IV

Income, Output, and Employment

RYOYAKU WA KUCHI NI NIGASHIGood medicine tastes bitter

CAN THE Japanese economy expand sufficiently over the next decade to absorb into industrial pursuits not only the present 3 million surplus farm population¹ and the 1.3 million surplus commercial and service workers, but also the 800,000 to 900,000 new entrants to the labor force who annually seek employment for the first time?² In brief, can Japan find employment in the so-called “secondary” sector of the economy for a minimum of 8 million or a maximum of 12.3 million more persons by 1965?

As one recent Japanese survey stated succinctly: “Limited land, scarcity of resources and a huge population are the fundamental conditions on which Japan’s national economy is built and is operating. Industrialization is thus of vital importance for Japan’s national survival as a modern nation.”³

The best measure of the overall economic growth of a country is net national product in constant prices—the value of the annual flow of goods and services after allowances for materials and assets consumed in the process of production. According to the latest, and apparently best, estimates available, Japanese net product measured in 1928-32 prices rose from 1,784 million yen in 1883-87 to 14,564 million yen in 1933-37, an eight-fold increase in five decades.⁴ Over the same period population doubled, rising from 39 million in 1885 to 69 million in 1935. Although the statistics are unreliable, it appears that the number gainfully occupied rose from 19,872,000 in 1880 (81 percent in agriculture, fishing, and mining; only 13 percent in manufacturing, construction, commerce, and transport) to 32,483,000 in 1940 (46 percent in agriculture, fishing, and mining; 39 percent in manufacturing, construction, commerce, etc.). Since the labor force in agriculture, fishing, and mining fell slightly from 16.1 million in 1880 to 14.9 million in 1940, it appears that the 716 percent increase in Japan’s net product was accompanied by a 460 percent increase in employment in manufacturing, construction, transportation, commerce, etc., and a 7 percent decrease in primary sector employment.

In the light of these figures one can appreciate the startling magnitude of the task Japan faces in attempting to add 8 million to a 1956 labor force of 42.3 million and, at the same time, to shift 3 million from the present agricultural labor force of 14.5 million to the present non-agricultural labor force of 27.3 million and to shift 1.3 million from trade and services.⁵ Can Japan’s total output of goods and services be expanded sufficiently over the next decade to add from 8 (minimum) to 12 (maximum) million new jobs to the present 27.3 million non-agricultural employment total?

The recovery in Japanese income and output in the postwar decade has been impressive. National income (in constant prices) rose 32 percent between 1930 and 1940. From 1941 to 1946 it fell by 50 percent. From 1946 to 1957 it rose by 170 percent. The 1956 figure represented a nominal gain of 13.4 percent over 1955, but because of the rise in commodity prices during the year the real gain amounted to 10.3 percent. Allowing for population growth, the real per capita increase in national income in 1956 was 9.2 percent. In comparison, the figures for 1955 were 9.4 percent nominal increase over 1954, 9.6 percent real increase (because of a slight drop in commodity prices during 1955), and, allowing for population, an 8.4 percent increase in real per capita income. Thus the extent of the gains in 1955 and 1956 becomes clear.

This is made even more apparent when the 1955-56 figures are compared with historic rates of development both in Japan and elsewhere. In Japan, the index of per capita national income in constant (1928-32) prices is estimated to have moved as follows:⁶

TABLE IV-1. Japanese national income and gross national product, 1934-36, 1950, 1952-1956

a Yen at its 1934-36 average value.b Fiscal year.c Calendar year.

Source: National Income and National Economic Accounts of Japan, 1930-56, Economic Planning Agency, Research Division, National Income Section, Tokyo, November 1957.

This gives a rough annual average increase of 7.1 percent over the 60 years, although, of course, the rate varied considerably from decade to decade. In the United States and the United Kingdom, over roughly the same period, annual growth rates of 4.8 and 2.9 percent were attained.⁷ Thus the Japanese 1955-56 rate of increase of 8.4 and 9.2 percent in real per capita national income is remarkable. Even the 1949-56 average rate of increase of 6 percent compares favorably with Japan’s past.

