Polarization in the Japanese Economy

Globalization can be understood to be in essence a profit revolution and a process by which the welfare state (big government) is being dismantled. The welfare state is the twentieth-century face of the modern sovereign state, which dates from the sixteenth century, and which developed into the nation- state through citizens’ revolutions. In that sense, globalization can also be seen as the dissolution of the sovereign state and the nation-state. The breakup of the Soviet Union, an extreme form of big government, led to the dismantling of the welfare state there. At the same time, the globalization process amounts to the revival of the empire. Deepak Lal states in his 2004 work In Praise of Empires that an empire is a nation that can exercise influence over not just the foreign policies but also the domestic policies of its partners. Because moving capital across borders makes no sense in the absence of this influence over the domestic policies of partners, globalization and empires have a close, inseparable relationship.

From the time of the foundation of the British East India Company in 1600 until the middle of the 1990s, capitalism assumed a number of forms, including mercantilism (physiocracy), free trade ideology, and imperialism, but these were all the same in the sense that capital and the state were wedded together. In the second half of the 1990s, however, this character of capitalism completely changed, with capital gaining ascendancy over the state. In the 1950s one often heard the phrase "What’s good for General Motors is good for the United States," but the same cannot be said of Microsoft, Google, and other such supranational corporations.

CAPITALISTS VERSUS WORKERS

As a result of globalization and the information-technology revolution, the supranational corporation has come out on top, and sovereignty is being transferred to the shareholder, the new "absolute monarch."

This also marks the end of "the golden age of labor" in the twentieth century. According to the French historian Fernand Braudel, workers in the fourteenth and fifteenth centuries enjoyed a golden age thanks to the success of the manorial system. In the same way, they prospered in the twentieth century in testament to the triumph of capitalism. The former golden age of labor drew to a close when monarchs emerged as capitalists and discarded the manorial system, and now the latter golden age has been terminated by the arrival of a supranational form of capitalism. This is the setting in which ever since the mid-1990s, capitalists in Japan and other developed nations have received the lion’s share of the fruits of value-added creation in the division between them and labor.

The motivating force has been a decline in rates of return on capital. Long-term interest rates, which provide a measure of rates of return from the use of borrowed capital, have steeply declined since around the time of the oil crises of the 1970s (figure 1). For 10 years since September 1997 in Japan, the return on an additional unit of capital has been under 2.0%. Except in Japan’s case, never has such a low return on borrowed capital been recorded since the birth of capitalism in the sixteenth century. One has to look all the way back to 1611–21 in Genoa, Italy, during the peak of the manorial society, to find another such case of rock-bottom interest rates lasting for as long as a decade. Indeed, as far as can be ascertained from Sidney Homer’s A History of Interest Rates, these are the only two cases of such low interest rates between 3000 bc and the present. The nations selected for figure 1 are those that had the lowest interest rates in each age. They were all major economies of their age, and with the exceptions of Italy and Japan, they were hegemonic powers. As defined by Deepak Lal, a hegemonic power is a country that exercises influence over just the foreign policies of other countries. Because money did not move across borders during the era of sovereign states, countries had no need to unify their financial systems.

Major economic powers usually have lower interest rates than the rest of the world because they have significantly larger accumulations of assets. Thanks to trade with the East and the invention of a currency-exchange system in the seventeenth century, Italian banks were able to draw in the world’s silver, and they financed the flattening of the hilly parts of the Italian peninsula for use as grapevine orchards. As a result, marginal profits moved down over time, and the return on each additional unit of investment fell to a very low level (1.125% in 1619). Japan at present is in a similar situation.

A rule of corporate profit maximization in the modernization process is to go faster and farther than others. This principle has been turned into a reality by the automobile and also by information products. From the 1980s into the first half of the 1990s, Japan led the world in the production volume of autos and semiconductors, and this manufacturing prowess led to the accumulation of capital. Exports of these products expanded, and Japan ran up huge trade surpluses year after year. These surpluses became net external assets, and Japan emerged as the world’s leader in this respect, with assets of ¥215.1 trillion as of the end of 2006. Long-term interest rates at the very low level of 1% marked this peak of modern-day capitalism, just as they had occurred once before, at the peak of the medieval manorial system.

