Challenges and Direction of

the Industrial Policy

December , 2012

Tadao Yanase

Ministry of Economy, Trade and Industry

Before the Great East Japan Earthquake

The Industrial Structure Vision 2010 June 3 ,2010: released by METI Minister’s Task Force

Industrial Structure Vision 2010

We analyze the background of the current stalemate into three factors.

［1st factor］: Problem of the overall industrial structure

( i.e. “too dependent on automobile” and “too many companies

in one sector”)

［2nd factor］: Obsolete business model

(Why Japanese industries “win in technology but lose in

business”)

［3rd factor］: Incompetitive business infrastructure

(tax system, human resources, etc.)

2

For the reform, the first step must be to objectively observe and

recognize severe current situation and challenges of Japanese

industries.

Current Situation and challenges of Japanese Industry

● Extreme dependent on automotive industry

① Problems in the Overall Industrial Structure

２．Background to the Stalemate

Automotive contribution is

about 50 %

¥ 13 trillion

¥ 6 trillion

Contribution of auto industry to GDP

growth (2000 – 2007 )

Overall

(GDP growth rate) Auto industry

share

Not sustainable

3

Current Situation and challenges of Japanese Industry

① Problems in the Overall Industrial Structure

● Too many companies in one industry → low profitability.

LCD TVs

Japan North America Europe Asia & others

Sony; Sharp; Toshiba;

Panasonic; Funai ElectricVizio (U.S.) Philips (Netherlands)

Samsung (ROK), LGE

(ROK), TCL (China)

RailwaysNippon Sharyo; Hitachi, Kawasaki Heavy Industries; Tokyu car corp.; Kinki Sharyo

ALSTOM (France),

Siemens (Germany)

Hyundai Rotem

(ROK)Bombardier (Canada)

Nuclear PowerToshiba (WH), Hitachi,

Mitsubishi Heavy

Industries

GE (U.S.) AREVA (France)Doosan Heavy Industries

& Construction (ROK)

Water business

(Drinking water &

sewerage)

oray; Metawater; Ebara; Kubota, others *The number of leading companies is 16 in equipment, 9 in plant construction, and 3 in operation and maintenance management.

Veolia (Europe);

Siemens (Germany),

Suez (France)

Thames Water

(Australia)

GE (U.S.), Nalco

(U.S.)

Diagnostic imaging

equipment

Toshiba Medical systems,

Hitachi Medical,

Shimadzu; ALOKA

Philips (France) ?GE (U.S.)

２．Background to the Stalemate

4

Current Situation and challenges of Japanese Industry

5

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Comparison of profitability (5 industries)

Japanese companies profitability is less than half that of overseas companies

Heavy electric

machinery

Tele-communications

equipment Semiconductors Chemicals Cement

(Profitability)

(2007) (2007) (2007) (2007) (2006)

Foreign

Japanese

(source) Made by METI based on 2009 White Paper on Manufacturing.

Current Situation and challenges of Japanese Industry

● The “key” to capture the global market has shifted to the “scale and speed of investment.”

Domestic market size per company in South Korea(Market size in Japan=1)

South Korea’s domestic market is

smaller than Japan’s, but market size

per company is bigger in South Korea.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

199119921993199419951996199719981999200020012002200320042005200620072008

Samsung

Average of 5

Japanese companies

(trillion yen)After the major reorganization

of industries in South Korea

Passenger cars Iron and steel Cellular phones

1.5 1.5 2.2

Electricity Oil distributor

3.9 1.1

6

Investment in Semiconductor

After the major reorganization

of industries in South Korea

Average of

5 Japanese companies

13.4

8.0

9.0

10.0

11.0

12.0

13.0

14.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

manufacturer

0

10

20

30

40

50

60

70

1961年度 1966年度 1971年度 1976年度 1981年度 1986年度 1991年度 1996年度 2001年度 2006年度

Capital investment

depreciation

value

Basic trend: Among Japanese manufacturers, capital investment scale is limited to their depreciation value after 90’s.

Vintage of plant and equipment results in drop of their competitive position.

