Media  Global Economy  2022.06.14

Japanese businesses complacent with low wages end up seeing their international competitiveness decline

Managers, failing to realize that they disregard human resources, should actively hire talented people with high academic qualifications

The article was originally posted on JBpress on April 19, 2022

Legal System/Governance People-to-People Exchange China

1. Japan’s GDP per capita has fallen in relative terms

Japan, which is only a small territory and has poor natural resources, is underpinned only by excellent human resources. This was often heard in former times but not in recent years.

In the 1990s, Japan ranked second or third among the members of the Organisation for Economic Co-operation and Development (OECD) in terms of gross domestic product (GDP) per capital. It was believed that this was because the abilities of Japanese were high.

Since the 2010s, however, its rank has remained low, at around 20th.

A look at changes in Japan’s GDP per capita based on data from the World Economic Outlook (October 2021) of the International Monetary Fund (IMF) indicates that if the figures for 1990 represent 100, the index is 151 for 2000, 174 for 2010, and 155 for 2020.

Japan’s GDP per capita grew by 50% in the 1990s but has remained almost at the same level for the past 20 years.

During this period, if 1990 represents 100, the index for China’s GDP per capita jumped by about 30 times over 30 years, at 274 for 2000, 1297 for 2010, and 3030 for 2020.

A look at South Korea’s GDP per capita using the same method shows that its index nearly quintupled over 30 years, at 186 for 2000, 349 for 2010, and 479 for 2020.

These figures demonstrate that Japan’s GDP per capita has dropped in relative terms compared to those for OECD members and East Asian countries such as China and South Korea, and furthermore, the range of decline for Japan has been large.

2. Long-term decline in academic ability after pressure-free education

In terms of human resources, Japan’s relative decline is conspicuous in the aspect of education for human resource development as well.

The Japanese government reconsidered “cramming” as it was increasingly criticized in the 1980s and shifted its educational policy to “pressure-free education” in the early 1990s.

Specifically, in 1992, it introduced a five-day learning system into public schools, and in 1996, it reduced what students must learn by revising its official guidelines for school teaching.

But immediately after these changes, experts started to point out that students’ academic ability was falling as exemplified by the fact that Japan was slipping down the ranks of the OECD’s Programme for International Student Assessment (PISA), and for this reason, the government has striven to review pressure-free education gradually.

A look at the results of PISA in 2018 alone shows that Japanese students’ academic ability in science and mathematics had recovered but that the decline in ability to read and comprehend had not been stemmed.

It is also indicated that the level of higher education in Japan is declining in relative terms. One example is that the number of Japanese students studying at first-rate universities and graduate schools in the United States has decreased significantly, and another is that major Japanese universities have long continued to fall in the world ranking of institutions for higher education.

3. Japanese businesses ignore academic backgrounds

The author believes that the reason for this decline in academic ability is that Japanese businesses make little of scholastic achievement.

Backed by the substantial improvement of income levels as described above, China and South Korea rapidly shifted its society to one that emphasized high academic qualifications, seeing the number of students who studied at top-rank universities in the United States rise substantially.

As a result, not only the number of Chinese and South Korean students who graduated from major universities in Europe and North America but also that of those who completed the doctor’s course has grown significantly.

In China, the prerequisite for hiring new employees at central government agencies, government agencies of major provincial cities such as Beijing, Shanghai, and Shenzhen, and principal state-owned and private enterprises is that applicants have completed a doctor’s course, and the minimum requirement for taking employment examinations is that applicants have at least completed a master’s course or higher.

University graduates are rejected in the process of screening documents.

The majority of Japanese businesses still employ university graduates, being delayed in establishing employment standards and salary systems for persons who have completed a doctoral course.

When they employ persons who have completed a doctor’s course, many Japanese businesses take the age factor into account based on the standards for those who have a master’s degree. There are very few high-level treatment systems that give consideration to highly technical abilities.

There are differences in the level of technical knowledge between persons who have completed a doctor’s course and those who have done a master’s course, and in addition, in terms of time and money spent until the completion of the course, the former differs significantly from the latter.

Despite these differences, if they treat the two equally, it naturally follows that Japanese businesses cannot hire excellent human resources.

Top-flight global corporations in Europe and North America require high-level expertise in diverse fields such as marketing, research and development, IT systems, accounting and taxation, and statistics.

For this reason, it is clear that they cannot survive in fierce competition in the global market unless they have the high-level knowledge of persons who have completed a doctor’s course.

In the Silicon Valley, where the world’s very highest-class businesses compete ruthlessly in technological development, researchers from countries such as the U.S., China, and India make their presence felt more, while the presence of Japanese businesses is weak with only a few Japanese researchers found there.

As described above, the decline in Japanese students’ academic ability is having increasingly serious effects on the competition with European and North American top-ranking global corporations.

But for their part, Japanese businesses lack a sense of crisis, nor is there an attitude to address this problem in earnest among them.

One of the reasons for this is probably that they do not understand the seriousness of this problem because they have only a few leaders who comprehend the necessity of high expertise provided by persons who have completed a doctor’s course or one of similar class.