By the end of 1956, real national income was 53 percent higher than the 1934-36 average and 64 percent higher than 1950. Yet it is clear that population increase absorbed much of these gains, for on a per capita basis real national income was only 17 percent above the 1934-36 level (see Table IV-1).⁸ Despite the considerable economic growth shown in 1955 and 1956 there were indications that the rate was beginning to slow down. From the abnormally low level immediately after the war, real national income increased by 85 percent from 1946 through 1951, but only 45 percent from 1951 through 1956. On a per capita basis the increase was 67 percent for the first half of the decade, 36 percent for the second half.⁹

TABLE IV-2. INDEXES OF JAPANESE PRODUCTION, 1946, 1948, 1950-1956

Source: Economic Statistics of Japan, 1956, Bank of Japan, Tokyo, 1957, Table 106, pp. 203-204.

Industrial activity expanded rapidly during the first half of the fifties, as a result of the stimulus of the Korean War and subsequent U.S. and U.N. procurement in Japan. In 1956 it was more than twice the prewar level and was 21 percent higher than 1955, as compared with an increase of 8.3 percent in 1955 over 1954 (see Table IV-2). The much higher level of population, however, reduced this large gain to a somewhat more modest figure. In Table IV-3 an index of population has been computed on a 1934-36 base and an index of real production, deflated for population, has been constructed. For 1956 this index stood at 167.9. Thus real per capita output in Japan may be said by the end of 1956 to have been some 68 percent above the prewar level. The largest gains were achieved in durable goods manufacture, chemicals, and electric power, with textiles and mining lagging behind.¹⁰

TABLE IV-3. INDEX OF JAPANESE INDUSTRIAL PRODUCTION DEFLATED FOR POPULATION, 1934-1956

Sources: Economic Statistics of Japan, 1956, Bank of Japan, Tokyo; Japanese Economic Statistics, Economic Planning Agency, Tokyo, January 1957, Section I.

Comparatively, there are two ways of viewing Japan’s industrial recovery. Since both Japan and West Germany started from such a low point after the war, their rate of increase was, of course, rapid as compared with countries expanding from higher initial postwar levels. As Table IV-4 shows, for example, Japanese industrial output increased by 271 percent between 1948 and 1956, exceeding the 256 percent increase for West Germany. Japanese expansion was far greater than the increase in world production, which rose 58 percent between 1948 and 1956. On the other hand, if one compares the level of world output in 1956 with that prevailing in 1937 it appears that despite the very large gains of recent years the Japanese have lagged behind. World production increased by 105 percent between 1937 and 1956; Japanese output rose by 77 percent.¹¹ As may be seen in Table IV-5, Japan failed to keep pace with expanding world production in six of the seven basic categories of output listed.

TABLE IV-4. INDEXES OF MINING AND MANUFACTURING OUTPUT IN SELECTED COUNTRIES, 1948, 1950-1956

a World excludes U.S.S.R., Bulgaria, Communist China, Czechoslovakia, Hungary, Poland, Rumania, and East Germany.

Source: Monthly Bulletin of Statistics, United Nations, April and May 1957.

TABLE IV-5. JAPANESE AND WORLD PRODUCTION OF CERTAIN BASIC COMMODITIES, 1937 AND 1956

a In million metric tons, except electricity (billion kwh.) and aluminum (thousand metric tons). Excludes U.S.S.R. and Communist China.

b In thousand metric tons, except electricity (million kwh.).

Source: Computed from Monthly Bulletin of Statistics, United Nations, April and May 1957.

Aware of this lag, the Japanese set out to do something about it. Aided by favorable world economic trends, they were able to undertake a remarkable increase in capital investment and equipment expansion from mid-1955 through mid-1957. The extent of the investment boom which developed may be seen from the following figures:

JAPAN: SELECTED INDICATORS OF EQUIPMENT INVESTMENT
(million yen)

Source: Fuji Bank Bulletin, September 1957, p. 16.

For the fiscal year ending March 31, 1957 investment in producers’ durable equipment was up 76 percent over the previous year, the new supply of industrial equipment funds increased 82 percent, and new orders for machinery were 2.7 times those of the previous fiscal year. The rate of gross private domestic capital formation in Japan rose from 15.9 percent in 1955 to 21.7 percent in 1956 (see Table IV-6). As a result of this increase in capital expansion, plant capacity in Japanese manufacturing rose 48 percent between March 1955 and March 1957. Production expanded to about the same extent, so that the operation rate in Japanese industry (roughly 80 percent—see Table IV-7) was the same in March 1957 as in March 1955 despite the expansion in capacity.¹²

TABLE IV-6. GROSS PRIVATE DOMESTIC CAPITAL FORMATION, JAPAN, 1950-1956

Source: Statistics of National Income and Expenditure, United Nations, Statistical Office, National Accounts Branch.

