Japan has outsourced engineering along with manufacturing

According to this source, Yoshio Watanabe, a professor of electrical engineering at Kanagawa University states that many Japanese companies have outsourced research, development, and engineering overseas in the last twenty years.

The same source states that science, math, and engineering are unpopular fields of study for Japanese students.

One theory regarding the decline in interest in science in advanced countries states:

“Highly developed countries in science and technology tend to face the problem that science literacy declines. This is because, in highly developed countries, outcomes of science and technology
becomes a “Black-box” and difficult to understand the mechanism behind the phenomenon”.

In an interview in 1998, Professor Ryoichi Ito, the President of The Japan Society of Applied Physics described his view of the “black box” problem:

“I think the reason is quite simple; we are surrounded by “black-box” technology. For example, when you open up a traditional watch you can see the cogs moving around; but nothing moves in modern watches. The fact that a television produces a moving image is taken for granted. In the days of the vacuum tube, if you opened up a radio you could see glowing valves and could see something “working”. These days, equipment is all solid state and it is not possible even to begin to imagine how it might function. The only things that you can still see working are bicycles. It’s becoming almost impossible to carry out basic repair to a car by yourself.

Q: Have you noticed any differences in the students who are entering your university nowadays?

Professor Ito: Yes, there have been many changes in the type of students we teach. One characteristic is that most of them have never carried out any experiments. They’ve never soldered joints or used tools to build equipment-or even repaired a bicycle. It’s very difficult to teach them how to carry out experiments. They have never experienced that “small electric shock” that many people used to receive. when playing with electrical equipment. They don’t have a feeling for what electricity is and how to use it in practice.”

This theory is doubtless partially correct.

A more likely cause of decline of interest in science is that scientific research organizations become large and bureacratic; slow to absorb new ideas and methods. Application of scientific advancements become the domain of multinational corporations and government, which suppress innovations that are not produced within their organizational systems. Students in their later teens can observe this and choose other, more rewarding career paths.

The NY Times reported in July 2010 that “large Japanese companies are increasingly outsourcing and sending white-collar operations to China and Southeast Asia, where doing business costs less than in Japan.” However, the Times reports,

“Japanese outsourcers are hiring Japanese workers to do the jobs overseas — and paying them considerably less than if they were working in Japan. Japanese outsourcers like Transcosmos and Masterpiece have set up call centers, data-entry offices and technical support operations staffed by Japanese workers in cities like Bangkok, Beijing, Hong Kong and Taipei.”
Japan is shipping both jobs and people overseas. Per a 2004 JETRO report:

Expanding Japanese Presence In East Asia Reflects Shift To Offshore Production
• At present, 60% of newly established overseas operations of Japanese manufacturers are in China and other parts of East Asia. Unlike Japanese affiliates in Europe and North America, however, these companies tend to sell output to their parent companies in Japan, rather than in the local market.
• The trend reflects efforts by the parent companies to shift production offshore, particularly assembly and finishing operations to the ASEAN4 nations and China.

It will likely turn out to have been a policy mistake for Japanese companies to have shifted production overseas.

What happens if Japan runs a trade deficit

Edward posted this in a comment to the previous post:

"Those who argue that Japan can simply keep eating its own debt indefinitely are right until and unless the economy can no longer run an external trade surplus.

Theoretically, as population ages, this point will be reached, since productivity will fall with rising workforce median age. So we know there is an outer limit somewhere, although we have no idea at this point where that limit is.

Once Japan has a trade deficit it will all be over pretty quickly, since then of course they will have to attract funds to finance the deficit, and this is where things will start to get pretty tricky."

Japanese workers take pay cuts to stay employed

On December 27, Bloomberg reported that "Japanese workers´ willingness to accept wage cuts to safeguard their jobs is lowering prices and deepening deflation". This assertion was attributed to Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. Yamada also asserted that

"Japan´s jobless rate would be around 10 percent, compared with the current 5.1 percent, if companies had fired workers rather than cut pay since Japan fell into a recession in 2008. "

The monthly average wage in Japan has fallen to 315,294 yen, the lowest level since the government started tracking the data in 1990. Assuming an exchange rate of 90 yen to the dollar, that is roughly $3,500 per month, or $42,000 per year.

Presumably Japan's employers are reducing labor cost to offset the effects of a stronger yen versus the dollar and price competition from Chinese goods on profitability.

One effect that the falling wage levels will have is to reduce the ability of Japanese households to put savings into government debt. This will add some volatility to the prices for Japan's government debt.

Falling wage levels also will make it more difficult for Japan to reduce its dependence on exports as the primary source of GDP growth.

A provocative analysis of Japan's economic prospects

I highly recommend WHEN JAPAN COLLAPSES, released today over at The Burning Platform. While the tone of the piece is a bit hyperbolic, the author has gathered a solid set of data shown in chart form to back up his thesis. That is as follows:

"If the market demands an interest rate of anything more than 3.5% to buy their debt then Japan will not have the revenue to service its debt. As the interest rate approaches 3.5% Japan must use all its tax revenue to pay interest on its debt. It becomes readily apparent that Japan will eventually be forced to default on their debt. There are no good options left. A minor uptick in interest rates will sink the 3rd largest economy on the planet. The near failure of a 3rd world country (Greece) turned the world upside down. The failure of Japan would likely touch off a worldwide crash."

The key is that any significant shift away from the current global patterns of trade and investment flows will likely lead to major defaults, as governments and central banks have used their textbook policy options and the results have been maintenance of a delicate balance at best.