The Impact of the Increasing Division of Labor in Japan's Manufacturing Industry
Between Domestic and Overseas Production Bases
- The Prospects for Boosting Economic Growth Through Differentiation of Domestic
and Asian Production -
December 20, 2005
Until recently, the motivation for the transfer of production activities to Asia by Japan's manufacturing sector was to cut costs by taking advantage of the supply of cheap labor. For this reason, as capital investment in Asian production subsidiaries rose, the volume of reverse imports from Asia to Japan grew, and the ratio of sales to Japan in the sales of Asian production subsidiaries rose. Since fiscal 2002, however, a new trend has emerged, with the ratio of sales to Japan falling although capital investment in Asian production subsidiaries has begun to rise once more.
One reason for this phenomenon is the increasing tendency among Japanese manufacturing companies to differentiate domestic and Asian production, and place more emphasis on domestic production. In Asia, where local demand is rising in conjunction with rapid economic growth, they are focusing on expanding supply to the local market; in Japan, they are striving for greater added value, partly by taking a "black box" approach to manufacturing know-how, and nimbly strengthening production systems to cope with shorter product cycles. As the growth of local markets in Asia and the pressure to offer greater added value and establish production systems with rapid reflexes is set to continue, it is highly likely that the future will bring still greater differentiation of production in Asia and in Japan.
What impact will these changes have on the Japanese economy? If the differentiation of Asian and domestic production increases, the "win-win" relationship whereby the volume of production in Japan grows in tandem with that of Asian subsidiaries will grow stronger, and, by fiscal 2010, will boost the balance of trade by ¥0.6 trillion as compared with fiscal 2003 and employment by 100,000 jobs. By contrast, if Japan's manufacturing sector becomes embroiled in a price war, or if the drive for higher added value fails and the differentiation of Asian and domestic production does not increase, the zero-sum tendency whereby a rise in production by subsidiaries in Asia leads to a fall in domestic production will gather strength, reducing Japan's balance of trade by ¥3.8 trillion and employment by 650,000 jobs.
From this macro perspective, the increasing differentiation of Asian and domestic production in recent years is likely to have a positive impact on Japan's economic growth. Policy support is essential to boost the chances of success of the differentiation scenario. If the position of domestic production is to be strengthened, it will be necessary to pursue joint projects involving industry, government and academia, reduce corporate income taxation and take steps to ensure the effectiveness of intellectual property rights, among other measures.
For more information on the content of this report, please contact: Ikuo Masuda the Japan Research Institute, Limited.