Japan’s export-led funk

Japan and Ireland’s economies are so different in character that I have never once read a comparison of the two, other than a nod to the concept of zombie banks. That said, a recent article in Foreign Policy that looks at Japan’s perpetual slump caught my attention.

Ireland’s path out of recession, we are told, lies in export-led growth. Precisely what we are to export is unclear but, leaving that aside for the moment, there is also the question of whether or not Ireland citizens can survive being hobbled as consumers?

Japan achieved this remarkable growth with a weak yen – which supported exports and discouraged imports – and high savings rates, which funded massive investments in infrastructure and manufacturing capacity.

An unfortunate side effect of export- and investment-driven growth is that it strangles the consumer. But that’s kind of the point: The entire exercise depends on suppressing consumers as their cheap labor fuels exports. In Japan’s case, the same undervalued yen that supported exports sapped consumers’ purchasing power while yields on their savings were kept artificially low to fund cheap loans to corporations and government. And the shrunken share of economic spoils that did end up in the hands of consumers had no outlet but the heavily protected domestic market with its hopelessly inefficient and shockingly overpriced goods and services.

For my money, I’ve never been a believer in the “weightless”, “post-material” economy and believe that productive manufacturing and export is a better option than either selling houses to one another or incomprehensible services to business and government.

That said, the above passages do have a faintly familiar ring: an economy geared-up for the benefit of some narrow sectors of the economy and does nothing for its citizens, lowering wages, collapsing savings… Ireland’s domestic market is not “heavily protected” but goods and services do remain “shockingly overpriced”.

Update: Just read this on the RTÉ News web site: “Call for Budget details to boost spending“.

The group representing the retail sector wants the Government to provide details of its proposed budgetary measures as soon as possible to help improve consumer spending. […] Director of Retail Ireland Torlach Denihan said the Government should give people some idea of how they will be affected by December’s Budget.

  • Alan Maskey

    There has not been a really weak yen in decades. It beats me how the Japense are still surviving with their uber strong yen. Japan was re-engineered by the USA after WW2 and changed immensely, largely in America’s interests.Ireland was similarly re-engineered in the Celtic Tiger years and is now an impotent basket case, full of useless Third World immigrants, vampire banks and other welfare bums. Cui bono?

  • slappymcgroundout

    For what you left out, the warning from them that went unheeded by us:

    However, in the second half of the 1980s, rising stock and real estate prices caused the Japanese economy to overheat in what was later to be known as the Japanese asset price bubble.

    The export strategy was working, for a while there:

    …effectively raising GDP on an average of 2.1% annually from 2003 to 2007. Subsequently, the global financial crisis and a collapse in domestic demand saw the economy shrunk [sic] 1.2% in 2008 and 5.0% in 2009.

    And, lastly, maybe not as bad as some think:

    Keynesians tend to claim that Japan’s economy is far stronger than generally believed. Some mainstream economists acknowledge that Japan, which unlike most developed countries has maintained its industrial base, and has vast capital reserves, currently has a strong economic outlook.

    So, they have the vast capital reserves and industrial base that we don’t. Oh joy for us.

    Sorry, one more. Maskey, they have some trouble owing to the strong yen, but they survive as they make superior quality products for a good price.

    They average 4 workers for every engineer for low tech and for high tech more than a few companies have more engineers than workers. You get greater innovation with less capital cost and so unit price declines, superior product, and sales up the wazoo. The most competitive US companies do likewise (Western Electric and Hewlett Packard). At WE, after speaking with workers, an engineer implemented a change from tongs being used to insert and remove glass tubes from furnaces to insulated gloves. Productivity increased 500%. A study of WE showed that each engineer increased the rate of growth of output per production worker by roughly 5%. The problem we have is that the Japanese are willing to accept that for a not insignificant portion of time, the engineer will simply be pondering the problem, with no real return. We instead prefer the certain output productivity from the extra worker or added machinery.

