Japan Institute for National Fundamentals

　
The Japanese economy has long been called stagnant. Economic outlooks indicate Japan as sluggish even among advanced economies. The government has had a sense of crisis about the stagnation, giving emphasis to growth strategies. It has set up numerous councils and programs, including the Future Investment Council, the Growth Strategy Council, the Growth Strategy Action Plan and the Green Growth Strategy. However, they can be taken as simply replacing nameboard or reapplying makeup in the absence of remarkable economic growth.

The Japanese economy cannot grow because its productivity is as low as 65% of that of the U.S. Why is the productivity so low? Japanese companies carry lower margins and taking less risks in terms of capital investment and research and development than their European and American counterparts. The quality of their business management has been criticized. While this is important, we must also pay attention to a severe business environment surrounding Japanese companies.

Constraints on capital investment

It is indispensable for the government to indicate areas for medium to long-term growth such as digitalization, decarbonization and economic security, and implement supportive measures for guiding companies into such growth areas. The problem is whether companies can change their investment behavior in response to such government initiative. Unless companies implement investment, any excellent growth strategy may end up being a pie in the sky.

Take, for instance, economic security that is positioned for a growth strategy. Economic security pillars include the development of resilient supply chains for semiconductors and other strategic goods. The government designates important goods and provides financial support for companies’ investment in domestic infrastructure for producing such goods. In this respect, a model program provides 600 billion yen for supporting capital investment in the production of advanced semiconductors under a supplementary budget for the current fiscal year.

Main players in developing resilient supply chains are companies that invest in production infrastructure. Important for their investment decisions are not only initial costs but also operation costs. Even if subsidies for capital investment are ready, companies will not invest when operation costs are too high for them to expect profits.

A major impediment to capital investment in Japan is the high electricity cost. The industrial electricity cost in Japan is about 1.8 times as much as in China and South Korea and 2.4 times as much as in the United States. It is difficult for the semiconductor industry and pharmaceutical materials producers in Japan to be competitive. In Germany where electricity prices have shot up due to a nuclear phaseout policy, the government has provided massive financial support regarding industrial electricity to ease companies’ burden and maintain their international competitiveness. Unless the Japanese government eases the electricity cost in addition to providing financial support for capital investment in production infrastructure for key goods for economic security, it will be difficult for companies to implement such investment.

Limits on nuclear phaseout

Fundamentally, however, the government should address the energy cost problem in its energy policy. Under energy supply excluding nuclear power, both growth strategies and economic security policies may end up being empty. Japan will have to consider not only restarting existing nuclear power plants but also building new and additional ones.

Masahiko Hosokawa is a professor at Meisei University and a former director-general of the Trade Control Department at Japan’s Ministry of Economy, Trade and Industry. He is also a Planning Committee member at the Japan Institute for National Fundamentals.