＜capital investment＞ （trillion yen）

Negative

trend

after 90’s

＜vintages of fixed capital＞

left：Financial Statements Statistics of Corporations by Industry(MOF) right：Business and Investment Survey of Incorporated Enterprises:, National Wealth Survey(Cabinet)

Getting older after 90’s

（year）

Sharp decrease of private sector’s investment

7

Current Situation and Issues of Japanese Industry

●Win by technology, but Lose in business

Car navigation system

DVD player

Solar power

generation

panel

Liquid crystal panel

DRAM memory

Sh

are in

the w

orld

mark

et (%)

② Problems Involved in Corporate Business Model

２．Background to the Stalemate

8

Ja

pa

n’s sh

are

in th

e w

orld

ma

rket (%

)

AF

+

Len

ses

Sh

utter

Ap

ertures

CC

D

CD

S

A

/D

LCD

Video

Memory

cards

USB

Closed / Open success strategy (Digital camera)

MCU

DSP

image

process-

ing

Controllers

AF and other lenses,

shutters, sensors

Applications

M/W

OS

Drivers

Image

compression

and

expansion

Fou

rier

Tra

nsfo

rmatio

n

Source: Materials from Univ. of Tokyo Professor Koichi Ogawa

Concentration and encapsulation

of integration know-how

Internal structure is a complete “black box” Only external

interface of digital

camera adheres to

global standard

Increase in mass

production by

other companies

9

Successful business model:

Closed / Open strategy (Digital camera)

1970s Late 1980s 1990s Around 2000s Present

Japan

U

.S.

Eu

rop

e

Shift in strategy

to open

inovation

Delay of change

Loss of world share

due to vertical integration

Loss of world share

Measures to boost

domestic economy

・Strengthening of location

competitiveness (corporate tax

reductions, etc.)

・Integration of intra-regional

markets

・Government-led joint research

・Drawing intellectual

human resources

・International

standardization

Restrictions on

foreign investment

Asia

Yen’s appreciation

Collapse

of bubble

economy

(1991)

Asian currency crisis

⇒Large industrial

reorganization (South Korea) Bold tax reductions for investment

・Pro-patent

・Joint research

Concentrated

investment in

specific

products

Three excesses

(debts, capacities,

employment)

Reform of state-run

enterprises, foreign capital

inflow policy (China)

Concentrated

support for

strategic fields

(clean energy,

next-generation

automobiles)

Bubble U

.S. an

d E

uro

pean

cooperatio

n w

ith lab

or

pro

ductio

n in

Asia

Winning back

world market

share by

promoting

modularization

models

Digital technology Modularization,

Move to open

technology

Changes in Added-Value Strategy in the World

Dominated the world

through vertical

Integral model and in-house

development policy

10

Competition

(Source) KPMG Japan

(Note) Figures for EU (15 countries as of 1998), OECD, and Asia are simple averages (but for Switzerland, the tax rate as of January 2008 was used).

○Actual tax burden ratios of major corporations in Japan and

South Korea

(Average for fiscal 2006 through 2008, on a consolidated basis)

Japan

South Korea

Sharp Canon Nominal

tax rate

35.8% 38.0% 40.7%

Samsung

Electronics

LG

Electronics

Nominal

tax rate

15.7% 19.2% 27.5%

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Japan

U.S. (New York State)

Asia (NIEs + ASEAN4 + China)

Advanced country average

42%

40%

34%

28%

41%

40%

26%

25%

(1) Corporate tax rate

Current Situation and Issues of Japanese Industry

③ Problems in Corporate Business Infrastructure

２．Background to the Stalemate

11

Port (Ranking of major ports in terms of containers handled)

・ Japanese port and harbor infrastructure has become less competitive.

・ Narita losing ground in terms of air cargo handled.

Airport name

1 Memphis (U.S.)

2 Hong Kong

(China)

3 Los Angeles

(U.S.)

4 Narita (Japan)

5 Seoul (ROK)

6 New York (U.S.)

7 Anchorage

(U.S.)

8 Frankfurt

(Germany)

Airport name

1 Memphis (U.S.)

2 Hong Kong

(China)

3 Shanghai (China)

4 Incheon (ROK)

5 Anchorage (U.S.)

6 Paris (France)

7 Frankfurt

(Germany)

8 Narita (Japan)

2000 2008

Airport (Ranking of major airports in terms of air cargo handled)

Port name

1 Hong Kong

2 Singapore

3 Kaohsiung

4 Rotterdam

5 Pusan

6 Kobe ・・・

10 Yokohama ・・・

15 Tokyo ・・・

24 Nagoya

Port name

1 Singapore

2 Shanghai

3 Hong Kong

4 Shenzhen

5 Pusan

6 Dubai

・・・

24 Tokyo

・・・

29 Yokohama

1994 2008

(2) Competitiveness of Distribution Infrastructure

12

・The inflow of highly intellectual foreign human resources into the Japanese labor market is very small

compared with other advanced countries.

