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Government and Economy

Burden-Sharing and "Correct Collusion" for Overcoming Deflation

Masakatsu Tamura
Professor, School of Social Sciences, Waseda University

Deflation plaguing Japan alone

Panicked by the sharp decline in exports due to the Lehman shock, major exporters and other companies in Japan rashly made extreme reductions in production. Although the economy has being recovering since the second quarter of last year due to increased exports, it is not a robust recovery. Sluggish consumption and price wars-resulting from declines in employment and wages-have spurred deflation.

(Table 1) Total Exports (in Trillion Yen) and Year-On-Year Growth (%, in Parentheses)

* Annualized except for the year 2000

  Total Amount Electric Equipment Automobiles Exports to the U.S. Exports to Asia
2000 52.0 ( 7) 13.7 ( 13) 6.9 ( 0) 15.5 ( 5) 21.4 (16)
Jan. to Sep. 08 85.3 ( 4) 16.4 ( -1) 16.0 ( 7) 15.1 (-10) 42.4 (7)
Jan. to Sep. 08 85.3 ( 4) 16.4 ( -1) 16.0 ( 7) 15.1 (-10) 42.4 (7)
Oct. 08 to Mar. 09 51.8 (-39) 10.1 (-39) 9.7 (-52) 9.0 (-45) 27.3 (-35)
Apr. to Jun. 09 53.4 (-36) 10.5 (-34) 5.7 (-60) 7.6 (-47) 28.2 (-36)

Japan is the only developed nation with a deflationary economy. As shown in Table 2, the Reuters index at the end of last year had nearly doubled from 2000 and was still 58 percent above the baseline the following year, and the cost of raw materials rose right along with the index. This resulted in increases of both prices and nominal wages by as high as 20 to 30 in the U.S., the U.K. and Germany.

Japanese prices and wages alone, however, have continued to drop. Parent companies force their small and medium-sized subcontractors to lower the delivery prices. Large retailers have engaged in price wars against this backdrop, and these factors have curtailed the profit margins of businesses-especially small and medium-sized ones-in turn leading to shrinking wages. This is the situation in which deflation has developed.

(Table 2) Price and Wage Indices in September 09 and the Reuters Index

(2000 = 100, 2008 in the left and September 2009 in the right columns)

  Japan The United States The United Kingdom Germany
Wholesale Prices 106.3 100.6 128.3 126.3 117.1 114.1 124.3 118.1
Consumer 99.5 98.2 125.0 125.4 116.7 120.0 115.0 115.3
Prices 93.2 82.8 129.0 133.2 136.4 138.8 115.0 139.6
Reuters Index: (2006) 145.8, (2007) 173.1, (2008) 183.1, (Oct. 2009) 158.5

* The nominal wages are for all industries, and Japanese wholesale prices are represented by the corporate goods prices.

A vastly disparate economy

The price war is widely said to have been caused by economic globalization. A more important factor, however, is that total labor compensation is declining due to increasing use of nonpermanent employees. The average monthly wages are 316 thousand yen for 40.9-year-old permanent employees and 194 thousand for full-time nonpermanent ones. The average for all employees including both permanent and nonpermanent is 299 thousand yen, which dipped below 300 thousand for the first time in the past 10 years. This pushed down the average annual family income in 2007 by 100 thousand yen from the previous year to 5,562,000 yen, the lowest in the last 19 years since 1989. It would have decreased further in 2009.

On the other hand, the unemployment rate hit a record 5.7 percent last July, and is still hovering in the 5-percent range. The job-offers-to-seekers ratio is on the 0.4 level. In addition, income disparity is ever expanding. Those whose incomes do not reach half of 2.28 million yen, the national average, account for 14.9 percent among all income earners. This percentage is the fourth highest after the U.S., Mexico and Turkey according to the 2008 OECD report. The Gini coefficient, an indicator of the degree of economic disparity, also jumped up from 0.25 in 1993 to 0.39 in 2005. This made Japan, which had been one of the most equal nations among major countries, a nation suffering the greatest disparity after China, the U.S. and Russia.

Shorter working hours and work-sharing

To solve the problems of deflation and employment, the following is required: first, expansion of domestic demand by "upward equalization of income" - increasing and equalizing income at the same time - with the Netherlands-style shorter working hours and work-sharing; and second, restoration of the normal economy by price and wage hikes through cooperative frameworks among small and medium-sized firms.

The former step involves shorter working hours and work-sharing in order to seek equal pay and equal social security for equal work. It is, however, hard to turn all nonpermanent employees-a group that has increased to comprise one third of all employees-into permanent ones. Forcing this step too quickly would induce more bankruptcy and unemployment.

