JAPAN attracted world attention in June 1960 when largescale demonstrations were conducted in opposition to ratification of the security pact with the United States and to the visit of President Eisenhower. Until then, most people had thought of Japan as a stable and prosperous nation making great economic progress under a conservative and pro-Western government. They were undoubtedly shocked by the unexpected incidents and they must have asked themselves: Where is Japan heading?

The question cannot easily be answered even by those living in Japan and with close knowledge of current events. The answer must be found not in short-term but in long-term considerations, and among these will be the probable future economic trends and conditions in Japan, which in turn will influence the social and political climate.

A study recently completed in Japan predicts a rather fundamental change in the nation's economic structure in the next 10 to 20 years from a labor-surplus economy containing many underdeveloped elements to a labor-shortage economy that can be described as highly developed.[i] Per capita national income is expected to rise from the present level of $300 (estimated for 1960) to a level of about $800 by 1980. This would be roughly equivalent to the current level of per capita national income in Western European countries.

In support of the above prediction there are, first of all, demographic factors. There was a rapid increase in population beginning with the modernization of Japan's economy in the early Meiji period. As the death rate declined and the birth rate continued at a high level, Japan's population increased rapidly from about 35,000,000 in the 1870s to about 85,000,000 by the early 1950s. After 1950, there was a sharp decline in the birth rate and in spite of a concurrent decline in the death rate, the net increase in population became smaller than in the earlier years. Japan now has reached a stage of demographic development similar to that found among highly industrialized countries. Her rate of net increase in population (the difference between birth rate and death rate) is now roughly half that of many Asian countries.[ii] The prospect is that Japan will finally be freed from its past problem of chronic population pressure.

Until about 1970, however, there will be a period of rapid increase in the work-age population because of the high birth rate and the sudden drop in the death rate in the postwar years. The annual increase in the work-age population (15 to 59 years of age) is expected to be about 1.3 to 1.4 million. After 1970, it is expected to decline to a level of 0.5 to 0.6 million a year. Obviously, this will greatly reduce the pressure on employment.

The second reason for the expected change in labor supply is the probable decline in the labor-participation rate, that is, the ratio of labor force to the total work-age population. This rate is now about 65 percent in Japan whereas in the Western countries generally it is about 55 to 60 percent. With rising levels of income, there will be less need to supplement the income of the family's principal income-earners, and therefore fewer people are expected to seek employment. Higher income of the parents will also enable a larger number of young people to enter high schools and universities, and this will lower the participation rate of the younger age group. Moreover, the expected decline in the agricultural population both in absolute numbers and as a percentage of the total population will further reduce the total labor force, since the labor-participation rate among farm families is at present very high. A decline in the labor-participation rate from 65 to 60 percent will mean a decrease of about 3,000,000 in the labor force.

The third factor affecting the labor supply is the reduction in work hours. So far, because of the low level of incomes, workers usually have preferred a larger pay-check to shorter hours. Now, however, the demand for shortening the workweek is becoming a hot issue in Japan and it is most likely that the demand will be realized, though gradually. If we assume that the present average of about 48 hours a week is reduced to 40 in the course of the coming 10 to 20 years, the result will be a reduction by nearly 20 percent in the potential labor supply.

On the demand side of the labor market there will be a continuing increase, assuming a relatively high rate of economic growth is maintained in the future. It is true that automation and mechanization of production usually reduce labor requirements for a given amount of production, but if it is assumed that the rate of economic growth will continue as it has in recent years, it will more than offset the reduction in labor demand due to higher productivity per worker. During the last several years, the annual average increase in productivity of about 5 percent was more than offset by the growth of total non-farm output of 9 percent. This increase was larger than that required to absorb the number of new workers entering the labor force each year. As a result, during the last four years there was a shift of 1.5 million agricultural workers, or about 10 percent of the total agricultural labor force, to non-agricultural industries.

There are already some signs of a labor shortage and indications that Japan is moving toward a full-employment economy. Although there are still big reserves of under-employed labor in rural districts remote from industrial centers and among middleaged workers, the basic trend is toward labor demand increasing at a rate which more than balances the growth in the labor force.

