Commentary / Japan

The decoupling of economic growth and convenience

by Takamitsu Sawa

The rate of economic growth indicates how much (in percentage terms) the nation’s gross domestic product increased from the previous year. While Japan has traditionally placed the top priority of its economic policy on achieving a higher growth rate, other advanced economies have put greater emphasis on employment (or cuts to the jobless rate). Compared with either the jobless rate or the number of people on payroll — both concrete and observable figures — the GDP is expressed in an artificially estimated number based on various government statistics (and calculated in accordance with the definition of economics). Whether the GDP growth rate is high or low is not necessarily linked to how people feel about their daily lives.

When Japan’s economy went through a period of rapid growth from fiscal 1958 to 1973, labor unions had strong bargaining power and wages increased at a speed roughly equal to the growth of nominal GDP, enabling citizens to actually feel the rapid growth of the economy through higher wages. During this rapid growth period, the GDP grew an average of 9.4 percent annually, bringing about a dramatic improvement in the convenience and comfort of the people’s living through an ample supply of home electric appliances and cars as well as the launch of the shinkansen service.

When asked what benefits accrued from economic growth, the standard answer in those days was that people became more affluent, and affluence meant an improvement in living standards, i.e., income, convenience and comfort. During the rapid growth period, most Japanese didn’t care about such noble subjects as weighing “spiritual affluence” and “material affluence” — since they were preoccupied with material affluence.

The rapid growth period came to an end during the October 1973 oil crisis, when crude oil prices jumped four-fold. In the subsequent period of slower growth from fiscal 1974 to 1990, the economy grew an average 4.2 percent — still a decent performance at a time when growth in the United States and European countries had tumbled to the 2 percent range — supported by sharp increases in the exports of electric appliances, machine tools and transport equipment.

In 1979, Ezra Vogel wrote of his admiration for Japanese systems and practices in his book “Japan as Number One.” In the 1980s, Japan was referred to as an economic superpower, and the nation entered the bubble boom in the late ’80s when the stock market and land prices surged for three straight years. Some even believed in the illusion that Japan would soon become the world’s largest economy. However, little or no improvement was observed in the convenience or comfort of people’s daily lives.

When the bubbles burst in 1991, the economy’s growth began to stagnate. The average annual GDP growth from fiscal 1991 to 2016 came to a mere 1.0 percent in real terms. But during this quarter century of sustained sluggish growth, the convenience and comfort in our lives saw dramatic improvements. Convenience in life leapfrogged with the increasing use of the internet. Email has enabled real-time communication with people anywhere in the world. Communication devices have become smaller and smaller — from PCs to tablets and smartphones. You can obtain the information you need instantaneously and anywhere on your smartphones.

In Japan, it’s now free to send and receive email or search on the internet. But a service that is free of charge means it will not contribute to GDP growth. One aspect of the internet is that it serves to dampen the economy’s growth by taking over many of the functions that used to require postal services, telecommunication, dictionaries and encyclopedia, maps, and so on.

Electric appliances now consume much less power, while the fuel efficiency of passenger cars has improved dramatically. Reduced demand for electricity and gasoline serves to slow down economic growth. Ostentatious consumption, which once was regarded as cool, is now being frowned upon. In selecting business suits and other clothes, shoes and bags that they buy, consumers put priority on utility of the products, and care less about unnecessary luxurious features. With the Cool Biz campaign taking root, office workers have come to do without neckties for about half the year. Wedding receptions and other parties are organized in much more simplified and inexpensive ways.

In short, consumers have begun to behave more rationally. Rational consumption naturally leads to avoiding waste. Consumers now tend to stay away from luxury foods, drinks, clothing and cars not for the sake of saving money, but as a lifestyle preference. The rational behavior of consumers has undoubtedly served to lower the economy’s growth.

The past quarter century has also witnessed a dramatic progress made in medical science. Cataract operation enabling the patient to return home on the same day, laparoscopic surgery replacing the laparotomy, immunotherapy and heavy particle therapy for treating cancer, regenerative medical treatment — these are some of the achievements that were considered impossible 25 years ago. Nobody would dispute that progress in medical science serves to elevate the convenience and comfort of daily life. Yet, highly advanced, state-of-the-art medical treatment comes at a heavy cost. Some drugs and medical technologies cost over ¥10 million a year per patient, since they have been made available as the result of massive research and development investment.

Under a program introduced in 1973 to subsidize costly medical treatment, ceilings were set according to patients’ incomes on the amount of medical expenses that they have to bear, and any amount in excess of the ceilings would be paid by the government. Most of the highly advanced medical therapies introduced over the past quarter century are covered by this subsidy system, which places an additional fiscal burden on the state coffer.

Within several years, postwar baby boomers will start reaching the age of 75, and the number of recipients of subsidized, high-cost medical services will no doubt increase — so will new drugs and therapies covered by the program. In an attempt to sustain the program, the government is seeking to raise the ceilings on the amount to be borne by patients, but such a step would amount to a drop in the bucket. The government resorting to a tax hike in order to sustain the subsidy system would slow down the economy.

The dramatic progress in the information, communication and medical technologies over these years has significantly increased the convenience and comfort of our living. Yet, such progress has done little to expedite economic growth.

During the period of rapid growth, the heavy and chemical industries were the driving engines of the economy. In the age of slower growth following the oil crisis, electric equipment and automobiles played the leading roles. After the collapse of the bubble boom, human resources and governmental funding for research were poured heavily into the information-communication sector and the medical field. But technological progress in these sectors has not necessarily contributed to economic growth.

Japan does not have a big competitive edge in the international market in either of the sectors, which tend to have poor effects in generating domestic demand in related industries. In sum, during the past quarter century, economic growth on the one hand and improvement of convenience and comfort in people’s daily life on the other have either been de-coupled or have fallen into a relationship of mutual trade off.

Takamitsu Sawa is a distinguished professor at Shiga University.