Among Japan’s major global corporations—those in IT-related industries, including electrical and precision machinery, nonferrous metals, and information communication electronics, along with the steel and transportation machinery industries—labor’s share of value added rose to 88.7% in the fourth quarter of 1993 and then declined, reaching 58.3% in the third quarter of 2007. The share is still shrinking, even though it has already moved below its average level for the pre-1973 period. The return on borrowed capital has greatly declined in a situation where the return on equity (shareholder’s capital) has also moved to a low level. Among major companies in the manufacturing sector, return on equity for fiscal 2007 (April 2007 to March 2008) is estimated at 7.8%. Although this is a substantial improvement from the 2.3% ROE for fiscal 2002, the first year in the current upturn, it is far below both the pre-1973 domestic average of 13.8% and the current ROE figures of major Western companies, which are in the 15%–20% range. During the upturn since 2002, the annual rate of increase in per capita wages at Japan’s large manufacturing companies (with 500 or more employees) has been an anemic 1.1%, and cash earnings for scheduled hours have crept up a mere 0.2%. By contrast, these companies paid out ¥5.5 trillion more in dividends in fiscal 2006 than they did in fiscal 2001. Looking at statistics for companies of all sizes in all industries, we find that dividend payments rose by ¥11.7 trillion over this period to a record-breaking ¥16.2 trillion in fiscal 2006. Employees’ compensation, meanwhile, contracted by ¥6.4 trillion over this period.

JAPAN’S GLOBAL AND DOMESTIC ECONOMIC SPHERES

These contrasts in dividend and wage trends paint a picture in which capitalists are the winners and employees are the losers, but not all those on the losing side have suffered the same fate. There are also winners and losers among employees. The decline of employees’ income is still going on in small nonmanufacturing companies, but income has increased for the employees of major global companies. According to the Monthly Labor Survey of the Ministry of Health, Labor, and Welfare, per capita wages at large manufacturing companies started heading up again in 2003 and are now 5.3% above the 1997 level. At small nonmanufacturing companies (with 5–29 employees), however, wages have continued to decline since 1998 at a rate of 1.5% a year, with the result that they are now 12.8% below the 1997 level.

In the past, when people talked about disparities, or the "dual structure" of the economy, they were referring to differences in rates of increase, such as wage-hike rates. Though wages may have been split into two tiers, there was an upward trend common to both. With the advance of globalization, however, the disparities between industries have become more rigid, and the direction of movement in corporate profits and wages has become split, with some industries heading down and others up. With a boost from Asia’s modernization, Japan’s global companies have been growing even faster than they were in the 1960s (figure 2). Asian countries other than Japan have the example of the advanced countries to guide them, and they are oriented toward fast growth, since the process of modernization is inherently one that brings a large middle class into being and creates a mass consumption (mass production) society. If we date the start of Asian modernization at around the time of China’s admission to the World Trade Organization at the end of 2001, we can understand that a trend that can be expected to last for decades is underway at present. However, Japan’s small nonmanufacturing companies are unable to link themselves to this modernization process and have not come up with a growth orientation for themselves in the postmodern period. As a result, they are going through a phase of decline that has now lasted for 17 years. When we look at figure 2 in this light, we can see it as portraying two groups of industries, one containing representatives of modernization and the other containing representatives of the postmodern world.

