JAPAN'S PRODUCTION SPURT CONTINUES BUT INDUSTRY EXPERIENCE MIXED
--- by Arthur J. Alexander

Factory output in Japan has risen by almost 9 percent since sinking to a recession low in December 1998. In fact, in just the first seven months of this year, the seasonally adjusted index climbed at an annualized rate of 4.7 percent. However, despite the vigor of manufacturing output over the last 20 months, the volume of production remains about where it was a full 10 years ago. A five-month moving average of Ministry of International Trade and Industry-compiled data shows no pronounced trend over the decade but, instead, a good deal of up-and-down movement (see Figure 1).

Indeed, manufacturing's share of Japan's total output has declined steadily over the past 30 years. As a percentage of gross domestic product, industrial production reached an all-time high in 1970, when it accounted for almost 38 percent of economic output; it now is below 25 percent. The proportion of the labor force employed in the manufacturing sector also has fallen, dropping from almost 30 percent in the early 1970s to just over 20 percent today. The fact that manufacturing's importance to GDP is greater than its share of employment indicates that productivity in this sector is considerably higher than in other parts of the economy.

Japan's experience has tracked that of the United States — but with roughly a 25-year lag. Manufacturing's share of the U.S. economy hit a peak in the early 1950s, when it represented 30 percent of both GDP and jobs. Today, factory output and employment are 16.4 percent and 14.1 percent of their respective American totals. The closeness of these two ratios in the United States indicates the narrow difference between this country's manufacturing and nonmanufacturing sectors in terms of productivity.

Even though production represents only a quarter or so of Japan's total output, its recovery is both a source of growth in several other areas and a reflection of the strengths and the weaknesses of the rest of the economy. MITI's breakdown of the manufacturing sector into more than 100 industries (narrowly defined) provides insight into the dynamic and the stagnant parts of the world's number-two economy (see Table 1). Surprisingly at first glance but more understandable on second thought, battery production heads the list with an average annual increase of almost 20 percent over the last five years. Every portable electronic device from laptop computers to games to mobile telephones requires a battery. In fact, electronics products of one type or another represent seven of the top 10 fastest growers. Toys are in ninth place, reflecting the surge of new electronic-based models and the global dominance of Japanese companies, the suppliers of such popular products as Pokemon, Tamaguchi and Power Rangers.

The lower half of the table also is informative. The output of furniture, textiles and clothing has declined over the last five years, driven down partly by weak consumer demand but also by increased imports of these low-technology, labor-intensive products.

The period from June 1999 through June of this year tells a somewhat different story (see Table 2). In addition to the electronics products that figured so prominently in the last half of the 1990s, the production of capital goods surged in the most recent period. Different types of industrial machinery and steel made up 60 percent of the top 10. If computers are added to the investment goods category, the ratio would rise to seven out of 10. Various consumer goods, including textiles and clothing, as well as some types of industrial equipment were among the big losers.

The GDP figures for the April-June period indicated a somewhat surprising downturn in business investment (see previous article). However, an examination of three representative capital goods does not reveal any cutback in production — nor, presumably, any slowdown in capital spending. Figure 2 shows output trends for two types of industrial machinery — robots and specialized industrial machinery — and one advanced electronics product, computers. These growth leaders apparently have bucked the overall decline in capital spending.

Broadly speaking, the recent resurgence of industrial output in Japan mirrors both the recovery of the economy and the shift of production from the heavy industries that dominated the postwar era to new areas that have become the drivers of today's economy. Regardless of all the talk about an Internet economy, manufacturing will continue to be important to Japan even as factory employment falls both in relation to the total and in absolute numbers because improved productivity allows companies to produce more with less.