistics indicate that only 12.7 percent of land in the archipelago can be used for agriculture. The rest of the Japanese islands are either too densely populated, too mountainous, or in the case of a substantial part of Hokkaido, too cold for productive agriculture. The agricultural land that is utilized is intensively cultivated, and Japanese farmers are highly productive. Because of agricultural efficiency, Ministry of Agriculture, Forestry, and Fisheries (MAFF) data indicate that as recently as 1980, Japan’s farmers could provide 53 percent of national food supplies. By 2005, Japanese farmers could produce only an estimated 40 percent of the food Japanese consumed. In 2005, Japan’s Ministry of Economics, Trade, and Industry data illustrated that Japanese must now depend on 10 nations (the United States and China being leading providers) and a number of other countries to make up the food supply gap. Rice, whose production is heavily subsidized by the government, constitutes one of the few widely consumed agricultural products where the Japanese are self-sufficient.

Japan is even less self-sufficient in its need for timber products than for food. Until the first years of the 1960s, Japan’s forestry industry was able to meet consumer demand, but with increasing economic growth, the situation changed dramatically as demand increased for a wide variety of timber products ranging from wood for construction to paper. According to MAFF, by 1980 Japan could produce only about 32 percent of the timber it needed, and by 2005 the nation’s forestry industry managed to supply 20 percent of the nation’s demand for timber. Japan does have a mining industry, but its output was responsible for a miniscule 0.16 percent of the gross domestic product (GDP) at the end of the 20th century.

Japan is still a major fishing nation, but the industry has declined because of diminishing ocean fish supplies, difficult environmental conditions, effective competition from foreign fisheries, and changes in international regulations. In 1960, Japan was the world’s leading fishing nation, and according to Japan’s Foreign Press Center, 1.5 percent of the workforce was employed in the industry. By 2006, only 0.3 percent of the workforce was still employed in fishing enterprises. United Nations statistics indicate that by 2004, Japan had dropped to fifth among the world’s fishing nations, with world-leading China catching more than four times as much fish that year as Japan. Because seafood is exceptionally important in the Japanese diet, Japan now is the world’s leading importer of fish.

Natural Resources: Energy

Ample energy supplies are critical to the survival of any economy and especially one as developed as Japan’s. Japan is highly dependent on foreign sources for its energy supply. International Energy Agency statistics indicate that in 2004 imports constituted about 82 percent of the national energy supply, and approximately 99 percent of oil consumed in Japan was imported. In the same year, Japan obtained approximately 90 percent of its oil from the Middle East, leaving the Japanese vulnerable to geopolitical events that might disrupt supply in that region of the world.

The government began stockpiling oil after the first world oil crisis in 1973. Japanese Agency for Natural Resources and Energy statistics indicate that as of January 2007, the government had enough oil stockpiled for 177 days if supplies were disrupted. Serious efforts have been underway for some time to reduce oil as an energy source. According to government and international statistics published by Japan’s Foreign Press Center in 2007, while Japan’s reliance on oil as a share of all energy sources remains higher at 50 percent than those of the United States or Western European countries, in 1973, 78 percent of all the nation’s energy was produced through oil.

In 2006, Japan’s government announced a new energy strategy based on both economic and security considerations. By 2030, targets have been set that include reducing oil to 40 percent or less as a source for all energy needs, reducing Japan’s transportation sector’s reliance on oil as a source of energy from 100 percent to 80 percent, reducing the costs for solar energy development, and developing nuclear power plants so that energy source will account for 40 percent of the nation’s power generation. In addition to the political volatility of the region of the world that supplies Japan with most of its oil, international economic developments, most notably increasing demand for oil by China and to a lesser extent India, also motivated the Japanese government to refocus on reducing oil supplies. In 2008, China passed Japan as the second-largest importer of oil in the world. Increasing need for oil by these growing economies will likely drive oil prices even higher for the Japanese. As of the fall of 2008, a liter of gasoline (slightly less than a quarter of a gallon) was selling for 126 yen, or about $1.20, at Japanese gasoline stations.