    The Japanese electronics manufacturers also pay special care in recruiting workers. They establish relationships with high school counselors and teachers. So they know who the best and brighest are. They have entrance exams and physical dexterity texts for their wanna be workers. This helps, since the brighter the souls are, the more likely it is that they will think of ways to improve the manufacturing process. At two companies, over a single year, employee suggested improvements to the manufacturing process saved, respectively, just under $2K and just over $2.1K per worker. Hewlett Packard does the same re the tests and the scrutiny in hiring new workers. They avoid lawsuits by having established guidelines and the proof that their guidelines are not racist, sexist, etc., but instead a bona fide occupational qualification. Most other companies say that we’d like to have the qualifications and the scrutiny, but the law says that we can’t. So they are simply lazy, as the law says no such thing, as it specifically exempts anything and everything that can fairly be called a bona fide occupational qualification.

    Next up is wage structure. They pay their new folks low wages, but the long-term experienced souls rake in the dollars (especially the best and the brightest of the long-term workers). And they have a huge advantage because most women are out of the labor force by age 32. So they don’t spend much time in the long-term high paid group, and so the Japanese company has a good income to wage ratio owing to the gap between productivity and low wage for younger workers, the females of whom will leaving by age 32. Also allows them to grow the work force for relatively little cost (just add more females, to start, as they’ll be gone by 32 and so won’t be getting the late in the day substantially higher pay meant to compensate for the early in the day undercompensating low pay)(the scheme isn’t designed to shaft labor but to incentivize the better workers to stay on long-term). And the American company pays the good worker 10.10 an hour and the lesser worker 9.90. Not much inventive to work harder, or better, for either worker. Meanwhile, Japanese company, 50 year old worker in the 90th percentile by pay earns 2x as much as the 50 year worker in the 10th percentile, even though both have the same education and job experience. That’s the notion of tying promotion to pay and not job function, ie., you don’t necessarily move up the ladder in job function, just more pay. And so while he stays in the same job, he has a reason to think of ways of making the process better, since he will advance in merit rank and his pay will go up for every good idea that increases productivity and profit. For the same reason, Japanese manufacturing workers participate in more training courses and seminars than US workers. We just send people out to learn. They send people out and give them a bonus or raise for going. So a reason to go and then come back and get another bonus or raise by showing that your training program allowed you to innovate the company into higher productivity and profit.

    Lastly, the capital structure is different as well. Over 90% of Japanese manufacturing company stock is not owned by private individuals but by other companies, with, more often than not, the suppliers of that company being a major stockholder. So they have a reason to see the company’s long term success, and screw savaging the company for short term profit. Another way of putting the matter is simply this. Since the supplier is indeed the supplier it has more interest in long term supplying (as it were) than short term profit at the manufacturing company’s expense. One plus, as it turns out, is simply that the cost of materials is more likely to be true cost than market cost. The supplier has no real reason to gouge the manufacturing company since it needs the manufacturing company to survive and profit, so it too can stay in business by supplying the manufacturing company and also so that the value of its manufacturing company stock might rise over the long term. So the supplier sells for true cost, or close, and not speculatively inflated market cost. And that helps both, as the manufacturing company can continue to profit over the long term, which means that the supplying company will still be needed to supply the manufacturing company over the long term. If I were a US company, I’d start buying back the company’s stock and then try to get my suppliers to start taking that stock in satisfaction of the price of materials. I’d tell them that while we aren’t a strictly vertical entity, that doesn’t mean that we can act like one, and that acting like one is good for us and good for you. Then I’d tell them that the reason why we don’t truly go all vertical is that it’s better to have the two specialists than to be jack of all trades but master of none.

    That’s short, or maybe not so short, explanation of how the Japanese survive. Sure, the strong yen hurts, but the rest of the scheme means superior product for a good price. That usually sells, i.e., the yen isn’t so high in value that it dictates that the great unwashed masses buy cheap, inferior crap.