It should be considered that this stance of managers who have ignored human resources with high expertise is one of the factors that have made Japanese businesses less competitive in the long run, leaving Japan’s GDP per capita sluggish over the years.

4. Low wages at Japanese businesses

Another important issue of human resources is that wages for employees in general are kept at low levels.

Businesses that earn a certain level of profit should be able to raise wages.

However, rather than raise wages, many Japanese businesses consider it as important to curb wage hikes, maintain high profitability to stabilize share prices, and return the benefits of expanding profits to shareholders.

On the other hand, wages for employees are kept low, forcing them to reduce consumption, and this continues to prevent total domestic demand in Japan from growing.

If this continues, the Japanese economy will never recover.

There is yet another problem with corporate conduct which resembles the one taken up above.

It is said that when they order parts and other products from suppliers, large corporations often demand harsh price reductions to reduce costs, thus maintaining profitability.

As a result, suppliers cannot expand their profits with wages for their employees kept low. This also causes domestic demand to remain sluggish.

If Japanese managers consider their companies’ employees and suppliers as important as shareholders, there will probably be more room for paying higher wages.

Demanding price reductions by applying pressure to suppliers, which are in a disadvantageous position, in order to reduce the price of finished products based on the benefit of such reductions, thereby maintaining competitive power, is an act of treating suppliers lightly.

Businesses should appropriately evaluate the efforts of suppliers in the same way as those of their own employees, set purchase prices that respect the value added, and reflect them in the prices of their finished products.

It is the responsibility of major manufactures to offer finished products that still sell through ingenious marketing.

The sales pitch of many corporate managers is to emphasize corporate efforts to maintain the prices of products and services under the slogan “customer focus” even if their costs rise.

In many cases, however, employees and suppliers are sacrificed, while customers, managers, and shareholders enjoy the benefits of such efforts.

The truth is that although employees work with their colleagues at the workplace earnestly to make business processes better through their job every day and bring results such as quality improvement and productivity growth, wage hikes that correspond to their efforts are put off.

It is difficult to define and quantify the value added to products and services (which can be calculated automatically from financial indicators, but the value thus calculated does not always indicate the genuine value added).

It is even more difficult to reflect it on the price appropriately.

There is a limit to price increases and sales growth because the Japanese market is not expanding and because the market competition is harsh.

There are also many cases in which businesses, fearing the risk of price increases resulting in sales decreases, avoid taking on new challenges.

Therefore, in general, they are highly unlikely to find a breakthrough as long as they remain in the domestic market.

Advancing into overseas markets requires excellent human resources.

Highly competent people grasp needs in overseas markets precisely, make free use of high technology to research and develop products and services that meet market needs, and reduce costs through productivity growth.

Those who achieve these results are, in many cases, persons who have completed the doctor’s course. Managers who know how to use them can make employees in the world happy.

5. Guiding principles required for management that focuses on human resources

It is generally considered as desirable that wages, which constitute a part of the cost, are kept at a low level and stable. But if seen from a different point of view, they are what sustain the livelihood of employees.

Low wages torment employees. Essentially, it is the virtue of Japanese businesses to consider employees as important, as if they are family.

If they attempt to put the virtue into practice, they must strike a desirable balance among factors such as selling prices for customers, dividends for shareholders, wages for employees, and purchase prices for parts and other products from suppliers.

No clear answer to this challenge can be obtained from economic theory, however.

When one thinks about this issue, Great Learning, a Chinese classic, preaches that “things have their roots and branches.” “Roots” refer to the moral way of life one should follow, and “branches” to the result obtained therefrom.

If one starts from “roots,” one can obtain “branches,” but the reverse does not hold.

If one gives top priority to obtaining “branches” or results when you act, one will stray from the moral way of life and end up being unable to obtain cooperation from those around one in the medium and long run.

This means that when one thinks about things and put them into practice, one can take the right step and obtain what should be obtained if one knows the order of priority.

In corporate management, rising profits and share prices should be considered as “branches.” If managers wish to achieve these goals, they should start from “roots,” which means considering customers, employees, and suppliers as important.

Firmly keeping this guiding principle in mind, they should plan an appropriate balance of operations for individual products and services that suits the market environment and put the plan into practice. If the business environment changes halfway through this process, they should adjust the balance flexibly according to the market conditions.

By continuing these efforts, they can gradually become able to achieve well-balanced management, and this is the concept of the order of priority advocated by the Chinese classic.

This concept can also be applied to the treatment of persons who have completed a doctor’s course as discussed in Section 3 and wages for employees in general as discussed in Section 4.

If more Japanese businesses pursue consistent, unwavering management in accordance with this guiding principle, they will certainly find a path they should follow to enhance their competitiveness and pay higher wages to employees, thus helping expand domestic demand in Japan and recover the Japanese economy.

Because we live in a period of rapid changes, we need the philosophy of “things have their roots and branches” as a support for management so that we are not swayed by the rough waves of the time.

Based on this principle, Japanese businesses are expected to play an active role in the global market by valuing both capable persons who have completed a doctor’s course and rank-and-file employees in general.