Eighty two percent of Japan’s electrical power output, according to the Agency for Natural Resources and Energy, is produced by nuclear, coal, and natural gas–powered plants, so even though Japan must import large amounts of natural gas and coal, oil dependence has been reduced. However, when international comparisons are considered regarding energy dependence in general and oil dependence specifically, it is apparent that Japan, because of a lack of energy resources, will be dependent to some extent on other nations for imported energy for the foreseeable future. Statistics published by Japan’s Foreign Press Center that are compilations of private-sector, government, and international agency sources indicate that as of 2004, Japan was the most dependent country on imported energy of seven major industrialized nations, including the United States, Germany, and China. When oil in particular is considered, only the Republic of Korea (ROK; 99.6 percent) exceeded Japan’s dependence (99.1 percent) on foreign sources.

Labor Resources: A Workforce Overview

Japan’s almost 67 million workers are highly educated by world standards, and the distribution of their employment conforms in general to what would be expected in a developed country. As mentioned earlier, less than 5 percent of all Japanese are employed in primary (mining, fishing, forestry, agriculture) industries. As of the beginning of 2007, according to economist Richard Katz, approximately 17 percent of all Japanese workers are employed in manufacturing enterprises, with the majority of workers (69 percent) in services industries (Katz 2008, 8). Even though the majority of Japanese workers, as is true in other highly developed economies, are employed in services, a substantially higher percentage of Japanese are in manufacturing than in the United States, where only 10.2 percent of workers are employed in the secondary sector (AFL-CIO 2007). Comparative statistics from Japan’s Institute of Labor indicate that in 2005, 18.2 percent of workers belonged to labor unions. This was a higher percentage than in the ROK or the United States, where unionization rates ranged from 12 to 12.5 percent of unionized workers. However, the percentage of Japanese workers in unions was much lower than in Western European countries like the United Kingdom and Germany, where 29 and 26 percent, respectively, of the workforce was unionized.

In most of the postwar years, Japan has enjoyed, even during the tough 1990s, low unemployment rates compared to other developed countries, particularly those in Western Europe. In 1990, the Japanese unemployment rate was 2.1 percent, according to the MHLW. Japan’s unemployment rate rose steadily during the economic problems of the 1990s, and by 2002, 5.4 percent of the Japanese workforce was unemployed. As Japan’s economy recovered, it dropped to 4.1 percent by 2006. MHLW comparative data for the same time frame is 4.6 percent for the United States and approximately 10 percent each for France and Germany. As of the publication of this book, Japan’s unemployment rate, as is true of most other nations, is rising again due to the 2008 world economic situation.

Japan is comparable to other developed countries in the percentages of women who work outside the home. Between 1980 and 2006, MHLW data indicated that the number of employed female women grew by 9.2 million or 68.2 percent. In 2006 women made up well over 41 percent of the nation’s workers. Explanatory factors for this change include women’s desire to work and improved opportunities as a result of equal employment laws, enhanced family leave laws, and more educated women than in earlier times. Japan now has about the same percentages of women working outside the home as most Western European countries and the ROK but still trails the US.

With a shrinking workforce because of population decline and the need to more effectively use human resources, the question of the role of women in Japan’s economy is more important for the nation than in the past. Approximately 48 percent of all adult women are employed outside the home, and for women ages 25–34, workplace participation has grown from 49 percent in 1980 to 68 percent at present.

Although significantly fewer numbers of women earn university degrees in Japan in such technical fields as engineering, the number of women who complete higher education is roughly comparable to the number of men. However on average, Japanese wives in two earner households’ wages are so modest, they account for substantially lower percentages of family incomes when compared to two-earner households in other developed countries. One reason that Japanese women earn so little income from work is that higher percentages of Japanese women work part time compared to Western European or American women. Another reason for the low earnings of women is that despite a more than 20-year-old equal employment law, the Japanese workplace, partially because of traditional attitudes and also because of company employment tracks that favor permanent employees, is still not effectively utilizing women.