Overpopulation and chronic under-employment, particularly in rural areas, have of course been basic features of Japan's economy and society. With the development of modern industries, beginning in the Meiji period, the economy of Japan came to have a dual structure, with modern and pre-modern industries existing side by side. The coexistence of very labor-intensive agriculture and small enterprises together with highly developed modern industries and institutions has been one of its basic characteristics. This economic structure, combined with the lack of labor mobility based on the Japanese practice of more or less lifetime employment, has created wide variations in the level of wages paid by different enterprises. According to government statistics, the average wage of small establishments with less than 30 employees is about 40 percent of that of large establishments with more than 500 employees. Very recently this wage gap has been somewhat narrowed because small enterprises have had to improve their conditions of employment in order to attract young workers. This is a very important development which, if it continues, will affect economic and social structure in Japan.

The report, "Prospects of Japan's Economy in 1980," predicts that the agricultural labor force will be reduced by one-half in the course of the next two decades. This would mean that the proportion of agricultural workers in the total labor force would fall from the present 39 percent to 15 percent in 1980. Conversely, it is expected that the proportion of the labor force in secondary industry will increase from the present 25 percent to 40 percent in 1980, while the increase in tertiary industries will be from 36 percent to 44 percent. This pattern, if achieved, will be very similar to that of Western European countries, particularly West Germany today.

II

The postwar recovery and expansion of Japan's economy with its very high rate of growth has often been called a miracle. During the immediate postwar period, 1946-52, the Gross National Product grew, in real terms, about 11 percent annually--a rate that was partly attributable to natural recovery from the deep drop in the economy after defeat. However, the rate of growth during more recent years has continued at a very high level. The estimate for the years 1953-1960 is about 8 percent per year--more than double that of Western countries, and even higher than that of the Soviet Union, whose rate of growth in recent years is estimated by Western experts at about 6 to 7 percent. Moreover, Japan's recent rate of growth is much higher than the prewar rate, which was 4 to 5 percent during the several decades preceding World War II. In the fiscal year 1959, the G.N.P. is estimated to have expanded by 16 percent without any appreciable price rise. Industrial output has more than doubled in the last four years.

Some of the factors contributing to Japan's rapid economic growth are these:

(a) The availability of an abundant supply of labor, in contrast to most of the other industrialized countries, which have had full employment for some time and are experiencing labor shortages.

(b) The high rate of capital formation (gross capital formation accounts for more than 30 percent of the G.N.P.) due to a combination of relatively high productivity and relatively low consumption.

(c) The reduction in military expenditures, which accounted for about 7 percent of the national income in the prewar years 1934-36, compared to about 1.5 percent in recent years.

(d) Technological innovations, which have had a particular impact because Japan was isolated from many developments during the war and early postwar years.

(e) The avoidance since the war of any serious depression.

(f) The generally favorable environment for exports of manufactured industrial products, particularly to highly industrialized countries, including the United States. In these countries such factors as the maintenance of full employment, prevention of serious business cycles, higher purchasing power of the people, and free trade policies contributed to increasing Japan's exports of industrial products. With its relatively abundant labor supply, Japan has had a comparative advantage in world markets in commodities with a high labor content, such as transistor radios, cameras, toys, etc.

(g) The expansion in Japan's capital-goods industry during and after the war, which enabled her to provide her own needs in support of rapid economic growth without causing an undue strain on the balance of payments.

(h) The rate of increase in the work-age population due to the earlier high birth rate and the sharp decline in the death rate after the war. In recent years the labor force increased at an annual rate of 2 percent, although the increase in total population was around 1 percent per year. For several years this trend will continue.

(i) The positive and expansionist attitude of the business community including the liberal lending policies of bankers. Businessmen have successfully taken advantage of opportunities as they occurred, and they have been effective in developing mass-production techniques and in promoting sales in both domestic and foreign markets.

The most important reason for Japan's rapid economic growth may be that she is now undergoing a transition during which production can be vastly increased simply by the more efficient use of labor. In this respect, as Dr. Gerhard Colm of the U.S. National Planning Association pointed out while he was in Japan last spring, Japan is sharing common economic ground with the Soviet Union, despite the political differences, in that about 40 percent of the total labor force is in agriculture. This reserve of underutilized labor seems to be one of the most important factors supporting high rates of economic growth both in the Soviet Union and in Japan.

