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Japan, please improve your services

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Japan's GDP per capita ranks only 16th highest out of the OECD's 30 members, and is about 25% less than that of the US.  After the current financial and economic crisis, it might be even lower again.  The US which caused this crisis seems to suffering from it less than most other countries.

Why is it so much lower?  You can of course point to many things like agricultural protection and tax policies.  But according to the OECD, the main reason is Japan's inefficient service sector. 


Hard to believe, isn't.  Every time I go to Japan I am so impressed by the enthusiastic and careful service that I receive.  The Japanese must be one of the few peoples who actually run at work.  By contrast, the French only run when they are leaving the office.

The Japanese economy is essentially made up of two main sectors.  In the first place, there is the manufacturing sector which is very competitive on world markets.  Its labour productivity has been rising by 4% annually for the last 30 years.  Then there is the service sector which is not exposed to international competition and which has a weak and indeed weakening productivity performance.  From 1999-2004, service productivity growth was less than one-quarter that of the manufacturing sector and mark-ups were three times as high. 

There are several big problems with this.  First, the competitiveness of the manufacturing sector increasingly depends on the services sector, as services feed into manufacturing processes.  In this way, the services sector could actually drag down the manufacturing sector.    Second, in most economies, the services sector is becoming more competitive thanks to information and communications technologies, and globalization which is leading to increased trade in services.  Third, the services sector accounts for the lion's share of our economies, some 70% of GDP and rising in Japan.  A weakening services sector could even drag down the economy.   

So what accounts for the weakness of Japan's service sector?

The service sector has long been sheltered from competition, both international and domestic.  Japan is riddled with regulations which hinder entrepreneurship and new business creation.  They have also hindered investment in ICT-using services.  The government has launched initiatives to boost productivity in the services sector, including through the "New Industry Development Strategy 2005".  But despite some progress made, there is still a long way to go.

Another area for improvement is competition policy.  The Japanese Fair Trade Commission has increased its efforts to combat anti-competitive practices, a legacy of government guidance of investment and industry-wide co-ordination that was permitted by numerous exemptions from the Antimonopoly Act.  And many other measures have been undertaken.  However, there is still a need to strengthen competition policy.  Out of its 30 member countries, the OECD ranks Japan at only 21st in terms of the effectiveness of competition policy.  Mergers and acquisitions are almost never rejected for being a threat to competition. 

Lastly, Japan seems to be missing the train for the globalization of services driven by ICT and market opening.  Product market and foreign investment restrictions mean that import penetration of the Japanese services sector is the lowest of all OECD countries, as is also the case for foreign investment in the services sector.  There is enormous scope for globalizing Japan's domestic services sector. 

Let's take a look at a few sectors, starting with retail distribution.  Japan's retail sector is chacaterised by an exceptionally large number of small stores and a corresponding lack of large stores.  Multinational enterprises are virtually totally absent.  Once again, this is due to a lack of competition stemming from regulations, weak application of competition law and the prevalence of unfair trade practices.  The result is one of the lowest productivity growth among the OECD group.

Turning now to electricity, we find predictably that prices are very high compared with other OECD countries.  While this pushed the government into reform action, prices still remain high.  In the transport sector, the same story as harbour and airport charges are high.  Following the bold initiative of former prime minister Koizumi, Japan Post, is being split into four companies and privatised.  There is hope that this will actually happen and generate important benefits.

After listening to this litany of inefficiency, one may well ask "does it matter?...surely this is the Japanese way!".  In reality, it does matter very much.  Japan has an ageing and declining population, and improved productivity is necessary to maintain prosperity.

Further, the Japanese work long hours compared to most other countries.  And when you see them at work, they are always running and worrying.  Quite simply, this is not necessary.  If they had a more efficient services sector they could perhaps relax a bit and enjoy themselves more.


"Enhancing the productivity of the service sector in Japan" by Randall S. Jones and Taesik Yoon.  OECD Economics Working Papers No. 651 -- www.oecd.org/eco/working_papers