No. 45 — December 6, 1996


Feature Article


Douglas Ostrom


Despite its size, the services sector has received relatively little respect in either the United States or Japan — or elsewhere for that matter — as a source of national prosperity. Indeed, economists historically have seen expansion in the demand for services as a hindrance in the quest for economic growth.

Building on this traditional belief, many analysts have argued that the rise in the services sector relative to manufacturing has negative implications for wage growth and international competitiveness, among other goals. This view overlooks the difficulty of determining even which activities belong in services and which in manufacturing. The two sectors are closely linked. In particular, goods and services industries compete not only for workers in the labor market but for customers in the product market; they also often have a complementary relationship in the production process. Engineering services, for example, are important in many manufacturing industries. As this example suggests, a healthier services sector may aid manufacturing in some respects. On balance, then, there would appear to be little reason to associate the growth of services with declining prospects for overall economic expansion.

Although the data are far from perfect, the available evidence suggests that the services sector is relatively unproductive in Japan relative to comparable sectors abroad as well as to domestic manufacturing. Deregulation of services in Japan would lead to greater efficiencies, a larger economy and, probably, somewhat less appreciation of the yen than otherwise would be the case.

Even though the case for such deregulatory actions would appear to be overwhelming, the very size of the services sector in Japan guarantees significant opposition from disadvantaged providers. Given the prospect that long-term economic growth in Japan is likely to be comparatively modest even if deregulation is implemented, forward-thinking policymakers may not be able to follow the postwar tradition of compensating industries that would lose under economic reform. That outlook renders changes in the services sector less likely.

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Weekly Review

--- by Douglas Ostrom

The Bank of Japan released November 27 a much-anticipated quarterly survey of business conditions (tankan), but, like a disappointing Thanksgiving meal, the result was something of a letdown. The report, although stuffed with data to chew on, was judged by most experts to be fairly unappetizing in its implicit conclusion that the Japanese economy is not yet in a robust recovery phase. The main course consisted of the survey of business sentiment, computed by subtracting the negative from the positive responses given by large manufacturing businesses. This finding indicated that by a scant 3 percentage point margin big manufacturers remained pessimistic at the time of the November survey. Many analysts had hoped that this key indicator would return to positive territory for the first time since late 1991. The results, however, represented an improvement of 4 percentage points from the previous survey. Moreover, analogous indicators — for large nonmanufacturers as well as for small manufacturers and nonmanufacturers — revealed that firms of all types are becoming less pessimistic, even though negative responses remain at least equal to positive ones in all cases.


--- by Jon Choy

In an action unprecedented in postwar history the Ministry of Finance moved November 21 to shut down and liquidate Hanwa Bank, Ltd., which was on the verge of insolvency, rather than force a healthier institution to merge with it or buy it. Observers hailed MOF's action as a sign that the ministry was changing its attitudes toward resolving the nonperforming loan crisis plaguing the country's financial sector as well as its thinking about the Finance Ministry's role as a financial regulator. Private-sector developments, as represented by the business results for the first half of fiscal 1996 posted by Japan's top 20 domestic banking institutions, also cheered analysts, because they showed that banks were continuing to write off nonperforming loans despite slimmer profits. The Japanese banking system is far from being out of the "bad-loan woods," however, as shown by MOF's unprecedented shutdown of Hanwa Bank. Among other worries the financial world remains concerned that domestic banks again will have to pay a "Japan premium" when borrowing on overseas markets.


--- by Barbara Wanner

Capping a year of often protracted discussions aimed at consolidating the U.S. military presence on Okinawa, the United States and Japan agreed December 2 on terms to return approximately 21 percent of all land used by the American military in the southernmost prefecture. The final report of the Special Action Committee on Okinawa builds on the interim recommendations put forth by the group last April (see JEI Report No. 15B, April 19, 1996) by spelling out timetables for the return of land now used by the U.S. military, adjustments to training and operational procedures generally aimed at lessening the intrusiveness of American forces there and improvements to certain procedures of the Status of Forces Agreement.


--- by Christopher B. Johnstone

The Asia Pacific Economic Cooperation forum's 1996 economic leaders' meeting ultimately may be remembered more for the accomplishments of sideline bilateral meetings than for the achievements of the group as a whole. The November 25 gathering in Subic, the Philippines — which was preceded by several days of talks among senior officials — produced only ambiguous support for a U.S. initiative to eliminate global tariffs on a range of high technology products. Delegations from the 18 member economies also formally presented individual action plans outlining the liberalization steps that they propose to take in order to meet APEC's stated goals — free trade and investment in the region by 2010 for the forum's developed countries and by 2020 for its developing members. Many of the plans were lacking in detail, however, and few appeared to go beyond commitments already made in other settings. In contrast, bilateral meetings between President Clinton and the leaders of Japan, the People's Republic of China and South Korea appeared to go a long way toward resolving at least some of the tensions that have undermined U.S. ties with these Asian countries in recent months. Mr. Clinton's talks with Chinese President Jiang Zemin in particular may represent a turning point in Sino-American relations.


Back-to-back contracts from two of the three biggest satellite builders in the world have catapulted Japan's no-name commercial space launch industry into the increasingly crowded ranks of competitors to Europe's Arianespace organization. In a deal concluded November 25 with Rocket System Corp. — a consortium of 73 Japanese companies that has been trying since mid-1990 to sign up commercial customers for Japan's first all-domestic heavy-lift booster — Hughes Space and Communications International, Inc. booked 10 launches on a planned redesign of the H-II rocket. Those launches, plus an undisclosed number of options, could be worth as much as $1 billion to RSC over five years beginning in late 2000. During the same time frame the Space Systems/Loral unit of Loral Space and Communications Ltd. has reserved Rocket System's yet-to-be tested H-IIA booster for 10 launches. The value of that November 27 contract was not announced.

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