Japan in the 1990s-23
The Locomotive Role of Service Industries in Japan's
Maturing Economy - Part i by Gregory Clark
One of my stronger memories from my time inJapan was during the economic slump of
the early 80s. The steel industry was suffering from slow exports. Steel industry
leaders were predicting unending economic gloom for Japan,on the grounds that productive
capacity for allgoods had far outstripped foreseeable demand.
Concerned by all this I arranged to visit one ofthe large steel mills on the shores
of Tokyo Bay.It was a depressing picture. Dedicated workerswith the latest in modern
equipment were onlybeing allowed to operate at 60% capacity becauseof lack of demand.
Maybe the Japanese economyreally was headed for chronic depression.
But on the drive back to the city I saw something that changed my mind. On reclaimed
land by thebay a site the size of a full steel plant was bustling with building activity.
They were setting up Tokyo Disneyland. The conclusion wasobvious: the leisure industry
was beginning toreplace manufacturing as the source of economic growth. Prospects
for the Japanese economy were not quite as bad as I feared.
Returning to Tokyo I wrote an article along these lines for a leading Japanese business
magazine. The response from a well-known but nameless steel industry leader was immediate:
I had failed to realise that the steel industry was far more important to Japan than
the leisure industry, and that if other people began thinking as I did then the future
of the Japanese economy really was bleak.
I mention all this because it highlights the ease with which Japan in the past has
tended to ignore its service sector. My father, the economist Colin Clark, happens
to be well known in Japan for his
statistical work in the 30s proving that as economies develop manufacturing inevitably
replaces agriculture as the major sector. However his second conclusion tends to
be ignored in Japan, namely that as economies mature services inevitably replace
manufacturing as the lead sector of the economy.
This shift is inevitable. Just as agriculturalists cannot stop the shift to manufacturing,
manufacturerscannot stop the shift to a service-sector-led economy. In the final
result, the structure of an economy is decided by the structure of demand. And as
people become prosperous it is inevitable they will demand more services-such as
education, transport and leisure-rather than more steel.
In this situation, industry leaders have no choicebut to shift production to meet
demand. If they do not, demand will simply find other sources of supply. For example,
the extraordinary boom inoverseas travel and pachinko is a direct result of the failure
to develop a satisfactory leisure industry.
Before Japan had its Disneyland, Japanese had togo to the U.S. to see Mickey Mouse.
Now Asianadmirers are coming to Japan. The building of Disneyland in Japan also helped,
even if indirectly, to increase demand for Japanese steel. Indeed,even some steel
makers now want to move into the leisure business. One has recently built an indoor
water park on company-owned land and another has built a theme park to rival Disneyland
on an old steel plant site.
But there is much more Japan could be doing.Every suburb should have an indoor sports
centerequipped with child-care facilities where one can enjoy a game of squash or
tennis cheaply. In theU.S. or Australia, family driving holidays are popular because
of the cheap and good roadsidemotels. In Japan, a family would have to stay at a
prohibitively expensive ryokan. Maybe there arestill a few conservative industry
leaders unhappy about the development of the leisure industry.But in the long term
it is inevitable, both for thewelfare of the Japanese people and the health ofthe
In my previous article, I argued that Japan's economy overall had been severely handicappedby
the slow development of new service industries,the leisure industry especially. As
a result consumerdemand is either suppressed or flows overseas.One obvious example
is the way many youngJapanese now prefer to take their holidays in Hawaii or Hong
Kong rather than in Hokkaido or Kyushu.
However, an even larger problem is the inefficiency in service industries. Thice
the car industry forexample. In manufacturing, Japan is well ahead of U.S. or European
rivals in terms of productivity.But when it comes to selling or renting cars Japan's
productivity is only half or even less. In Japan the average car salesperson sells
only four to five cars a month compared with twenty cars in the U.S. Why? Because
Japan relies heavily on door-to-door or personal introduction sales. In the U.S.
most cars are sold direct from the showroom.
True, door-to-door sales can mean superb service for the customer. I have even heard
stories of customers demanding that the sales person repair flat tires a year after
buying a car.But the price tag for such service is equally superb.Where the normal
car buyer elsewhere wouldassume immediately that he or she could get a better price
by going direct to the salesroom, the Japanese consumer is often too gullible or
too flattered by the individual attention from door-to-door sales people to even
think about the extra price tag. Nor is the service quite so good all the time. As
often as not a very expensive price tag will be attached to very ordinary or mediocre
A major problem seems to be one of injecting price competition into the service sector.
In manufacturing it is hard to avoid competition. Finished products can easily be
compared withidentical products on a nationwide or even world-wide level. Prices
have to be competitive or theenterprise will not survive.
In the service sector, however, competition is restricted to the areas in which the
services can be physically delivered. Within those restricted areas the few competing
firms often find they cansurvive very well simply by reaching implicit agreements
to restrict competition and to keep prices high.
However, in the few areas where nation wide competition does exist for a standardized
service we find remarkable productivity. The best exampleis truck delivery (takkyubin)
service for small parcels. Here each company provides the same nationwide services.
The scope for fudging on prices and delivery times is very limited. The result is
an efficiency on a par with anything in the world.
Unfortunately, this kind of productivity is the exception however. Whether it is
construction or transport, finance or distribution, gas or electricity utilities,
or even my own industry (university education) the inefficiency found in Japan stands
in such glaring contrast with manufacturing as to make one wonder whether the same
nation could be involved in both sectors.
To date Japan has relied too much on its manufacturing sector for economic growth.
When markets were not available at home it sought aggressively new markets abroad.
But foreign opposition and the rising yen have shown the limits to this approach.
An improved service sector will allow Japan to develop as well if not better than
an improved manufacturing sector, if only because the service sector is now twice
the size of the manufacturing sector. And an expanded service sector does not require
expanded exports; if anything it cuts exports and increases imports. A very considerable
plus for the foreseeable future.
What is now needed is some way to make producers more subject to competition, and
consumersmore price conscious. Maybe this is one area wherewe foreigners have something
to teach Japan