The Ministry of International Trade and Industry attributed this 1955-57 investment surge to six factors: (1) greater stability of corporate finances, due to the increase in corporate profits; (2) the encouraging business outlook, the continuance of world prosperity, and the expansion of international trade; (3) the decline in money rates in Japan in 1955 and the early part of 1956; (4) the fact that output in key industries such as iron and steel, machinery, chemicals, electric power, etc., was coming close to or had reached existing capacity; (5) the extensive growth of new industries such as petrochemicals, synthetic fibers, and plastics; and (6) the pressing need for rationalization and better equipment to improve the competitive power of Japanese heavy industries in overseas markets.¹³

TABLE IV-7. OPERATION RATES IN JAPANESE INDUSTRY, 1950-1957

Source: Ministry of International Trade and Industry, Tokyo.

The Economic Planning Agency observed:

Why, then, did such a sharp increase in investment occur? First, we must point to the extremely intense desire for modernization as the driving force of the investment boom. Second, increased profits and the ease with which investment funds were available under the easy money situation contributed materially to the investment boom. Third, as fund improvement became easy for medium and small enterprises, an unprecedented degree of equipment investment initiative developed in these quarters. Fourth, rush additional installations were carried out in the textile industry and department stores. Fifth, as it was advantageous, under the Capital Replenishment Law and the Special Taxation Measures Law, to carry out capital increases by January-February, 1957, all enterprises hastened to raise their capital diverting their proceeds to investment.¹⁴

Aware that with the pace of technological advance, the role of investment becomes the key factor in economic growth,¹⁵ the Japanese have kept their rate of capital formation high. This may be seen from the following table:

CAPITAL ACCUMULATION RATES IN MAJOR COUNTRIES^a

a Public and private gross capital formation.

Source: Monthly Statistical Bulletin, United Nations, December 1957, p. xvii.

The key roles in Japan’s early postwar capital accumulation were played by the government and by the Bank of Japan. Government capital formation, which had averaged but 3.0 percent in 1934-36, rose to a peak of 11.2 percent in 1947 and then averaged 8.0 percent for the period 1948-56, more than double the prewar average.¹⁶ When government lending was curtailed in 1949-50, bank lending expanded sharply to take its place, but by 1953 government capital formation was almost back to the 1948 level. This increased reliance on government capital was due to industry’s greater dependence on external funds since the war, and to the banking system’s financial difficulties in the early postwar years. Whereas before the war industry generated more than half its funds internally, from depreciation allowances and retained profits, in the postwar years it has raised 60 percent of its new capital externally. The vast postwar inflation not only rendered depreciation allowances minute and meaningless but also brought a necessary expansion in corporate financing through a vast increase in corporate debt.¹⁷

By the end of the postwar decade Japanese industry had imposed a substantial layer of new and efficient plant upon a large base of antiquated and obsolete equipment. The latter worried the Japanese. The Mitsubishi Economic Research Institute declared: “Although equipment capacity on the whole is excessive at present, it is rather short from a long range point of view. Quantitatively, most equipment is so superannuated that it must be modernized or rehabilitated. Consequently either enlargement investment or rationalization investment must constantly be made.”¹⁸

The Economic Planning Agency declared:

It must be pointed out as one of the commonest weaknesses of Japanese enterprises that the rate of operation fluctuates sharply and is unstable in accordance with the changes of business conditions, and that it has remained at a very low level in normal times, even if it is true that once in many years it may be upped to a very high level and antiquated equipment may be employed as a result. A particularly important task of the enterprises will be to carry on investments for modernization of equipment, while at the same time maintaining a high level of capital efficiency. If Japanese enterprises continue to face the current boom while preserving obsolete equipment, Japan will remain a limited supplier of the world. It is essential that consideration should be given to the heightening of the rate of operation of highly efficient up-to-date equipment and to the modernization of equipment and elimination of obsolete and antiquated equipment.¹⁹

Aware of their backwardness in this respect, as one means of tackling the problem the Japanese have been inviting foreign, particularly United States, private assistance in technical instruction and patents on an investment basis. By March 31, 1957, 662 private technical assistance contracts had been signed, 448 of them, or 67 percent, with U. S. firms.²⁰ These agreements, which follow no one set pattern, provide for Japanese use of foreign patents, permit the sending of Japanese engineers and technicians to the foreign corporation’s plants for training, bring United States and other foreign engineers and specialists to Japan to train the Japanese in new techniques and procedures, etc. For such benefits the Japanese agree to pay royalties to foreign firms on a basis which varies from one contract to another. The capitalized value of these contracts, at the end of 1955, was placed at $353 million, and during fiscal 1956 the Japanese paid royalties on them amounting to $28 million.

