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Monday, April 25, 2005

JAPANESE PERSPECTIVES

Nonmanufacturing industries rising to meet global challengers


A number of Japanese firms are expected to report sharp gains in profits for the third straight year when they announce their earnings for the business year that ended March 31.

The ongoing recovery in the Japanese economy is being supported by the corporate sectors, and while public attention tends to focus on blue-chip companies in the manufacturing sector, such as Toyota Motor Corp. and Canon Inc., the nonmanufacturing sectors are starting to play an increasingly important role in Japan's economy.

Today, they account for about 64 percent of the nation's gross domestic product, 81 percent of the companies, and 69 percent of the jobs.

Since the nonmanufacturing sectors encompass a wide variety of businesses, including distribution, finance, transport, communications and services, few attempts have been made so far to examine and analyze the trend in the nonmanufacturing sectors as a whole. But recent research by Keidanren shows that nonmanufacturing firms in Japan have been steadily beefing up their competitiveness in recent years.

As part of a survey, Keidanren interviewed top executives at both Japanese firms, including Mitsui Sumitomo Insurance Co., Nippon Express Co. and Ryohin Keikaku Co. (of "Muji" brand fame), and foreign-affiliated companies, including American Family Life Insurance Co., DHL Japan Inc., and shopping mall operator Chelsea Japan Co. These firms have been expanding actively either in Japan or overseas and achieved major success.

Large numbers of foreign firms, including those covered in the latest survey, have entered the Japanese market at a time when their Japanese counterparts are actively increasing activity worldwide. This has led to intensified global competition in the nonmanufacturing sectors as well.

Cross-border availability of international shipping, communications, finance and Internet services is rising sharply, as is direct investment by nonmanufacturing firms.

While global competition increases, the firms in each sector are trying to boost their competitive edge. To assess the outcome of those efforts, the Keidanren survey examined the competitiveness of Japanese nonmanufacturing firms in two different formats.

One of the more commonly used formats assesses corporate competitiveness by value added per employee. This method showed that the average competitiveness of nonmanufacturing firms fell 3.0 percent over the past five years while that of manufacturing firms rose 3.2 percent.

But such a comparison may not give a correct picture of what's happening because employment in Japan has diversified.

Nonmanufacturing sectors rely more heavily on part-time employees, who receive different wages and working hours than full-time employees. Therefore, a simple comparison on a "per-employee" basis will nominally show that the nonmanufacturing sectors lag the manufacturing sectors.

Therefore, Keidanren examined what each sector's added value "per personnel cost" was and found that the competitiveness of nonmanufacturing firms had climbed 4.8 percent over the past five years, compared with 5.3 percent among manufacturing firms. This shows that the competitiveness of Japan's nonmanufacturing companies is steadily rising.

To support the process, the government needs to further deregulate the nonmanufacturing sectors.

Government regulations can pose hurdles when firms try to expand operations overseas. It is imperative the government accelerate talks for services trade liberalization under the World Trade Organization and conclude free-trade agreements and economic partnership accords with other countries in East Asia.

Yoshio Nakamura is a senior managing director of the Japan Business Federation (Nippon Keidanren).


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