Effects of Information Technology and Aging Work Force on Labor Demand and Technological Progress in Japanese Industries: 1980- 1998
Kiyohiko G. Nishimura, Kazunori Minetaki, Masato Shirai, Futoshi Kurokawa

This paper raises many very important issues relating to the continuing economic crisis in Japan. In particular insofar as it relates to questions concerning the impact of new technologies on an ageing society. The report has mixed conclusions. It fails to clearly establish robust relations between IT introduction and productivity. It does however claim that information technology development in the 1990s has had a negative impact on one of the past strengths of the Japanese economy: productivity increases achieved through high-education workers' learning by doing. This result will need further examination, but it does sound a warning, as much for Germany as for Japan. The only serious hope for sustained economic growth in a society with a declining labour force and declining participation rates comes through extracting an increasing productivity component from those who are working. If new technologies, and new forms of work have the consequence of reducing the value to be attributed to experience over initiative and adaptability, then the winds of creative destruction could prove devastating for those societies whose standards of life rest on accumulated stocks of wisdom and expertise.


Abstract: The purpose of this paper is two-fold. First, we examine the direction and the magnitude of substitutability or complementarity between information- and communication-related capital stock and various labor inputs to know about differential impacts of information and com-munication technology on labor demand. In this way, we can obtain information about what segments of workers information and communication technology can effectively substitute for.


Second, we estimate contribution of information and communication-related capital stock and various labor inputs on the value-added growth of the Japanese economy in the recent turbulent era (1980s and 1990s) and explore factors determining technological progress. In particular, we investigate whether rapid accumulation of information-related capital stock has a positive effect on technological progress, examining IT externality. We also discern the effect of compositional changes in labor inputs on technological progress examining the inflexibility issue and IT-induced technological obsolescence issue.


Three remarkable facts emerge from our result with respect to substitutability- complementarity issues. First, IT capital stocks are shown to be significant substitutes for young workers with a low education level, whereas old workers with a low education level are consistently quasi-fixed in all industries under investigation. Second, IT capital stocks have complementary relationship with workers with a high education level in many industries. Third, workers with a high education level and those with a low education level are substitutes. These all suggest that IT investment and human capital accumulation are of utmost importance to overcome possible shortage (in relative terms) of young workers with a low education level caused by rapidly aging population.


As for IT externality, we find at first positive correlation between IT stocks and technological progress in manufacturing, suggesting a strong externality effect of IT capital stocks. In the first glance it is very promising, since this suggests that this IT externality can be used for boosting productivity growth. However, the correlation is not robust. First, if non-manufacturing industries are included, the correlation vanishes. Second, if "Electrical Machinery" is excluded from the sample of manufacturing, the correlation also vanishes. Thus, we fail to discern clear-cut evidence for IT externality. Thus, the proposition that IT "revolution"can pop up productivity growth and can counter the pressure of aging population is not supported by our data, although investment in IT-producing industries is surely an important driving force for economic growth through substitution effects. As for the effect of labor force composition on the rate of technological progress, the results do not support that the "inflexible old worker" hypothesis of productivity slowdown. There is no correlation between the rate of technological progress and the ratio of old workers with low education in the total labor inputs.


However, the results suggest that information technology development in the 1990s has a negative impact on the past strength of the Japanese economy: productivity increase through high-education workers' learning by doing. In manufacturing industries where Japan has been strong, the rate of technological progress in the 1980s has positive (though weak) correlation with "maturing" high-education labor force. That is, the ratio of old well-educated workers in the total labor inputs has a positive (though weak) effect on technological progress. This suggests that the increased average skill among well-educated workers due to longer experience has a positive effect to improve productivity. However, the relationship changes significantly in the 1990s, and we have rather negative relationship. The nature of technological progress apparently changed adversely.
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To Monetise or Not to Monetise, That is not the Question

Curious how almost everyone who's anyone in New York or Washington thinks that the Japanese problem has a monetary solution, while almost everyone who's anyone in Tokyo disagrees. This time it's the turn of Morgan Stanley's Robert Alan Feldman.

Is it too late for Japan? The monetization is now complete along the yield curve. European investors ....worry that Germany might be the next Japan, or that somewhere else might be the next Japan. In particular, criticism has been targeted at the Fed and ECB for not moving aggressively enough in the face of deflation potential. Japan is cited as the example of what not to do, for example, in a paper by the Federal Reserve (�Preventing Deflation: Lessons from Japan�s Experience in the 1990s,� by Ahearne et al., June 2002). Although I agree that Japan has provided some examples of what other countries should not do (just as have European and North American economies at times), the contention that monetary policy was the key failure is, in my view, absurd. Rather, the key omission was an aggressive approach to structural reform in both financial and industrial sectors.

So we get back to the debate on what monetary policy should do. For those who think that ending deflation simply means lowering rates a lot and/or printing a lot of money, Japan�s experience should toll a warning bell. Base money is up by 80% since 1997, while deflation has continued. Even monetarists in Japan now agree that the collapse of money velocity cannot stop without structural reform. Moreover, the Weimar experience suggests that rapid money printing will not end the troubles of the Japanese economy. Even in less dramatic contexts, no one has ever argued that high inflation improves resource allocation -- even if it removes bank debt at the expense of creditors. On the contrary, capital flight is the natural result of such an approach, in the wake of which both confidence and real investment collapse.