The political system that is emerging as a replacement of the order of sovereign states has been described as a new medievalism in Hedley Bull’s Anarchical Society: A Study of Order in World Politics (1977) and Tanaka Akihiko’s Atarashii Chûsei (1996; trans. The New Middle Ages: The World System in the 21st Century, 2002), but the economic system that will prevail in the postmodern world cannot yet be delineated. Indeed, there is not even agreement on the direction in which the existing system is changing, with some people arguing that modernization is still in progress. One conceivable direction is the "growth-oriented path" (3%–4% growth of nominal gross domestic product), while another is the "stable growth path" (slower growth without inflation). The former is essentially that of the age of the price revolution of the sixteenth century, and it is one in which growth is considered to be capable of healing all injuries, as Braudel has commented. Those who see the present day in the twenty-first century as a continuation of this path would argue that the framework of modernization offers the correct choice for getting through crises. After all, they do not acknowledge that a transition to postmodernism is in progress. The advocates of the second path call for fundamental rebuilding of systems to enable the economy and society to get by even with slow growth, but adjustments have been hard to make because of clashes of vested interests between generations, regions, and other interest groups. In Japan as in other parts of the world, the policies that have been selected thus far have tended to be neoliberal policies, which have a strong growth orientation.

The growth-oriented path is presented as the best way to combine correction of fiscal deficits with economic growth, but in the age of globalization, this very way of thinking is behind the times. The growth is taking place among the global corporations that benefit from Asian modernization, while the lack of progress in restoring health to public finance is a result of the inability of small nonmanufacturing companies (especially those in such industries as distribution, construction, real estate, and services) to move into the postmodern era, and it is also the result of a structure of government revenue and expenditures still premised on modern society. We are dealing here with two entirely different economic spheres. The argument that correcting fiscal deficits requires economic growth presumes that there is a positive correlation between these spheres. What it fails to recognize is that globalization is widening the rupture between them.

The industries and major global corporations that have achieved strong growth since the mid-1990s have not conferred benefits on the small companies in the nonmanufacturing sector. The big global corporations have grown at a pace of 9.7% on a per capita basis since 2002, registering a better performance even than the 7.5% growth rate of the emerging-market countries. By contrast, small nonmanufacturing companies have been unable to move out of a long period of negative growth. Over the period since fiscal 1993, nominal GDP growth in Japan has averaged 0.5% per year. During the current expansion it has been 1.1% (from fiscal 2002 to the first half of 2007). This is a rather poor performance for an upturn that is billed as Japan’s longest yet, longer even than the Izanagi boom of 1965–70.

The government introduced a policy mix of the neoliberal, growth-oriented type in 2002, but that did not enable small nonmanufacturing firms to begin growing again. This provides evidence that these firms cannot be rescued from their long-term decline using the mechanisms of modern society. Globalization has turned Japan into a country with two economic spheres, each with its own arrangements. What had been a relatively homogeneous economy has been split apart. This being the case, not much can be expected of measures to enhance labor mobility across the two spheres, since each relies on its own systems. The disparities between the spheres may only grow more permanent. And as the gaps become more acute, they will quickly translate into problems of poverty. If we take a relaxed view and talk about how inequalities are only natural, we will end up turning a blind eye to poverty.

DECLINE OF THE MIDDLE CLASS

If we accept globalization as a given, we will find that the more tenaciously we try to preserve the sovereign state, the harder we have to struggle with problems of inequalities and poverty. This is because giving free rein to globalization can split the state in two, terminating its existence as a unified entity. The employees of Japan’s large manufacturing companies (including executives) number only 3.7 million, or 6.4% of the workers in all industries. By contrast, the employees of small nonmanufacturing companies number 28.4 million, or 59.3% of the total. The Industrial Revolution in the eighteenth and nineteenth centuries became a success in a structure where Britain was at the core while such countries as India became impoverished on the periphery. Under globalization today, we have the same sort of structure forming within countries. Japan’s global corporations can use the human resources of the small nonmanufacturing firms around them to secure a supply of inexpensive labor. There is both a core and a periphery within Japan. During the age of sovereign states, a combination of state regulation and organized labor’s influence blocked the formation of two economic spheres within countries, but today’s state no longer has the will or the power to do likewise.