One traditional term, kanai, that Japanese men use when referring to their wives literally means ‘‘inside the house,’’ and usually, even until the 1970s, only poor women and those of questionable reputations worked outside the home. During that decade, women were still supposed to married by age 25 and have two or perhaps three children. During the 1980s, Japanese attitudes had changed to the point that it was socially acceptable if middle-class women worked part-time, and many, because fertility rates had dropped, were in a position to seek outside employment. By the 1990s, massive numbers of women were entering the Japanese workplace. Even so, a large number of married women still stop working when they have young children and return when their children are in school. The overall female workforce participation rate slightly dropped from 50 percent in 1980 to 48 percent now because Japan’s overall population, including women, is aging (Katz 2007, 7).

Although estimates vary greatly because it is difficult to collect precise data on part-time employees, women, especially part-timers without tertiary educations, often do the same work in Japan as their male counterparts but earn substantially less money. MHLW 2006 statistics indicate that in workplaces employing more than 30 people, on average, women’s earnings are about 60 percent those of men. This Japanese pattern is in contrast to much smaller salary gaps between women and men doing the same work in the United States and other developed countries.

Despite recent improvements and such long-standing exceptions as in the education and fashion industries, it is still difficult for female graduates of universities to obtain salaries commensurate with their educational levels. The majority of large Japanese companies do not make permanent managerial positions available to women university graduates because of a belief that after becoming mothers, women will devote more time to child rearing than work if they continue employment at all. There does seem to be some progress, however, in the earning power of women under 30 relative to men, as recent statistics indicate women in this age cohort now earn 86 percent of the hourly wages of their male peers. This progress may be primarily due to the fact that fewer women in this age group are married than has been the case in the past, and divorce rates have risen. One-third of all 30-year-old women are now single.

Japan’s effort to escape the economic doldrums of the 1990s also affected women in the workplace. Approximately 60 percent of all ‘‘freeters’’ (mostly younger people during the 1990s who began a pattern of intentionally seeking a series of temporary jobs) are women (Miyamoto 2006, 23–26). Also, a substantial portion of women who work full-time with one company are contract rather than permanent employees. As is the case with anyone regardless of gender, people in these job categories usually have lower salaries than permanent employees, and health and pension benefits are low to nonexistent. Women freeters who are unmarried are particularly vulnerable. They often don’t have a second breadwinner on whom to rely, and because they are women, it will be even more difficult for them to move into permanent employment than for their male counterparts.

As noted, the major problem with the Japanese workplace and women is that many business leaders in major and medium-sized firms still do not even consider women for regular-employment management-level positions. Also, unlike in the United States and several other developed nations, Japanese management has been reluctant to experiment with flexible work schedules and job configurations that allow ambitious and talented women to have both children and a career.

Many working females are typically young, unmarried women, for whom the Japanese have a nickname that may be translated as ‘‘office ladies.’’ These young women do menial work for a corporation for five to six years after they graduate from high school, junior college, or even a university and upon marrying are expected to leave the company. Traditionally, male Japanese view these work years for a woman as a time she can learn about the world before settling down. Office ladies are usually not given meaningful work but instead are expected to create a pleasant environment for the permanent, mostly male employees by making and serving tea and running errands. Many executives in Japanese companies feel obligated to help their young male employees find wives. Management often views the pool of office ladies as a good source of brides for these young men. Women are an underused resource in Japan’s economy.

Despite substantial remaining economic barriers for women, there are signs of progress. When starting salaries are compared, Japanese women with graduate degrees receive approximately equal pay as their male counterparts while university graduates who are women are receiving about 10 percent less than their male counterparts. Males with high school educations received about a 9 percent higher starting salary than their female counterparts (Facts and Figures 2007). Although statistics are unavailable, the salary differential in favor of men in the private sector probably becomes even higher later in working careers since a larger percentage of women than men take extended time off from working when they have small children and because of a glass ceiling that still exists at management levels in Japanese companies. Although change is occurring, it takes place in the face of cultural traditions that date back to the introduction of Confucianism.

Two segments of the Japanese workforce, older workers and the young, also face some particular problems that are more pronounced in Japan than in other developed countries. Senior citizens who are over 65 constituted almost 20 percent of the population in 2005. This number is expected to rise to 28 percent of the population in 2020 and approximately 30 percent of the population in 2030. At the same time, percentages of young people annually entering the Japanese workforce are steadily dropping. Children constitute less of a share of Japan’s population year after year. Currently, children who are 14 years old or younger are a smaller percentage of the population than people over 65 (Lincoln 2007, 36–37).