I agree with my colleagues that it is necessary for the ECB and the Fed to move aggressively, in order to prevent deflation. Where my approach differs is on the question of whether monetary aggressiveness is sufficient. Easy money was NOT sufficient for Japan to avoid deflation. Structural policies were necessary too. In my view, the real lesson from Japan will be learned only when both Europe and the United States focus on the heavy, political issues of dealing with structural impediments to resource re-allocation in their own economies.
Source: Morgan Stanley Global Economic Forum
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Japan: Let the Fiddler Play On


More on divining the entrails in Japan. Much recent western comment has been mildly optimistic on the possibility of serious change and reform in Japan. Japanese commentators meanwhile, when not actually banging their heads against the wall, seem to spend most of their time tearing their hair out. This piece from the Asahi Shinbun's Senior Staff writer is pretty typical. If they're even halway right it looks like the best we can hope for is more fudge. It seems Duisenberg isn't the only one to be busy fiddling while the empire burns.

British writer Thomas Carlyle, who lived in the same period as Karl Marx, called economics ``dismal science.'' The epithet may well apply to the current economic debate on deflation in Japan. One gets the impression that the nation's economy is going nowhere. The underlying problem seems to be a policy stasis that stems from the inability of policy-makers to draw up a unified blueprint for action. The sense of paralysis was evident at the symposium held last month at the Finance Ministry under the theme: Challenges for Japan's Economy-Deflation and Economic Policy. Symbolic of the policy paralysis is the standoff between the government and the Bank of Japan over ways of beating deflation. Government officials feel this way: ``We are taking steps such as tax cuts. Now it's the BOJ's turn to follow up.'' But central bank officials are deeply suspicious of the government. Their feeling is: ``We could be left holding the bag trying to generate inflation.''The discord came to a head at the symposium, creating acrimony among the participants. Academic panelists demanded that the BOJ change its monetary policy, but some in the audience-politicians and BOJ people-reacted sharply, saying it is wrong to blame only the central bank for inaction. A truce of sorts was called when University of Tokyo professor Hiroshi Yoshikawa, a panelist and a member of the government's Council on Economic and Fiscal Policy, said, ``The important thing is for the government and the Bank of Japan to put together a unified package of measures to remove uncertainties over the future.''

The question is specifically what kind of anti-deflation program should be worked out. If it turns out to be a hodgepodge of halfway measures, the economic situation will become gloomier still. For example, a mere increase in public works investment-a prime example of distorted resources allocation and wasteful spending-would only make things worse. On the other hand, aggressive measures focused on generating inflation could end up creating ``stagflation''-a combination of recession and inflation. What is needed is a bold plan of action-namely, a forward-looking, reform-oriented program to fix deflation. Reform means dismantling the ``construction state''-the bloated system of public works projects-and increasing investment in other areas such as environment, welfare and education. Along these lines, utmost efforts should be made to foster industries of high growth potential and create new jobs.
Source: Asahi Shinbun
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Japan: Which Side Are You ON?


I'm posting this piece from Morgan Stanley's Takehiro Sato since, apart from anything else, it is a hoot. Trying to make sense of what happens in Japan is difficult at the best of times, but when a market oriented party starts to socialise the economy, and the ex-communists begin to demand market based measures, well, I think we move from the world of the sublime to that of the ridiculous. Sato - to steal a phrase from Brad Delong - certainly seems to be 'banging his head against the wall' here. I hope it isn't too painful.

Let�s look at recent remarks by an opposition party official regarding the Industrial Revitalization Corporation of Japan (IRCJ): �The plan put forward by the government calls for dividing bank lending that has concern for recoverability into two categories, with the genuinely bad loan going to the RCC and other watch list loan being handled by the IRCJ. Yet banks should be responsible for the job of lending. In this plan, however, the government-owned corporation will be assuming the responsibility of banks and shouldering the credit risk and then using public capital to cover losses if companies fail, instead of the banks. Rather, banks should be doing the job of industrial revitalization. It does not seem appropriate for such a special public corporation to take on this role.�

Before proceeding, it should be noted that I personally am not a supporter of this party and have no intention of giving it a boost. The party�s core principles call for liberation from the exploitation of capitalism and construction of a planned economy through socializing the means of production. What is stated here, however, is mostly correct regardless of the party�s ideology.

It is rather confusing in Japan that the right-wing �conservative� party is pressing for revision of the national constitution, while the left-wing �reformist� party wants to leave the current constitution intact, for example. We find a similarly ironic contradiction in the party that stands for �liberalism� relying on government control in both macro and micro policy, while the socialist party fights for market principles and resists the takeover of excessively indebted companies by such a government-owned entity. Currently, a conservative to center-right coalition cabinet backs a socialistic economy despite the prime minister�s resolution, while left-wing opposition parties criticize these policies, therefore calling for a market mechanism. Such a distorted situation came to be a normal state of affairs, and the PM has aptly acknowledged that Japan has a socialistic economy along the lines of the former Soviet Union and East Germany.

The IRCJ runs the risk of being transformed into a holding ground for excessively indebted companies and classic example of socialistic policy, if political interference were to be allowed. Likewise, policymakers seek to prevent as much as possible an expansion of social inequalities from a hard-landing scenario. Furthermore, the core capitalistic concept of �profit-making� is seen to be nearly rejected, perhaps from some manifestation of Confucian mentality, which makes the groundwork for oriental ethics.

The most obvious example is banks. There have been policies that effectively reject profit-making by this sector through the Revitalization program which was aimed for the increase of lending to comparatively risky borrowers such as small and medium enterprises. Also, public opinion takes an extremely harsh view of bank profiting. In this sense, I have asserted that Japan�s banking business has been converted into a non-profit organization (NPO).
Source: Morgan Stanley Global Economic Forum
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