More than half of the contracts were in the machinery field, with the chemical industry also accounting for a large number. For example, the chemical division of B. F. Goodrich, through investment in the Japanese Geon Co., Ltd., was instrumental in establishing a new vinyl plastic plant in Japan to increase Japanese output of this product by 50 percent. B. F. Goodrich furnished the engineering design and manufacturing techniques. Radio Corporation of America has aided Tokyo Shibaura Denki in the latest techniques in the manufacture of cathode ray tubes and transistors. It has assisted more than two dozen Japanese companies to manufacture radio equipment and television sets. E. I. du Pont has entered into a number of contracts to enable Japanese companies to manufacture synthetic fibers. Armco Steel has helped both the Yawata and Fuji Steel companies to modernize their techniques.²¹

Every three months, for over seven years, the Japanese government has issued an announcement of fields in which foreign technological assistance is desired. Recent lists concentrate mainly on the heavy industries—electrical machinery, machine manufacturing, aircraft, chemicals, engineering, and metal manufacturing. The list changes from quarter to quarter as new fields are added and old ones, where needs have been met, are removed.²²

These and other encouragements to industrial modernization and expansion are sorely needed if the ever-expanding Japanese labor force is to be absorbed in gainful employment. The gravity of the situation is highlighted by the fact that while manufacturing output increased by 196 percent between 1950 and June 1957, manufacturing employment rose only 35 percent. Conditions were even worse in mining. Over the same period, output rose 44 percent, but employment fell by 27 percent. The figures are as follows:

JAPAN: OUTPUT AND EMPLOYMENT
(1951 = 100)

Source: Ministry of Labor, Tokyo.

The contrast between the slow growth of employment and the rapid growth of output is attributed by Japanese economists to the fact that manufacturing industries as a whole had excess labor employed in 1949-50 and that much of the subsequent expansion took place simply by making fuller use of such labor. Between 1949 and 1956 employment rose by only 2 percent a year, in contrast with an annual average increase in manufacturing output of 18 percent over the same period.²³

Japanese official estimates of unemployment are not very meaningful because only a small minority of those without work register with the labor offices as fully unemployed.²⁴ The majority either fall back on the family, the traditional unit of social security in Japan, or return to the ancestral farm during periods of urban unemployment, or find some minor service function to perform part time, which prevents them from being classified as “unemployed.” For example, at a time when the official unemployment figure in Japan was said to be only 660,000, a responsible American observer declared: “However, as many persons are only partially employed it has been estimated that hidden unemployment and underemployment in Japan may total as high as 8,000,000 persons.”²⁵

Japanese sources tend to confirm this impression. One declares: “It is impossible for us to understand fully Japan’s unemployment problem without full apprehension that this total statistical unemployment of 660,000 cited above, is not more than that part of an iceberg visible above the surface of the sea.”²⁶ Another states:

A study of the agricultural and commercial population alone shows that there now exists a latent unemployment problem of several millions. According to past experiences, there is always a strong tendency for the unemployed population during periods of depression to infiltrate primarily into agriculture and petty trade. This fact can be viewed as characteristic of the labor structure of Japan. Of course, the existence of such a concealed unemployed population is not limited to agriculture and commerce alone. There is no doubt that this is true in the manufacturing, building, and other industries. As mentioned previously, the Labor Force Survey shows that the unemployed population is very small, giving the outward impression that the labor situation is very favorable. The facts show this is to be absolutely contrary to the real state of affairs. It must be admitted, therefore, that the labor situation in Japan is a serious problem.²⁷

The Oriental Economist asserted:

Here in Japan, the level of employment is high in agriculture, forestry and fishing (primary industries) and low in manufacturing, mining and construction (secondary industries). There are other factors contributing to unstable employment, such as the comparatively large number of self-employed and family employees and the working hours lengthened or shortened to an extreme. For this reason the surplus labor force which should basically be put down as actually unemployed is recorded as actual workers. In other words, employment in Japan is shown in the form of short working hours and low income rather than in the number of unemployed.