The dual nature of the Japanese economy (the modern combined with the pre-modern) also enables Japan to maintain high rates of capital accumulation, because the wage level is low relative to labor productivity. Moreover, the high rate of economic growth itself has contributed to high rates of saving because consumer expenditures have lagged behind the rise in income. These factors, in turn, enabled Japan to strengthen her competitive position in world trade, particularly in exports having a high labor content. In short, the high rate of capital accumulation, the expansion in export trade, together with the relatively abundant labor supply have been major factors in the remarkably high rate of economic growth attained without any appreciable rise in the price level.

The strength of Japan's economy, however, may be rather temporary in that rapid economic growth will gradually eliminate those conditions which supported Japan's high rate of growth in the first place. As the reserve of under-utilized labor is consumed, and as the dual structure gives way to a wholly modern economy, the rate of growth itself is likely to fall to a level nearer that of advanced economies of the West.

With these considerations in mind, the authors of "Prospects of Japan's Economy in 1980" assumed a 7 percent average annual rate of growth in the G.N.P. for the first ten years and 5 percent for the second decade ending in 1980. At these rates, the G.N.P. in 1980 is expected to be more than three times its present level, and because of the relatively low rate of population increase in the future (i.e. 17 percent during the 20 years to come), per capita G.N.P. will also be nearly tripled. If measured in terms of the per capita national income, the figure for 1980 will be, as mentioned earlier, about $800 as compared with about $300 today. More optimistic people argue that, as the rate may be even higher than the estimate and as the real purchasing power of the yen is somewhat undervalued at present, the per capita income in 1980 may be even higher than this.

III

The leading sector for future economic growth will of course be industry. The report estimates that the industrial production index (1955 = 100) will reach about 900 in 1980, or about four times the 1960 level. Among the various branches of industry, machinery is expected to expand most rapidly; iron and steel, petroleum refining and chemicals are expected to follow. Heavy and chemical industries, including machinery, are expected to account for about 70 percent of the total industrial output in 1980 as compared with the estimated figure of about 50 percent in 1959. Annual production of passenger cars in 1980 is estimated roughly at 1.2 million units and the number of passenger cars per thousand of population is to rise from 2.7 in 1958 to 42 in 1980. The latter figure nearly equals the present average for Western Europe.

Production of iron and steel measured in terms of crude steel is expected to reach some 38 million tons in 1970 and 65 million tons in 1980. Steel production in recent years has been rising very rapidly and is expected to reach 20 million tons in 1960, placing Japan fifth among the world's steel-producing countries.

Such marked industrial growth will place a heavy burden on Japan's relatively limited sources of energy, which are already inadequate. A major portion of the future increase in the energy requirement must be met by imported energy, particularly of petroleum. Thus dependence on imported fuels is expected to rise from about 25 percent in 1958 to 70 percent in 1980. Petroleum imports will probably expand from 25 million tons in 1959 to roughly 70 million in 1970 and 130 million tons in 1980. The actual amount will depend, of course, upon the extent to which atomic power can be put into practical use. Stations generating several million kilowatts of atomic energy may be installed by 1980, but their contribution to the total energy supply is not likely to be very large before 1980, as it is now believed that it will take a longer period than had been initially expected before atomic power generation will become economically feasible on a large scale.

With the rapid expansion of industrial production and with the changing pattern of food consumption, agriculture is also expected to undergo a rather fundamental change. As mentioned earlier, the agricultural labor force is expected to fall by at least a half during the next two decades. On the other hand it is estimated that agricultural production will double. With rising levels of income, the diet of the average Japanese has already changed markedly in recent years, shifting from the traditional foods--rice, soybeans, vegetables and fish--to a more Western type of diet--bread, butter, milk, meat and fruits. As incomes continue to rise, this shift is likely to go further; there will be a decline in the consumption of cereals, including rice, and a sharp increase in the consumption of dairy and livestock products. Already, Japan has become almost self-sufficient in rice. Traditional emphasis on rice production is likely to lose ground gradually and, with the decline in agricultural workers, the heavy consumption of labor is likely to be replaced by labor-saving techniques. These developments, combined with the flow of labor off the land, are likely to have far-reaching effects upon Japan's social structure.