Since per capita real GDP is moving in opposite directions in Japan’s two economic spheres, we can understand that per capita personnel costs, which are a component of real GDP, are also diverging. Income differentials can therefore be calculated using the ratio of personnel costs at large global companies to those at small nonmanufacturing ones. As shown in figure 3, the differential has been rapidly widening since around 1994, confirming that disparities are becoming more acute under globalization. According to Ministry of Finance statistics, annual wage payments at small nonmanufacturing companies were ¥2.87 million per worker in fiscal 2006. At the smallest of these firms, those with capital under ¥10 million and employing 8.6 million workers (18.0% of all employees), annual wages were ¥2.16 million. The pay at these firms has been falling since hitting a peak at ¥2.6 million in 1994, and workers’ families have been forced to draw down their savings. Eventually these families wind up without any spare money, whether in bank accounts, life insurance policies, private pension contracts, or stocks. As also charted in figure 3, households with no savings have been rapidly increasing since the 1990s. As of 2006, one of every four households was in this category.

People who say they have run out of money have been applying for welfare benefits in growing numbers, and the number of households receiving such benefits has been steadily increasing since 1992. The economy has gone through three upturns over that period, but evidently this poverty problem cannot be solved simply by a period of business prosperity. The number of households receiving livelihood assistance rose from 586,000 in fiscal 1992 to 1,075,000 in fiscal 2006. In a swiftly rising trend, applicants are citing "savings, etc., have dwindled or been used up" as the reason for their assistance request. Whereas 7.6% of all households gave this as the reason they needed help in fiscal 1997, the share had risen to 15.5% in fiscal 2006. Japan’s public policies have come to incorporate a mechanism that causes poverty to reproduce itself. The tier of workers’ families with the lowest income level is seeing further income erosion year after year. Because the livelihood expenses of this lowest income tier are used to determine benefit amounts for families on welfare, life is becoming increasingly harsh for the nation’s impoverished class.

We cannot brush off this polarization of the economy as a phenomenon caused by special factors found only in Japan. What has come to the fore since the 1980s in Japan is a contradiction inherent to all modern societies. It has become acute and readily visible because the modernization process has moved at a high speed in countries like Japan and Germany. In Britain and the United States, by contrast, modernization has progressed at a slower pace.

When modernization is equated with capitalism, a lowering of the return on capital is considered to be a critical problem or dire crisis. One means that is utilized to rectify the situation is inflation of asset prices. Examples include the land bubble in Japan during the 1980s and the housing bubble in the United States since the second half of the 1990s, along with its offshoot, the boom in subprime mortgage lending. Bubbles, however, always burst eventually. When they do so, moreover, it is not the wealthy that suffer but the middle class, because it joins the buying game late, after price inflation is well underway. In capitalistic competition where capital and the state are unified, the countries that gain a superior position are those with a homogeneous public (that is, those with a prominent middle class sharing the same values). In today’s global capitalism, however, capital has gained the upper hand over the state, money flows easily across borders, and the homogeneity of the people breaks down. For this reason, a country like Japan that was one of the most successful at capitalism at the stage of a unity between capital and the state can be expected to have the most difficulties in adapting to global capitalism. What is involved here is the disintegration of what Benedict Anderson has called the "imagined community."

The polarization Japan has experienced since the 1990s needs to be perceived as a sign of the breakdown of the nation-state. This is not a simple problem that can be solved by asking people to take responsibility into their own hands with the advice that "hard work will be rewarded." The steps Japan takes to resolve the problem can set an example for the developed countries of North America and Western Europe, where low-income families are also becoming more impoverished as a result of developments like the subprime mortgage crisis. In advanced countries that have developed a dependency on asset prices, economic polarization raises the question of how globalization should be addressed. Driven as it is by the IT revolution, globalization cannot be reversed. The chances are that it will continue to move forward as long as capital produces adequate profits.

The cogs of the wheels that moved the world out of the feudal system of the Middle Ages into modern capitalism included the invention of movable type, the great voyages of discovery (made possible by advances in navigation technology), and the Reformation. What is lacking in the current IT revolution and process of globalization is the element of religious reformation—the birth of a new spirit. No doubt we will see rivalry among nations to come up with a compelling ideology for global capitalism. The market fundamentalism espoused by the United States has just been dealt a setback by the subprime mess. This has presented Japan, the first country to encounter the woes of economic polarization, with a chance to make a contribution.

Translated from an original article in Japanese written for Japan Echo.

© 2008 Japan Echo Inc.