The number of persons “incompletely employed” in Japan today is, according to the Labor Ministry survey, at least 3,000,000. (This is a total of persons seeking to change their occupations, persons desiring to find further employment because their weekly working hours are less than 35, and persons desirous of jobs though they make no effort to find employment.) The statistics prepared by the Unemployment Counter-measures Council show that the number of persons whose income is less than standard pay reaches as many as 6,000,000, a figure which is nearly nine times as much as that which represents the completely unemployed. This clearly shows that the number of the completely unemployed is but a drop in the ocean.²⁸

The Economic Planning Agency stated:

Completely unemployed persons totaled 600,000 in fiscal 1956. As the number of workers employed totaled 43,000,000, the ratio of completely unemployed persons to the number of workers employed was less than 2 percent. In advanced countries, unemployment ratio of less than 3 percent is considered to mean full employment. Is Japan’s employment situation satisfactory then? It is by no means so. The reason is that in a country like Japan where agriculture and small business are preponderant, the real problem is the existence of underemployment with low productivity and low income. The employment situation cannot be gauged, as in more advanced countries, merely by the number of completely unemployed persons.²⁹

Thus unemployment, underemployment, or “latent unemployment,” as it is sometimes called, is a real problem in Japan, and the absorptive capacity of agriculture or of small-scale commerce and services such as street stalls, peddling, or other petty self-managed or family trading enterprises may be near the limit. As of the end of 1956 the labor force of 42.3 million consisted of 10.8 million self-employed, 13 million unpaid family workers, 560,000 “unemployed,” and 17 million paid employees (see Table IV-8). In Japan paid employees constituted but 46 percent of the labor force,³⁰ compared with 91 percent in the United Kingdom and 82 percent in the United States. Most of the unpaid family workers and self-employed were either in agriculture or in small-scale trade or a variety of petty services. The labor force in agriculture is held to contain a surplus of three to five million: that is, there are an estimated three to five million underemployed in agriculture. In addition, Professor Okasaki estimates that there are 1.3 million surplus workers in trade and commerce. They are employed in petty enterprises as family workers; they may earn some income but it is insignificant, and they are dissatisfied with their work. Thus for practical purposes they can be regarded as unemployed or underemployed. Recent estimates of “latent unemployment” range from Tsuru’s 2.6 million to the 6.8 million given by the Government Council on Employment Policy.

TABLE IV-8. LABOR FORCE SURVEY, JAPAN, 1950-1956

a December 1956.

Source: Economic Statistics of Japan, 1956, Bank of Japan, Tokyo, Table 151, pp. 305-306.

But even if one disregards this category and reasons that everyone can stay where he is now without any further depressing effect on the Japanese economy, what of the 800,000 to 900,000 new entrants to the labor force each year? It can hardly be argued that they too can be absorbed into the primary or tertiary sectors. Over a decade their number will amount to seven or eight million. To find employment in the industrial (secondary) sector for these new workers—that is, to add about eight million employees to the present 13.2 million³¹—will require a vast expansion in manufacturing output.

Japanese economists speak of the “dual structure” of their economy. They point out that Japan’s employment structure is polarized, with large-scale modern enterprises on the one hand and small enterprises based on pre-modern labor-capital relationships, ultra-small enterprises operated by family management, and agriculture on the other.³² The proportion of medium-sized enterprises is very small. This may be seen from the following:

JAPANESE MANUFACTURING INDUSTRY BY SCALE
(percent of total)

Source: “Problems of Small and Medium Enterprise,” Fuji Bank Bulletin, Tokyo, Vol. VIII, No. 2, June 1957, p. 8.

Whether the capital-short agriculture and small enterprise sector can continue to absorb the bulk of the increase in the labor force, as it has over the past decade, is open to doubt. Less effective demand per worker is generated in this sector than in the modern sector. Low productivity results in low wages in the pre-modern sector. Thus for future absorption of additions to the labor force with rising standards of living, the Japanese must look to modernization of the backward sector and further growth of the modern sector. “It has become clear that full employment—the ultimate objective of the Japanese economy—should be achieved, not merely by reducing the number of completely unemployed persons but by eliminating the dual structure through economic modernization and growth.”³³