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Stagnation and Structural Adjustments of Nonmanufacturing Industries during the 1990s 1 2

February 1999
Bank of Japan
Research and Statistics Department

Click on ron9902a.pdf (160KB) to download the full text.

Introduction

Since the burst of the financial bubble at the beginning of the 1990s, the Japanese economy has seen several signs of recovery only to find them elusive before consolidating its growth. Among the factors which apparently weakened this recovery process, particularly after 1993, is the stagnation of nonmanufacturing industry. The operating profits-to-sales ratio of the nonmanufacturing industry, for example, has kept declining and thus shown a stark contrast with the ratio of the manufacturing industry, which improved from 1993 to 1997. Moreover, the recovery of the business fixed investment of the nonmanufacturing industry has lagged far behind that of the manufacturing industry since 1993. This clearly goes against expectations from past experience, which indicate a faster investment recovery in the nonmanufacturing industry than in the manufacturing industry.

The Japanese economy is no exception in experiencing an expansion of the service sector, and the share of the nonmanufacturing industry in the overall economy has now overwhelmed that of the manufacturing industry. Besides, the nonmanufacturing industry has often underpinned the Japanese economy when it faced unfavorable macroeconomic conditions such as a sharp appreciation of the yen, by leading a recovery of business fixed investment and absorbing excess employment of the manufacturing industry. Meanwhile, the nonmanufacturing industry still contains many regulated industries, which lack competition and incentives to improve productivity and thus render prices extremely high compared to those in foreign countries. During the 1990s, deregulation has progressed in the nonmanufacturing industry while the manufacturing industry has intensified its efforts to reduce costs against the background of globalization and the sharp appreciation of the yen. If these environmental changes have some relation with the sluggish performance of the nonmanufacturing industry during the 1990s, the current problems of the nonmanufacturing industry can be understood as being structural rather than cyclical.

The purpose of this paper is to analyze the background of this sluggish performance of the nonmanufacturing industry during the 1990s, mainly using profit indicators. Given the importance of the nonmanufacturing industry in the Japanese economy as well as the seemingly structural nature of its problems, this analysis is also expected to provide some insight regarding the desired state of the Japanese economy for the coming century.3

  1. This is a summary of the titled paper (in Japanese), which was published in the February 1999 issue of the Bank of Japan Monthly Bulletin.
  2. Correspondence: tsuyoshi.ooyama@boj.or.jp
  3. Due to some data availability problems, in this paper, unless otherwise noted, "the nonmanufacturing industry" refers to the following six industries: wholesale and retail, construction, real estate, transportation and communication, services, and electricity and gas.