This decline in young workers and increase in retirees presents significant problems for such social programs as pensions and health insurance since unless significant increases in immigrants or birthrates occur, fewer numbers of workers will be funding larger numbers of senior citizens each year.

In the postwar years, Japan’s mandatory retirement has always been lower than a number of other developed countries; MHLW statistics indicate that as late as 1960 the mandatory retirement age for approximately 77 percent of Japanese workers was between 50 and 59. Since 1990, the mandatory retirement age for most Japanese workers has been 60, and this was still true for 90.5 percent of workers as of 2006. The combination of inadequate government and private-sector pension funds and increasingly long life spans has meant that larger percentages of Japanese workers, particularly males, remain in the part-time workforce at 65 or older than is the case in the United States or Western Europe. Comparative MHLW 2006 data indicate that almost 29 percent of Japanese males 65 or older still had at least parttime jobs compared to 19 percent of their American, 9 percent of their UK, 5 percent of their German, and less than 2 percent of their French counterparts. The problem is now compounded by the aging of Japanese baby boomers, 6.8 million of whom began to retire in 2007. In response, the government has enacted laws mandating that employers either raise the retirement age to 65, abolish mandatory retirement, or rehire in part-time positions formerly full-time employees who have retired. More than 90 percent of employers are responding to the new laws by hiring their retired employees as part-timers. Previously, retirees had to find jobs elsewhere than the firm where they had worked, so the new option usually provides more attractive part-time options for the average senior employee. The 1990s transition of Japan’s employment structure from a situation where many workers had either permanent employment or full-time positions to a more market-based system that depends on more part-time employees than was the case in the past poses even more widespread challenges for young people than for their older counterparts. This is discussed in detail in the next section.

The Transformation of Employment

Around April 1 of each year all over Japan, induction ceremonies for employees entering new firms are conducted with much fanfare. This account of an induction ceremony at NEC is typical of what occurs in large and medium-sized firms: The ‘‘entering the company’’ ceremony, or Nyu Sha Shiki, for 1,400 recently hired young people is about to begin. Many Japanese consider such a ceremony as this one to be a profound moment for the individuals honored, the company, and society. There is the attendant feeling that if group harmony and teamwork are to be promoted, young employees must be celebrated by this ritual.

All the new inductees are required to be present at 8:25 A.M., before the ceremony, and roll is taken. The ceremony begins promptly at 9:00 A.M. with new inductees and assembled corporate dignitaries singing the company song accompanied by the corporate band. After speeches by corporate officials, including the president, each new member reaches under his or her seat and opens a packet that contains business cards, a corporate lapel badge, and a 520-page textbook containing all kinds of information about the company, company expectations, and suggestions for employees. Then a young, new female inductee, chosen to represent the entering class, comes forward and recites the new company member pledge, which is a promise to improve the daily lives of people with electronics and communication. Finally, the president of the company leads the entire assembly in the company oath (Reid 1999, 153–155).

The entrance ceremony epitomizes the Japanese notion of company as family. Japan is famous for being a society that places high importance on the group, and this notion has historically been as true in the world of work as in other aspects of Japanese life. In Tokugawa times and even before, artisans took in apprentices, or deshi, and if they proved worthy gave them status similar to family members in the Japanese household, or Ie. A few industrial concerns were experimenting with permanent employment for skilled blue-collar workers around the time of World War I. Companies that tried this tactic during this time did it for pragmatic reasons; rapid industrialization meant rapidly rising wage rates for machinists, mechanics, and others with technical skills. The promise of a lifetime job could keep a worker in high demand from leaving. However, the practice had cultural resonance in a group society.

During Japan’s postwar high-growth years, permanent employment and the related seniority pay system became regular and much-touted parts of corporate Japan. Although permanent employment linked to seniority-based pay systems and entrance ceremonies are still part of Japanese life, the proportion of employees who can access ‘‘lifetime’’ and regular employment tied to guaranteed salary increases based on tenure with the firm has been in decline for more than a decade and a half. Throughout the high-growth years, these practices promoted teamwork within the company, discouraged office politics based on ambition for higher salaries, and contributed to the production of excellent goods and services.

