Japanese Economy and Living Standard

Economic Performance

In the 1950s and 1960s, the Japanese economy grew at nearly 10% per annum and caught up with the European countries in the 1970s in terms of GDP at the current foreign exchange rate.

After the first oil crisis in 1973 the average rate of economic growth declined to nearly one half of that of the 1950s and 1960s. Still the growth rate was higher than those of other OECD countries. In contrast with the decline in the rate of economic growth, the social security benefits and their ratio as a percentage of national income began to increase remarkably (See Chart 1).

As a result of the fast economic growth, Japan caught up with and surpassed most of the European countries in terms of per capita GDP in the 1980s (See Chart 2).

In 1994 and 1995, when the yen appreciated, the per capita GDP of Japan at the current foreign exchange rate jumped to the top levels in the world. However, per capita GDP at current exchange rate overestimates the "real" standard of living in Japan, because the purchasing power of Japanese people is not so high if the price level is taken into account.

Low Unemployment Rate

Until a few years ago Japan had succeeded in maintaining full employment. The unemployment rate was less than 3%. In 1995, the rate increased to 3.4% (See Chart 2) as a result of a prolonged recession. Still the rate was relatively low compared with other industrialized countries (See Chart 3). The rate will decrease as the Japanese economy is recovering from the recession. The labor demand/supply ratio at the official employment office began to increase, as Chart 3 shows. The Japanese experience suggests that when the rate of economic growth increases, the labor demand/labor supply ratio increases and the unemployment rate decreases (See Chart 3and 4).

Chart 4 suggests that when the rate of economic growth increases, the unemployment rate declines. One of the possible reasons for the low rate of unemployment in Japan may be explained in terms of Japanese employment practices.

In Japan, companies are mainly responsible for maintaining employment of their employees due to the lifetime employment practices based on an implicit contract between employees and employers.

Unemployed workers receive the unemployment allowance - the equivalent of 60% of wages - from the employment insurance funds. Thanks to the low unemployment rate, the costs of unemployment benefits are relatively low compared with those of European countries. Preventing unemployment rather than paying unemployment allowances forms the basis of Japan's productive welfare policy.

Chart 5

Cooperative Labor-Management Relations

Japan has won a reputation for not only employment security but also cooperative labour-management relations. However, the Japanese model of business management and labour-management relations aisre now faced with difficult problems and requires reform. The Japanese model of business management worked well when the average age of employees was low and the economy and companies were growing steadily. With Japan's workforce ageing and its economic growth rate is low, however, the Japanese model does not work well.

First, the seniority wage and promotion system has become difficult to maintain. Second, the large wage differentials between male and female workers, and between large companies and small firms cannot be justified. Third, the group-oriented business practices that tend to treat outsiders differentially cannot be justified in international markets. Last, the Japanese method of policy management proved efficient when the economy was in the catch-up stage, but it is not suitable to encourage creative activities of workers. Lifetime employment, the seniority wage system, in-house employee education and the provision of fringe benefits have to be reformed without losing their merits.

Financial Situation of the Government

In the 1980s, the general account of the Japanese government was in the black. After the collapse of the economic bubble in 1990, the financial situation has deteriorated. The budget deficit of the central government as a percentage of total government expenditure has increased since 1991 and the total amount of financial liabilities of the central and local governments amounts to more than 90% of GDP (See Chart 6), though the net financial liabilities are about 14% of GDP. This is one of the reasons why the government has decided to restructure the social security system. For example, the government decided to extend the age of employees public pension upward from 60 to 65 gradually.

Current Balance of Payments

Different from most other OECD countries, Japan has seldom suffered from deficits in the current account balance. As Chart 7 shows, since the beginning of the 1960s, the current account balance has been in surplus or in balance. In the 1980s through 1990s, Japan has been often criticized because of its large current account surpluses.

The large surplus can be attributed to the following factors.

First, aggregate savings are larger than aggregate investments.

Second, the dual structure of the Japanese economy, which comprises high-productivity sectors subject to international competition and low-productivity sectors sheltered from international competition. It is not the competitive ability of the entire economy but the high-productivity sectors that affect the yen's exchange rate. Metaphorically speaking, a country's victory in an international athletic competition with specially selected and trained athletes does not necessarily mean that the country's average people are good athletes.

Third, the group-oriented practices of Japanese businesses and complicated government regulations on business have discriminated in some respects against foreign companies.

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