Australia Canada U.K. U.S. France Japan

29% 26% 16% 13% 12% 0.7%

Ratio of foreigners who have finished higher education in the country (By far smaller compared with other advanced countries)

(2008)

Ratio of foreign students (Japan is lowest among major countries)

U.S. U.K. Germany France Australia Japan

5.8% 25.7% 12.4% 11.7% 28.6% 3.5%

(2009)

（Number of foreign students accepted ÷ Number of students attending higher education institutions)

(3) Competitiveness of Japanese Human Resources

13

Shift in industrial structure - Building a new industrial structure that connects potential strengths to business -

From a “Mono-pole

structure” based on

automobiles and

electronics

Industrial structure

From a efficient, one-

item selling industry

Sources of added value

- Infrastructure related /

system sales

globally(nuclear, water,

railroad, etc)

-Environment and energy

problem solving

industry(smart community,

next generation

automobiles)

-Creative industries (fashion,

content, etc.)

-Medical, nursing, health, and

child care services

- Frontier fields (robots,

space, etc.)

Strengthen 5 strategic areas

I

Environment & energy,

falling birthrate, aging

population

Impediments to growth

How to tackle the challenges

14

To a “Stable multi-pole

structure” based on the

5 strategic industrial fields

To industries focused on

system sales, business solutions

and cultural value-added

products

Converting inhibitors into

“Problem solving industry”

Shift in business model

- Win by technology and win in business -

High-level vertical

integral model and

in-house

development policy

Many firms in a war

of attrition in Japan

Keys to

glo

bal c

om

petitio

n

Industry

reorganization

and realignment

to meet global

markets

International

standardization

in coordination

with business

strategy

Modularization model

(strategic combination

of black box policy with

open policy and

international standards)

in the private sector

Investment scale and

speed

II

15

How to tackle the challenges

Shift from the dichotomy between globalization and domestic employment

- Job creation by aggressive globalization “and” building world-class

business infrastructure -

“Globalization = hollowing out”

theory

- Make domestic operations more

internationally competitive

(corporate tax reform aiming at

international standards, enhanced

logistics infrastructure)

-Attract High Added-value function of

foreign enterprises abroad(Asia

headquarter, R&D)

- Develop and invite high-level global

human resources

- Maintain key industrial capabilities

within Japan (support investments in

strategic areas, develop shop floor

professionals)

- Support SMEs’ entry into overseas

markets

III

Shift in growing

markets from Japan

and developed

countries to

emerging countries

Aims of the Industrial Structure Vision Embarking on a nationwide effort to strengthen industrial competitiveness

16

Development after

Industrial Structure Vision

18

・Providing preferential treatment in terms of immigration control for foreign people by “point system.” ・Bill on Special Measures for the Promotion of Research and Development by Certified Multinational Enterprises (aimed at making Japan an Asian business center)

・Amendments to the Law on Special Measures for Industrial Revitalization ・Establish the big fund for the open innovation (the Innovation Network Corporation of Japan (INCJ))

・FY2011 tax reform (reducing the effective corporate tax rate by five percentage points)

・Progress negotiations of Japan-EU, Japan-China-Korea FTA ,TPP, Japan-Canada EPA ・Support to industrialization of Agriculture

・Introduce a subsidy program for domestic site location ・An Act of Support for Strengthening the Management of Small and Medium Enterprises

Promoting economic partnership for high-level liberalization

Enhancement and retention of key industrial capabilities

Attract and educate for higher-level global human resources

Reorganization of industries to enhance their competitiveness in the global market

Corporate tax reform aiming at international standards

Cross-cutting policies

Major progress after the Industrial Structure Vision 2010

Major progress after the Industrial Structure Vision 2010

19

・Introduction fund by strategic partnership between the government and private ・Adoption the projects to cultivate overseas

・Enforcement of the Act on special Measures Concerning Renewable Energy ・Storage battery strategy ・Bill to amend the Act on the Rational Use of Energy

・Support for the export of infrastructure and related operational management services ・Demonstrative experiments on smart community technologies

・Promotion of R&D in Frontier fields ・Identification of seven strategic fields of International standardization(next-generation automobiles, etc.)

Overseas sales of all-inclusive infrastructure packages

Environmental and energy solution business

Creative industries (fashion, content, etc.)

Medical, nursing, health, and child care services

Frontier fields (robots, space, etc.)