In the early 1990s, many of the Japanese companies that suffered through years with low profits or even losses were operating in an economy characterized by low growth and faced increasingly intense domestic and foreign competition. Hiring large numbers of lifetime or regular employees each year threatened to bankrupt many firms.

At one point in the early 1990s, estimates of even some of Japan’s most successful companies indicated that top management reported the number of surplus workers ranged from 5 percent to almost 20 percent. Foreign companies could downsize in bad years, but this was difficult for Japanese firms, so they initiated changes. Because the public and their elected representatives strongly endorsed the company-as-family concept, there were only a few well-publicized cases of actual situations where longtime employees of large firms lost their jobs. As discussed earlier, even before World War II a few companies were offering lifetime positions to new recruits. Even today, those Japanese who are hired by firms as socalled permanent employees will lose their jobs only if companies go bankrupt.

However, by the mid-1990s, the survival strategy that Japanese firms adopted was to hire many fewer regular employees and drastically increase the recruitment of part-time workers. These part-timers were paid much lower salaries and benefits than regular employees and could be laid off when particular businesses and industries faced hard times. Ministry of Internal Affairs and Communications statistics over a 15-year period indicate the number of regular employees in Japanese business declined from about 35 million to 34 million during a time when the number of potential job seekers was slowly growing, while the number of nonregular and part-time employees almost doubled, from almost 9 million to more than 16 million workers. As a result, many Japanese firms have managed to survive and even make high profits while average pay in private-sector companies failed to increase for 8 consecutive years during the time for which statistics were compiled.

This change in the use of human resources in the workplace that began in the 1990s resulted in a new word as well as work pattern, ‘‘freeter,’’ a term that is a combination of the English word ‘‘free’’ and the German word for worker, Arbeiter. A recent government estimate indicates there are more than 2 million young people, most of whom are in their twenties and many of whom have university educations, who are freeters. Freeters earn a living by changing from one part-time or temporary job to another, and the jobs pay less and offer fewer opportunities than regular employment. Many of the freeters are now approaching or in their thirties, and even though companies are hiring more full-time workers again, freeters lack job skills that are often gained through regular employment. Also, the fact that they are older than other applicants coming out of school and seeking employment means freeters are less attractive to employers because the seniority system, which can be based on age as well as time, means management would theoretically be obligated to pay the older freeter looking for permanent employment a higher salary than the younger recruit. The national government is concerned about the freeter problem and has established a special council to provide assistance in job training for them. As noted earlier, it is estimated that 60 percent of all freeters are women, who have historically experienced institutional gender discrimination in most Japanese workplaces (Miyamoto 2006, 23).

Japanese firms that cut back on hiring full-time employees in order to survive the ‘‘lost decade,’’ as many in Japan label the 1990s and the early part of this century, are not the only example of the reconfiguration of human resources in Japan in the face of a changed economy. Japanese human resources experts report and statistics confirm that by the year 2000, substantially more employees with such desirable university degrees as engineering were more narrowly focused on their own careers and much more willing than in the past to leave one firm for more lucrative employment in another firm. One study indicates that the job turnover rate among employees in their first three years with a firm was about 20 percent in 1992 but had risen to 35 percent by 2006, with no sign that the trend was reversing. This pattern has both positive and potentially negative effects for Japan’s economic health (Jo 2006, 18–22).

More employees who are willing to change jobs to advance themselves could very well boost productivity and also give firms a chance to hire skilled people in a much more flexible manner than in the past. This new trend, as does the strategy of hiring part-time rather than full-time employees, helps Japanese companies compete on a more level playing field with foreign competition. However, the substantial number of freeters who move from job to job as well as the rise in career-focused rather than organizationally loyal workers puts the traditional Japanese companyas-family model, and the societal stability that it created, considerably at risk. How significant will company entrance ceremonies remain given the changing environment?

There are already indications as well that the freeter problem is increasing income inequalities in Japan since permanent employees are considerably more affluent on average than part-timers. Having too many part-time workers also reduces national government revenues for maintaining the expected level of social services that are sorely needed in a country with a rapidly aging population since the government collects less tax revenues from part-time than full-time workers. Also, the aging of the Japanese population along with the substantial present and projected future numbers of nonworking to working Japanese threatens to increase a recently growing gap between rich and poor. In order for Japan to increase or improve existing affluence levels, barring massive immigration or dramatic increases in birthrates, almost all economists concur that increasing worker productivity is the only strategy open to a nation with fewer and fewer workers and a growing elderly population.