We should therefore pursue equal pay for equal work taking advantage of such a large proportion of nonpermanent workers. We will be on the right track when permanent employees and management share the pain with the national and local governments who are actively committed to it. The Japanese Trade Union Confederation known as RENGO has a policy to strive for the upward equalization of wages through serious efforts for improving the treatment of nonpermanent employees during the upcoming spring labor offensive. In addition, the government, labor and management must reach agreements to push further for the shorter working hours and work-sharing mentioned above.

Industrial cooperative frameworks and "correct collusion"

Overcoming deflation also requires that industry organizations-consisting of small and medium-sized companies, as well as regional associations involving firms from various industries-"openly collude" to achieve price and wage increase that would be acceptable to everyone. If the current excessive competition failed to be restricted, deflation would continue to get worse.

To this end, market fundamentalists must correct their misunderstanding that any form of cartels violates the principle of free market competition, though such inter-business organizations may ignore public interests to only seek benefit for their own industries when the mental foundation of the social community has not been built sufficiently.

National and local governments monitor these organizations closely in order to avoid these problems. Monitoring should not, however, be targeted at individual companies directly. Instead, the supervision should be exercised through the principle of disclosure introduced in the inter-enterprise organizations in the first place. One method would be third parties who represent consumers or other public interests participating in these company associations.

Meanwhile, the industries should unite-always bearing in mind that they are public organizations for realizing social justice-and protect small and medium-sized companies against oppression by larger ones and from the storms of the economic globalization. This would also lead to regard for consumers' interests rather than the egoism of the industries. Such cooperative frameworks among the industrial organizations, the government, and local communities must lie at the heart of the free economy-frameworks which would actually encourage orderly competition.

Masakatsu Tamura / Professor, School of Social Sciences, Waseda University

[Biography]
1945 Born in Matsumoto City, Nagano Prefecture. Later graduated from Matsumoto Fukashi Prefectural High School
1968 Graduated from the School of Political Science and Economics, Waseda University
1974 Graduated from the Doctoral Program at the Graduate School of Economics, Waseda University
1972 Research Associate, School of Social Sciences, Waseda University
1982 to present Professor, Waseda University (Dean of the School of Social Sciences from 1992 to 94)

[Specialization]
Economic policy and social philosophy

[Academic Degrees]
Doctor of Economics

[Associations and Affiliations]
Executive director of The Society of Economic Sociology (former president), Director-General of the Japan Economic Restoration Association

[Major Publications]
Economic Sociology: Beyond the Logic of the Modern Society [Keizai Shakai Kenkyu: Kindai Shakai no Ronri wo Koete] (Waseda University Press, 1977)
The Contemporary Economic and Social Systems: Their Future and Overcoming the Modernity [Gendai no Keizai Shakai Taisei: Ryou-Taisei no Yukue to Kindai no Choukoku] (Shinhyoron, 1980 and 1990)
Dynamics of World Economy: Nationalism, Unionism, and Globalism [Sekai Keizai Doutai-Ron: Nashonarizumu, Yunionizumu, Guroubarizumu] (Waseda University Press, 1983)
Philosophy for Social Sciences [Shakai-Kagaku no Tame no Tetsugaku] (Koujinsha, 1986)
New Development of the Japanese Economy: Economy and Leisure for Human Restoration [Nihon Keizai no Shin-Tenkai: Ningen Fukkou no Keizai Yoka Ron] (Shinhyoron, 1989)
Social Philosophy for the New Era: Shift from the Modern Paradigm [Shin-Jidai no Shakai-Tetsugaku: Kindaiteki Paradaimu no Tenkan] (Waseda University Press, 1995 and 2000)
The "Fluctuating" Structure of the World System: EU, East Asia, and the World Economy [Sekai Shisutemu "Yuragi" no Kouzou: EU, Higashi Ajia, Sekai Keizai] (Waseda University Press, 1998)
Visible and Invisible Natures: Environmental Preservation, Natural Rights, and Natural Philosophy [Mieru Shizen to Mienai Shizen: Kankyou Hogo, Shizen no Kenri, Shizen Tetsugaku] (Waseda University Press, 2001)
The Contemporary Society and Volunteers [Gendai Shakai to Borantyia] (co-authored, Minerva Shobo, 2001)
Communities Coming Back: Dialogue between Philosophy and Social Sciences [Yomigaeru Komyunityi: Tetsugaku to Shakai Kagaku no Taiwa] (Bunshindou, 2003)
Lecture on the Principle of Social Sciences [Shakai Kagaku Genron Kougi] (Waseda University Press, 2007)
Studies on Volunteers: The Philosophy and Practice of Coexistence [Borantyia-Ron: Kyousei no Rinen to Jissen] (as the editor and a contributor, Minerva Shobo, 2009)