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Tuesday, Feb. 10, 2009

Consumption amid constraints


During the period of Japan's rapid economic growth — from 1958 to 1973 — the three items that households yearned for most were a black-and-white TV set, washing machine and refrigerator. By 1965, when more than 80 percent of households had these items, the next targets for purchase were a color TV, an automobile and an air conditioner, which together drove national household consumption and gross domestic spending.

The oil crisis, which started in October 1973, put an end to rapid economic growth, and in the following year the Japanese economy experienced the first negative growth since the end of World War II. After 1975, however, the economy grew 4 to 5 percent a year.

A major contributing factor to this soft landing was steady consumer demand for these and other durable goods. In 1975, cars were owned by only 41 percent of the population, air conditioners by 17 percent, and microwave ovens by 6 percent. Video tape recorders were still at the starting gate.

With the help of the government's economic stimulus measures, the sale of these durable consumer items grew steadily. Notable was the growth in automobile sales, which had a widely favorable impact on markets — from retail business to producers of materials.

During the 15 years from 1975 to 1990, which I define as the "period of slowed-down economic growth," automobile ownership rose from 41 percent of households to 80 percent. Thus it was the auto industry that served as the locomotive of the nation's economic growth in this period.

Since 1991, however, the car ownership percentage has remained virtually unchanged. As is the case with other durable consumer goods, the saturation of the market has limited car purchases to purchases of replacement vehicles. Car sales also have declined with the longer replacement cycle.

In the latter half of the 1990s, a large number of households began purchasing digitalized electronic items such as personal computers, digital cameras and DVDs. Increasing sales of these products, however, did not have much ripple effect on the overall economy. And now these electronic products, too, are approaching the market saturation point.

In fact, the state of saturation attained by automobiles and other durable consumer products has been the main factor in Japan's real economic growth rate of only 1 to 2 percent since 1991.

Introduction of new products that everybody needs or desires is a prerequisite for sustainable economic growth. As new products are popularized, household consumption grows steadily. When they reach their saturation points, the next generation of new products must be introduced. So what new products are needed now?

This is often called the century of environmental protection for two reasons: First, global environmental problems will become increasingly more serious, and, second, environmental constraints will trigger economic growth.

Generally speaking, innovation takes place only when there is "insufficiency" or "constraint." So what are the insufficiencies or constraints of the 21st century? Answer: the desire for a healthy, long life with environmental restrictions. That's why attention is focused on research and development in the fields of biotechnology and environmental protection.

Slogans of U.S. President Barack Obama, as he took office last month, promoted the "Green New Deal" and creation of "green jobs." These terms obviously stem from the close resemblance between the current American economy and that of 1933, when Franklin D. Roosevelt entered the White House amid the Great Depression. Roosevelt's New Deal is said to have saved the nation. Obama is aiming to stop global warming as well as shore up the U.S. economy and create employment opportunities by implementing policies to fight global warming.

Obama has pledged to invest $150 billion over the next 10 years to develop renewable energy sources, such as solar and wind-power generation, and to save or create 4 million jobs. He also aims to provide financial support to the development of electric and plug-in hybrid automobiles. European countries, South Korea and China are also working to revitalize their economies by investing heavily in eco-friendly cars and the development of renewable energy sources, while Japan's government has started mapping out its own version of the Green New Deal with the Environment Ministry playing the key role.

Many products aimed at protecting the environment, particularly those that contribute to preventing global warming, have already moved from development to mass production. The bottleneck is cost. For example, it costs around ¥2.3 million to install solar panels on the roof of a house to generate 3 to 3.5 kilowatts of electricity. Electric cars are likely to be very expensive. Actions on the part of the government are needed to encourage the use of these and other eco-friendly products, including: (1) Letting the private sector deduct from taxable corporate income the R&D costs related to reducing CO2 emissions. (2) Obligating utility companies to purchase solar cell-generated electricity at several times the market price. This system is already being tried in Germany, where utility companies pay three times the market price. (3) Making car acquisition and possession taxes proportional to fuel efficiency. This means raising taxes on gas guzzlers while lowering them on more efficient vehicles. (4) Introducing an environment tax to lower the life-cycle costs of fuel-efficient cars and power-saving electric appliances.

Through these measures, consumers would be encouraged to buy cars with good gas mileage and to install solar power systems. They would be motivated not only to replace what they already have but also to make new purchases. Although further study is needed to ascertain the extent to which such measures would impact the economy and create employment opportunities, the government should waste no time in adopting them.

Takamitsu Sawa is a professor at Ritsumeikan University's Graduate School of Policy Science and a specially appointed professor at Kyoto University's Institute of Economic Research.


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