Improving Productivity

Often when one hears the word ‘‘resources,’’ such natural resources as oil, copper, or perhaps agricultural land come to mind. Although an extensive discussion of these kinds of resources is included in chapter 1, Japan is by world standards a poor nation in nonhuman resources. Japan’s greatest resource is its workforce, which is, by world standards, highly skilled.

Labor productivity, or the amount of goods or services a worker can produce in a given amount of time, is a vital ingredient in any economy. Productivity or the lack of it is a key determinant of standards of living in any country. Japan is one of the world’s richest countries because, like the United States and Western Europe, the workforce is well educated, possesses high skill levels, and works with large amounts of excellent equipment and machinery. Although Japanese workers, like their American and European counterparts, enjoy high salaries by world standards because they are productive, Japan is substantially less productive than the United States and several Western European countries in such important sectors of the economy as construction and services.

As noted, the ‘‘graying’’ of Japan and a shrinking overall population makes improving productivity a critical imperative for the nation. Studies indicate that in the next 20 years Japan’s working-age population will shrink by about 16 percent compared to an overall population decline of 9 percent. Specifically, until 2025 the percentage of Japanese workers is expected to annually drop almost one percent faster than the general population (Lincoln 2007, 36–37). If increasingly fewer workers are creating goods and services in this environment, employees must produce higher quantities of output relative to the past to maintain or improve prosperity levels. If all kinds of taxes and not just income tax are considered, Japan already has relatively high tax rates. Its aging population will need more social security and health care in the future than ever before. If productivity doesn’t improve at some point in time, future economic growth could be further jeopardized by the imposition of even higher levels of taxation.

Fundamental changes in Japan’s economy mean that some traditional ways in which the Japanese bolstered productivity probably won’t be options in strategies for future improvement. Throughout the 1980s, Japanese led developed nations in the annual number of hours worked, and Japan is still, along with South Korea and the United States, a world leader in this category. However, annual working hours in Japan are about 5 percent lower than was the case in 1990 because the increased number of part-time workers hired earlier is cumulatively putting in fewer total hours than was the case with Japanese employees when a higher percentage of the workforce was full-time. Also, education and training are critical in improving employee productivity. In the past, when the lifetime employment system was more pervasive than now, large companies had a strong incentive to constantly improve employee skills through in-house training. Now Japanese business is more dependent than in the past on educational institutions for what economists call the improvement of their employees’ human capital.

Even though the Japanese face some daunting challenges, significant future improvements in labor and overall productivity are certainly possible. During the high-growth years and beyond, the Japanese were either the world leaders or near the top in average annual manufacturing productivity growth rates. Today, Japanese automobile and semiconductor companies, along with a number of other firms involved in international business, are some of the most productive companies in the world.

Still, when Japanese productivity rates are compared to other industrialized, developed countries over the last 10 to 15 years, a clear pattern emerges. Japan’s manufacturing workers are 30 percent less productive on average than their American counterparts, who are world leaders. However, Japanese employee annual manufacturing productivity growth rates and already high manufacturing productivity levels place Japan somewhere among the top five nations in the world each year in manufacturing productivity. But Japan, because of low productivity among workers in services and distribution industries, tends to rank average at best and often below average in overall productivity when compared with other affluent nations. The major root of Japan’s productivity problem is the continued existence of the dual, or two-tiered, economy, a situation that has existed in Japan since the early part of the 20th century in one form or another. During the economic miracle years, Japan was making such massive improvements in manufacturing technology that a ‘‘rising tide,’’ assisted by government redistribution of monies from productive to nonproductive sectors of the economy, ‘‘lifted all boats.’’ The situation is different now.