Strategic areas

・Bill to Promote Businesses to Address Economic and Social Issues ・Promotion of Japanese-style medical care with integrated devices and services overseas

Reducing the effective corporate tax rate by 5 percentage points

Effective corporate tax rate (including local taxes)

20

(FY2011)

40.69% (FY2012-2014)

38.01% (FY2015~)

35.64%

Cut by 5%

New Economic challenges after the Great East Japan Earthquake

０．Repair of Fragility of supply chains against earthquake and flood →Relatively repaired ”reconfirming Japanese strong point”

１．Continuous deflation

３．Supply shortage and cost increase of electricity and energy (by the accident at the Fukushima Dai-ichi nuclear power station and unstable Middle-East politics)

２．Risk of hollowing-out by further appreciation of the yen exchange rate

４．Financial problem in Europe

22

23

Shrinking equilibrium and gradual decline of the private sector

・Households: With suppressed consumption, savings continue to increase.

・Corporations: Weak domestic investments lead to excess savings.

National wealth keeps shrinking Nominal GDP has decreased by over 40 trillion yen in the last four years

Difficult to reallocate a shrinking pie

Current status: Shrinking equilibrium and gradual decline

Nominal GDP

(2007FY)

513 trillion yen

(2011FY)

470 trillion yen

▲ 43 trillion yen

Limitation of business management based on patience and cost cutting ①

During the recovery phase starting in 2002, domestic demand failed to provide a

sufficient driving force for the Japanese economy as the benefits of increased exports

did not trickle down in the form of higher wages

Japan U.S.A.

(Sources) “National Accounts,” OECD; net values

24

90

100

110

120

130

140

150

160

170

180

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ

2002 2003 2004 2005 2006 2007

Export

Private-sector

Investments

Employees’

compensation

90

100

110

120

130

140

150

160

Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ

2002 2003 2004 2005 2006 2007

Employees’

compensation

Export

Private-sector

Investments

Limitation of business management based on patience and cost cutting②

Japan’s import price index has risen significantly while export price index has been on a downward trend (i.e., deterioration in the terms of trade).

25

The Japanese industry today may be poor in its ability to increase or create value added (i.e., ability to pass costs

on to prices).

Japan U.S.A.

Euro Zone Asia

【Note】 (Source) IMF International Financial Statistics

Import prices are U.S.dollar-denominated. Asia includes India, Indonesia, Malaysia, Philippines, Thailand, etc.

Import price index

Import price index

Import price index

Export price index

Export price index

(Year 2000=100)

(Year 2000=100) (Year 2000=100)

(Year 2000=100) (Year) (Year)

(Year) (Year)

Import price index

Export price index

Export price index

55

60

65

70 19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

フランス

ドイツ

日本

イギリス

アメリカ

（労働分配率＝雇用者報酬/国民所得：％）

（年）

Limitation of business management based on patience and cost cutting③

■Despite reduced compensation for employees, the labor’s share of national income remains high in Japan.

26

Labor’s share of national income

(Source) OECD National Accounts

Unless Japanese companies build ability to create and increase value added,

Japan will never be able to stave off shrinking equilibrium and gradual decline.

Japan

France

U.K.

United States

Germany

(Labor share = Compensation of employees / national income: %)

(Year)

Consumers also exercise patience out of anxiety about their future

Relationship between the savings rate and

post-retirement concerns

Impact of anxiety about post-retirement life and pensions on

saving behavior measured in the amount of additional savings

27

22

23

24

25

26

27

28

29

20 30 40 50 60

Ratio of people with post-retirement lconcerns (%)

Savings rate (%)

1985

2008

1,982

2,846

1,786

0

500

1,000

1,500

2,000

2,500

3,000

Thousands of yen

With more people feeling anxious about post-retirement life, the savings rate of wage-earning households is on the

rise.

People with post-retirement concerns tend to have additional savings of two million to three million yen.

→ Worries about post-retirement life cause consumers to suppress consumption (patience for restrained consumption)

Sources: Ministry of Internal Affairs and Communications, “Survey of

Household Economy”; Cabinet Office, “Survey on People’s Life.”

Extremely worried

about overall post-

retirement life

Worried about the

sufficiency of

pension and

insurance benefits

Worried about

possible cuts in

pension benefits

Source: Cabinet Office, “Annual Report on the Japanese Economy and Public

Finance 2009.”

