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No resting on techie laurels

by Takamitsu Sawa

Between March 1991 — when a protracted recession started after the economic bubble burst — and fiscal 2012, Japan’s economy averaged a dismal 0.9 percent in annual real growth while contracting 0.2 percent per year in nominal terms.

I would like to point to three major factors that I believe have led the Japanese economy to lose its growth potential.

The first one relates to domestic sales of automobiles. In the years following the 1973 oil crisis, many Western industrialized countries suffered a sharp slowdown in growth to below 3 percent. By contrast, Japan’s economy expanded at a relatively high growth rate of 4.8 percent, largely because the domestic market for passenger vehicles was still expanding.

In fiscal 1973, 30 percent of households in Japan possessed cars. The figure had shot up to 80 percent by fiscal 1991 when the economic bubble burst. However, expansion of car ownership leveled off after that, and has since hovered in the 80 to 85 percent range.

The cost of owning a car in Japan is quite high. Buyers must pay an acquisition tax, vehicle inspection fees, insurance premiums and garage rents. Thus more than 10 in every 100 households have been forced to give up owning a car for economic reasons.

With the rapid aging of the population, an increasing number of elderly people have given up car ownership, while the younger generations’ interest in automobile ownership is in decline. New car sales in Japan plummeted from 5.1 million units in fiscal 1990 to 3.52 million in fiscal 2011.

The auto industry is closely linked to other industrial sectors, and growing car sales had in the past served as the driving force in the nation’s economic growth. That growth appears to have ended in the 1990s.

The second factor behind the loss of Japan’s growth potential is that most new products launched into consumer markets from the 1990s to the 2000s were digital products like cellphones, digital cameras, DVD recorders, personal computers, smartphones and tablet computers.

A simple comparison between a digital camera and a car shows that the impact of digital products in terms of ripple effects on other industrial sectors is much smaller than it is for automobiles.

Moreover, just about every new digital product purchased is a replacement for an existing product — like a digital camera displacing a film camera — thereby forcing the old products out of the market.

There is no denying that the introduction of small-sized digital equipment and high-speed data transmission systems has enabled us to enjoy greater degrees of convenience and comfort than in the past. Still, the introduction of one new digital product after another — with even better functions and further size reduction — has an immeasurable negative impact on gross domestic product growth and job creation.

The third factor I wish to point to is the weak international competitiveness of Japan’s “software” sectors — by which I refer to service sectors including banking, information, communications, medicine, legal services, education and research and development (but excluding wholesale and retail trade, transportation, real estate, warehousing, and foods and beverages).

Japanese banks, securities firms and insurance companies, which have long been protected by the Finance Ministry-led “convoy” system, appear to have little or no chance of winning when faced with fierce competition from their American and European counterparts.

In the fields of information and communications software, Japanese corporations lag far behind their American and South Korea counterparts in developing the operating systems for personal computers, smartphones and tablet computers.

American, Swiss, British and French companies rank high on the list of the world’s leading pharmaceutical firms, while Takeda Pharmaceutical Co., the largest in Japan, is ranked only 12th. Takeda’s total sales in 2011 were only 30 percent of top-ranking Pfizer’s.

In my book “Green Capitalism,” published three years ago, I emphasized that the future growth of Japan’s economy would be driven by environment- and green energy-related technologies. I wrote that the one and only growth strategy for Japan would be to develop and export new products imbued with innovation that overcame the constraints imposed by having to cut greenhouse gas emissions.

That forecast was way off the mark. Japan, which once was the world leader in production of photovoltaic solar panels, is now overshadowed by China.

A regional breakdown of production in 2010 shows that China and Taiwan had a combined 59 percent share of the world’s total solar panel production, followed by Europe with 13 percent, Japan with 9 percent, North America with 5 percent and others combined with 14 percent.

Japan’s fall in global competitiveness is also seen in the market for lithium-ion batteries, which are indispensable for such products as personal computers, smartphones and electric cars — the “ultimate” form of low-carbon vehicles. The three leading Japanese makers of lithium-ion batteries — Panasonic Corp., Sony Corp. and Hitachi Ltd. — lag behind South Korea’s Samsung Electronics and LG Electronics in global sales.

The heavy operating losses that Panasonic and Sharp Corp. suffer today are partly due to the decline of their international competitiveness in environment-related products.

Japanese electronics makers are unable to keep up with the competition from Samsung and LG in the field of home electric appliances.

Although Panasonic bought up Sanyo Electric Co. — known for its technologies in solar panels and storage batteries — to try to move more aggressively into environment and energy-related fields, it remains on the defensive in the face of stiff competition from China and South Korea.

In the battle to develop fuel-efficient cars, Toyota Motor and Honda Motor, until recently, maintained a dominant lead with their hybrid vehicles. At the 2013 International Geneva Motor Show in March, however, Volkswagen AG exhibited an ultra-high-mileage plugin hybrid model dubbed “XL1,” which can cover a 111-km distance on a liter of gasoline, thanks to a lightweight body that offers minimal air resistance. When carmakers the world over are becoming more serious about marketing cars with high fuel efficiency, Japanese automakers cannot afford to remain complacent.

Nor should Japanese manufacturers be overconfident about their leadership in other eco-friendly fields such as energy-saving home electric appliances and stationary fuel cells. They may have led the world three years ago, but they must be aware that overseas competitors can quickly catch up and overtake them.

The 1997 Kyoto Protocol on climate change obliged Japan to reduce average emissions of greenhouse gases between 2008 and 2012 by 6 percent from the 1990 level. At that time, leaders of the Japanese business community complained that the already energy-efficient Japan was being forced to “squeeze more water from a towel that’s already dry.”

It must be remembered, though, that energy-saving technologies are no longer Japan’s monopoly but a common public quest throughout the world.

Whether the towel is dry or not is relative. There is every reason to believe that more water can come out of Japan’s towels if they are wrung.

Takamitsu Sawa is president of Shiga University.