The major drag on Japan’s economy is unusual among the world’s developed nations in that there is such a wide discrepancy between the high productivity levels of large industries that export and are thus exposed to intense foreign competition and the low productivity of manufacturing firms and entire sectors of the economy that sell only to the domestic market. Examples of industries and sectors of the economy that are clearly in the lower tier include those segments of Japanese manufacturing not exposed to the global market: food processing, construction, and much of retail and wholesale distribution. These industries in general suffer from low productivity levels, and most actually experienced productivity drops while the Japanese economy was improving after the lost decade.

Viable strategies for improving productivity in the lower tier of Japan’s economy are also important because, as is the case in other highly developed economies, recently in Japan manufacturing jobs have been declining and service sector jobs increasing. Factory jobs have fallen since 1997 to 17 percent of all jobs while during the same period service jobs have risen from 26 to 34 percent of all employment (Katz 2007, 8). When the total output of workers in services, construction, distribution, and low-productivity manufacturing sectors is considered, the typical worker in the lower tier produces less than half the output of the average worker in the highly productive segment of the Japanese manufacturing sector. Employees in the lower tier of Japan’s economy constitute 60 percent of the nation’s workforce.

Human Capital Development

Although education is addressed more extensively in a future chapter, in an information economy the quality of education and training is crucial. Just as financial capital is needed to buy machines that make for more efficient production of goods or services, high levels of what economists call human capital, or the knowledge and skills workers possess, are crucial to productivity growth and national affluence. Japan has a tradition dating back to Tokugawa times and before of deep respect for education. One of the keys to the development of the Japanese economy during the Meiji years was the successful implementation of universal elementary education. During the American occupation, access to secondary and higher education was dramatically expanded. Today, Japanese literacy rates are more than 95 percent, and about the same number of the high school cohort graduates, compared to 89 percent of American students. Japanese mathematics education, especially important as a foundation for later technical training, ranks among the world’s best.

One leading scholar of Japanese education asserts that the typical Japanese graduates from high school with the same level of content knowledge as the average American who completes two years of college. Comparable percentages of Japanese and Americans go on to some form of postsecondary education. An extensive network of mostly private postsecondary vocational schools and public technical colleges provide advanced technical training, and the Japanese have, behind the United States, the second-largest university system in the developed world.

Still, throughout the 1990s and beyond, large numbers of the public as well as many business and political leaders increasingly felt, whether correctly or not, that the educational system was failing to meet the needs of the workplace. At the elementary and secondary levels, Japanese mathematics scores in international testing, while still quite high, fell behind such countries as Singapore and the ROK. According to Organization for Economic Co-operation and Development 2006 international test data, first-year Japanese high school students scored 14th out of 15 developed nations in reading comprehension. First-year students also indicated a lack of interest in their studies and typically did not read any books for pleasure. Also, increasing numbers of Japanese felt that the education system was too factand examination-orientated and did not promote the kind of critical thinking and creativity needed by future workers in an intensely globalized economy. During the 1990s, there were also much-publicized cases of student violence that led many to believe that young people were not receiving the kind of moral education that facilitates the development of a disciplined and principled workforce.

In response to these concerns in 2002, the Ministry of Education began to implement widespread educational reforms that officials labeled the most significant since World War II. In an attempt to develop better independent and critical thinkers, one-third of the national curriculum was eliminated, and Japanese students in grades 3–9 were required to take a course titled ‘‘Integrated Studies,’’ in which they and their teachers jointly planned projects, field trips, and other hands-on activities. The long-term results of these reforms, which have been controversial since their inception, are impossible to determine at this time but indicate a deep societal concern about the adequacy of a heretofore impressive educational system for the new economic environment. The Japanese government has also recently initiated policy discussions focusing on ending public schoolteachers’ iron-clad tenure protection, liberalizing teacher certification to attract talented and creative ‘‘outsiders’’ to education, and facilitating the hiring of school principals who have experience in the private sector and fields other than education. All of these proposed policy changes are primarily intended to more adequately address the larger question of how to develop a more effective future workforce.

Virtually all educational policy analysts, Japanese and foreign, agree that the one educational institution most in need of reform is the Japanese university, particularly in regard to shaping it to better meet the needs of the economy. Although about the same percentage of Japanese students as their American counterparts attend university, there is substantial evidence that the structure of the typical university causes most undergraduates to learn less than their counterparts in other countries. In Japan, the majority of students attend private universities because the national government has historically limited the supply of public universities relative to demand so that the more elite students qualify for low-cost, tax payer–subsidized education. Although some private institutions are top flight, most are inferior to public Japanese universities, and funding for professors, laboratories, and other facilities in private universities is modest at best compared to public universities.

