Japan's manufacturers must be able to produce and supply goods in small quantities and quickly to survive competition from China and other parts of Asia, the government said in a report released Tuesday.
The second white paper on manufacturing also calls for more corporate efforts to protect intellectual property obtained through research and development.
The failure to properly manage intellectual property has invited an "unintentional outflow" of the latest technologies to other parts of Asia, causing Japanese firms to lose market share to illegally copied products, the report says.
Highly skilled engineers and people with management expertise are becoming increasingly important to produce more value-added goods, it says.
The annual report was jointly compiled by the trade, health and culture ministries.