Japan's structural reform, according to Yuko Kawamoto
At the Tokyo JAT meeting on February 24, Yuko Kawamoto spoke about the need for structural reform and innovation to achieve Japanese economic growth. She concluded with a few words on the translation industry, noting that prospects are good for skilled, specialized translators due to advances in technology and globalization. This write-up by Helen Iwata covers the key points of the presentation.
Structural reform
Numerous factors in post-war Japan have made serious structural reform a must. These include a major demographic shift, misdirected investment, and a record high government deficit. Meanwhile, businesses have tended to pay little attention to profitability, and the country’s banks have worked off a huge volume of bad debt accumulated during the bubble years. To sustain the presence and growth of the Japanese economy and society, Japan must establish an economic structure that enables it to optimize resource allocation and fully leverage the potential of its people.
The aging of Japanese society presents a major challenge for the government. By 2025, 46 percent of the population is expected to be over 60 – eligible for a pension – compared with just 18 percent in 1970. At the same time, the birthrate is declining. This situation has resulted in ballooning social security costs, with the current pension system unable to generate sufficient funds to be sustainable, and growing healthcare responsibilities.
Furthermore, the government does not invest sufficiently in the country’s youth, beginning with school-age children. The government’s policy of yutori kyoiku – the “relaxed” education system – has resulted in thinner textbooks and lower academic standards. Ranking among OECD countries, Japanese school children fell from 8th to 14th in reading comprehension and 1st to 6th in mathematical application between 2000 and 2003.
Out of school, a relatively high number of young Japanese are also out of a job. While Japan claims overall unemployment rates of under five percent, joblessness among 15 to 24 year olds grew from around six percent in 1995 to almost ten percent in 2003.
Instead of investing in its people, Japan continues to pour funds into infrastructure. By 2003, the government had laid 3.07 kilometers of concrete road per square kilometer – more than any other country. Germany ranked second, but with only 1.77 kilometers per square kilometer. Compared with the U.S., Japan has 30 times more concrete per person. Even though only a few of Japan’s numerous highways are profitable, the government still plans to build more roads and bridges.
Infrastructure maintenance costs are high and contribute to the growing financial burden on Japan’s shrinking population. The ratio of total public debt to GDP at national and local levels increased from 87.1 to 170 percent between 1995 and 2005. By comparison, the UK ratio fell from 52.7 to 44.9 in the same period.
On the business side, Japan suffers from a lack of management sensitivity to profitability. The average operating profit margin in the 1960s was 4.8 percent. By the 1990s, it had fallen to 2.5 percent, and in the 2000 to 2006 period, it had only recovered to 2.85 percent. This is half of European profitability and one third that of the U.S. Although Japan wrote off over JPY100 million of bad debt between 1996 and 2006, regional banks still hold JPY15 trillion in non-performing loans, and profitability in those financial institutions has been almost flat in the same period.
In response to the above factors and the resulting need for structural reform, the Japanese government has launched efforts spanning finance, government-affiliated corporations, fiscal discipline, regulation, the pension system, Japan Highway Public Corporation, the postal service, and a regional reform that aims to reduce national subsidies, transfer tax revenues to local governments, and reform the grant-in-aid system. While some areas, notably the bad assets issue, have seen progress, reform is far from complete in others.
Innovation
Structural reform alone, however, is not enough. Japan also needs to innovate in order to address weak productivity, respond to the changes in the 21st century economy and corporate environment, and compete internationally.
A look at labor productivity in Japan reveals that the economy is polarized. Ten percent of the workforce is employed in export-oriented manufacturing, including automotives, electronic machinery, IT equipment, and steel, where labor productivity is 20 percent higher than in the U.S. Productivity in other sectors, which collectively employ 90 percent of the workforce, is 37 percent lower than the U.S. average. Moreover, while productivity in the Japanese retail sector is half that of the U.S., the Japanese work 47 percent longer hours than Americans. Innovating to increase productivity in the sectors that employ the majority of the population is vital if Japan is to achieve economic growth, especially in the face of its declining workforce.
At the same time, the 21st century economy is characterized by three factors: globalization (expanded business sphere and increased M&As and market failures), capitalization (heightened volatility due to a greater likelihood of market impact), and digitalization (expanded networks and information volume). Simplification and flexibility through innovation are essential for business leaders to manage increased complexity.
Recently, the Japanese corporate environment has shown clear signs of change. Companies used to have low profitability and capital productivity, but domestic institutional investors in capital markets are demanding stronger returns, and more activist funds, such as Murakami Fund and Steel Partners, are emerging or taking an interest in Japan. The number of M&As is likely to increase as Japanese companies become potential targets for foreign players. As a result, top management is under increasing pressure to enhance corporate value and looking for innovative ways to do so.
Japanese companies are becoming more aware of the need for governance, and are beginning to reorganize into boards (ownership), corporates (management), and business units (execution). Disclosure requirements are becoming more stringent, and there is a more apparent correlation between information disclosure and performance – with disclosure, companies become more self-disciplined, work faster, and become accustomed to evaluating and verifying results. Japanese companies need to move away from individualist thinking and embrace more objectiveness, including bringing in outside directors – even women!
While Japan has some highly competitive international players, others lag in comparison with their global rivals. In a Yahoo! Finance index ranking the top company in each industry as 100, Japan leads the automotive industry with Toyota at 100, while DaimlerChrysler scores 33.3. By contrast, non-Japanese players lead other sectors, namely mobile phones, courier services, banking, pharmaceuticals, cosmetics, consumer goods, electrical equipment, retail, and food, and Japan lags considerably. For example, Pfizer stands at 100 with Takeda at just 21.1, P&G scores 100 and Kao trails with a mere 9.8. Japanese companies need to innovate in order to compete globally.
Despite the clear need for innovation in the above areas, Japan’s investment in venture capital compared to GDP is the lowest among OECD countries and around one tenth of the average. Japan has its share of outstanding scientists and engineers, and plenty of investors and cash to support them in the pursuit of innovation. An environment that allows these resources to be fully leveraged, however, remains to be created.
Corporations are looking at innovative ways to leverage resources and do business. As part of this effort, executives from a number of Japan’s top companies should form a group with the aim of promoting a freer labor market for talented individuals, including movement between academia and business, and investing into venture startups. Innovation, particularly to improve productivity, will continue to be an important theme in Japan.
Implications for translators
Japanese and English translation supply is growing due largely to two factors: more translators and more output per person on average. In addition to the translation community traditionally found in Japan and English-speaking nations, large numbers of practitioners are emerging in developing countries, such as India and China. Productivity and potential output per translator have increased with advances in technology, including faster look-up through the Internet and wider use of tools such as translation memory, optical character recognition, and voice recognition. Increased supply is putting downward pressure on translation rates in parts of the market. In a sense, this reflects a balancing of supply and demand compared with the past when limited supply drove prices higher.
The good news for translators is that globalization and larger flows of information will bring more translation demand because most people will not have the skill or will to learn the required languages quickly enough to be able to operate effectively in a multilingual environment. In this expanded market, if translators translate like machines, that is, if they simply replace words automatically with little consideration for context or appropriate target-audience style, they will produce material of machine-translation quality and earn at machine-translation rates. Translators who provide a value-added service through expertise in their field and polished writing skills will command higher rates. Quality is key.