Also, certain companies and government ministries tend to recruit from one or only a few public or private universities. In Japan, university entrance is primarily determined by examination, and job recruiters have traditionally not been as interested in students’ majors as in what university they were able to enter. Most Japanese students tend to relax once they are admitted to a particular university and not apply themselves very diligently in their undergraduate years. Because professors are often not very demanding as a rule in many Japanese universities when compared to universities in a number of other developed countries, students can get away with not working hard—or learning much—and still graduate.

In the United States and other countries, university research and graduate programs often directly service the needs of business and industry. This has not been the case in Japan. For a variety of reasons, only a few Japanese university departments rank among world leaders in research, and Japanese industry has long complained that the private sector is not obtaining enough benefits from the nation’s university system given the resources allocated to higher education. Graduate programs in Japan, particularly those for professionals instead of scholars, are still scarce compared to the United States. In fact, it is common practice in large Japanese companies to send bright young managerial employees to the United States for MBAs or graduate degrees in the sciences. The human capital levels of Japanese university graduates will improve considerably if higher education can be reformed. On April 1, 2004, the Ministry of Education initiated a major reform intended to make the institution of higher education more beneficial to the economic needs of the nation. All 88 of Japan’s public universities were turned into independent agencies. Also as a result of this policy, college faculty and staff at these universities no longer have the status of national civil servants with guaranteed jobs for life.

These sweeping reforms, specifically modeled after former British Prime Minister Margaret Thatcher’s 1980s policies intended to introduce competition and flexibility in government universities, were designed to increase institutional autonomy and teaching productivity while at the same time developing financial transparency for national government assessment of institutional effectiveness. Former Prime Minister Koizumi, who aggressively pushed through the reforms, also believed in introducing market forces in higher education. A major goal of the higher educational reforms also has been to improve graduate and legal education through the initiation of a process whereby national universities competed with each other for government funds for research, the majority of which is intended to be specifically related to economic and scientific development. The Japanese reforms are creating some competition between higher educational institutions within a uniform regulatory framework, but it is still too early to tell if they will have the far-reaching effects that supporters claimed.

In a related development, the government-appointed Justice System Reform Council in 2001 moved from the undergraduate law major and called for the creation of three-year American-style law schools. This was a radical change from a legal system that changed little throughout the high-growth economy years. Because of a cultural distrust of both highly verbal people and the disharmony of an advocacy-oriented legal system, becoming an attorney has traditionally not been a highly popular profession in Japan. Perhaps even more important, until recently important sectors in the Japanese economy have been closed to foreign business, so legal expertise in contract law was not as crucial as is presently the case. Historically, the Japanese bar and Ministry of Justice kept the number of lawyers miniscule by maintaining an admission pass rate of 2 to 3 percent for the legal examinations. It was the 1960s before the number of attorneys throughout Japan surpassed 500 annually, which is fewer than Harvard Law School’s annual graduating class. In 1990, 90 percent of Japan’s cities and towns had only one attorney, but by 2004 the first of what are now 68 law schools were opening.

Japan, who still has only about 20,000 lawyers nationally, fewer per capita than most other developed countries, began to be hurt economically in the 1990s by this scarce human resource. As Japanese companies went bankrupt and struggled to restructure, there was an increasingly significant demand for bankruptcy attorneys and merger and acquisition specialists. Large financial institutions as well as foreign and domestic investors who needed legal assistance were frustrated by this impediment to business.

As Japan’s economic system began to change from one that depended less on personal relations, whether between private companies who had historic ties or between government bureaucrats and business, and more on carefully worded contracts between strangers, the low supply of attorneys was a problem that had to be addressed. The Japanese bar is expected to increase annual admissions to the profession from the now 1,200 to 3,000 by 2010. The long-term goal is 50,000 attorneys in Japan by 2018. This particular kind of increase in human capital is for the most part a direct response to the requirements of a significantly changed economy (Stern 2006).