IV

Japan, of course, is highly dependent on foreign trade because of the paucity of natural resources to support her growing economic activity. For her supply of important foodstuffs and raw materials, such as wheat, sugar, soybeans, salt, raw cotton, wool, petroleum, iron ore, coking coal, bauxite, etc., she must depend upon imports for all or a high percentage of the total. Imports of manufactured goods, such as machinery and chemicals, are increasing year by year, and with the recent decision to liberalize foreign exchange and import controls, they are likely to increase further in the future.

On the other hand, increased production of highly processed industrial products and the expansion of service industries will help to counter the growing dependence on imports. It is assumed that imports will rise from the present level of 13 or 14 percent of the national income to 16 percent by 1970, and that thereafter they will more or less level off. Based on these estimates, imports will amount to about $8.5 billion in 1970 and $14 billion in 1980, as compared with $3.6 billion for 1959.

To meet the cost of imports of that magnitude, exports must be expanded equivalently. In 1959, total exports amounted to $3.46 billion, and this figure is estimated to have accounted for about 3.5 percent of world export trade. If world trade is assumed to grow in the future at an average annual rate of 4 percent, Japan's share of the total must rise to 5.2 and 5.8 percent in 1970 and 1980 respectively. Such substantial expansion will not be easy. Among the prerequisite conditions are the maintenance of world peace, steady economic growth in developed countries, growing income in underdeveloped economies and generally freer trade.

As for the commodity structure of Japan's export trade, machinery, metals and chemical products are expected to become more important in the future while the relative importance of light-industry products, including textiles, is likely to decline. For the time being, Japan's export trade has a dual character in that commodities with high labor content, such as cameras, radios, toys and clothes, are sold to high-income markets, while the relatively capital-intensive commodities such as machinery and equipment, steel, chemical fertilizer, etc., flow to low-income markets. In recent years, the former markets have grown faster than the latter. As a result, the United States, Canada and Europe have taken an increasing share of Japan's export trade. But as we have seen, her competitive advantage may gradually diminish as Japan moves toward a full-employment, high-income economy. Other newly industrializing countries, which have a more abundant labor supply and relatively low wages, may then take over Japan's markets for products of high labor content. Indications of such a trend can already be seen in the growing competition between Japan, India and Hong Kong in some of the simpler industrial products, such as gray cotton cloth, rubber shoes, bicycles and sewing machines. Japan's economic future, therefore, will depend very much upon her success in modernizing her economic structure and in developing lines of industry which require high technological standards and are relatively capital-intensive.

Japan is now undergoing a far-reaching and rapid process of transformation, both economic and social. With the expanding national income, living standards are also rising rapidly. The average real wage of workers has been rising 4 to 5 percent annually in recent years and this trend is likely to continue. There are, however, problems related to income distribution, such as the relatively low pay received by university professors, government employees, and other intellectual groups; the still conspicuous wage gap between large and small enterprises; and the low incomes found in agriculture, fishing, mining and small industries. There are also stresses and strains arising from the process of rapid economic change itself and from the time lag in social and political adjustments to the new economic conditions. However, in view of the fact that the free economic system, based upon private initiative, seems to be functioning efficiently, and further improvement in living standards and conditions of employment is in prospect, there is every reason to expect--despite apparent political and social instability--that Japan will continue to develop within a free and stable social and political system.

[i] In May 1960, a committee attached to the Economic Planning Agency and chaired by Professor Seiichi Tobata published a report on the "Prospects of Japan's Economy in 1980." The Planning Bureau of the Agency, headed by the author, worked directly with that committee. The following discussion on the future course of Japan's economy is based mainly on that report.

[ii] Criticisms have been heard to the effect that a considerable part of the decline in Japan's birth rate was brought about by means of induced abortion. In recent years, however, the number of cases of abortion has declined while the use of contraceptives has become more widespread. It may also be pointed out that in other countries, where abortion is illegal, the number of cases can never be obtained with any accuracy; in Japan relatively more reliable statistics are available.

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  • SABURO OKITA, Director, Planning Bureau, in the Economic Planning Agency, Japanese Government, Tokyo; author, "The Rehabilitation of Japan's Economy and Asia"
  • More By Saburo Okita