Structural factors of the current scenario of shrinking equilibrium and gradual decline

28

Continuing deflation → Decrease in the

expected rate of growth

Worsening employment environment

→ Decline in labor income

Increasing anxiety about the future

→Increase in domestic savings

Weak domestic consumption

Business management based on patience

→ Low value added

Downward spiral of

the shrinking

equilibrium and

gradual decline

Efforts need to be focused on enhancing value added and increasing

households’ labor income.

Strong yen poses the risk of driving entire industries out of Japan

【Conventional offshoring】

◆ Serving the growing local markets

of host countries

◆ Taking advantage of cheap labor

29

Offshored operations may not return to Japan even if the yen weakens in the future

①Processing and assembling factories established

to produce for local markets

②Capital equipment-intensive industries and certain

materials industries giving priority to the “black-boxing” of

their technologies tend to stay in Japan.

【Ongoing offshoring】

◆Burdened with six handicaps, Japan

has lost locational advantage

◆Foreign exchange risk is too big to

be dealt with by a single company

①Processing and assembling factories producing

for the Japanese market transferred overseas

(e.g., Nissan’s production lines for the March

transferred to Thailand)

②Materials industries are joining the offshoring

bandwagon

(e.g., Toray’s carbon fiber production in Korea;

Downstream steel processing operations in Asia)

③Increasing dependence on overseas suppliers for

parts procurement

(e.g., Nissan Kyushu’s import dependency ratio

for parts procurement: 10%→40%)

Japan Korea

Sales 100.0 100.0

Raw materials Fuel Outsourcing etc. Labor Depreciation Customs

－67.8 －1.0 －3.2

－10.1 －4.8 －1.9

－64.4 －0.5 －3.2 －7.3 －5.5

0.0

(Total cost) 88.8 80.9

Operating profit 11.2 19.1

Interest paid －0.1 －1.0

Profit before tax 11.1 18.0

Corporate tax※ －4.4 －4.0

Profit after tax 6.6 14.1

Foreign exchange impact －12.8 －0.4

Profit net of forex impact －6.2 13.6

Why Japanese manufacturers find themselves in a difficult situation ■ A Japan-Korea comparison of automobile manufacturers’ profit-making structures shows that while declining cost

competitiveness and shrinking profit margins are factors behind why Japanese automakers are thrown into difficult

situations, the yen’s appreciation is having the biggest impact at the moment.

Source: Table was prepared by the Mizuho Corporate Bank’s Industry Research Division with some adjustments made by the presenter based on data from industrial and other

statistics issued by the Ministry of Economy, Trade and Industry and other information.

A. Cost competitiveness

C. Appreciation of the yen

【Comparison of Japanese and Korean automakers in profit-making structures】

30

※Effective corporate tax rates:

Japan 40%, Korea 22%

B. Profit margin

31

Japan may fall into a current account deficit as early as the second half of the 2010s

If nuclear power plants resume

operations and the yen

depreciates

If nuclear power plants remain shut

down and the hollowing out

continues

Current account balance

may turn negative in the

second half of the 2010s.

Japan’s current account balance (estimate) (Trillion yen)

How to tackle?

【Survival Plan①】 “Defensive” measures to cope with industrial hollowing out

33

Assisting companies to keep investigation in Japan

Supporting small- and medium-sized enterprises in restoring operations, making capital

investments

Addressing the mismatch between job openings and job seekers

“Defensive” measures are needed in order to prevent the rapid hollowing out of industries.

Ⅱ．Measures to counter the strong yen

Ⅰ. Developing globally comparable investment and business environment

Coping with overshooting yen appreciation

Establishing new economically viable energy policy and global warming policy

Promoting economic partnership for high-level liberalization

Reducing public service burden on companies

e.g., the effective corporate tax rate, the equipment investment tax (depreciable

property tax), the employers’ share of social security contributions

Ensuring sustainability in social security and public finance

→ Promoting integrated social security and tax reform

<Industries that cultivate potential domestic demand> <Industries that capture global demands>

Energy and environment Aging society and fewer

children

Bill to Promote Businesses to Address Economic and Social Issues

Quality evaluation

Support SMEs to expand overseas operations

Diversify and revitalize SME support service providers

Social regulations reviewed for changes

Financial support

Exploring overseas markets

Basic policy (collaboration with other ministries) →Plans approval and authorization

Creative industry (Agriculture,

foods, content, “Cool Japan”)

Infrastructure,

next-generation

automobiles

New energy industry (Rechargeable batteries,

electricity-saving services etc.)

Healthcare Industry (Medical and nursing care;

health-related services)

【Survival Plan ②】 Package of “Proactive” measures (Creation of new industries)

○Healthcare services

○Support services for working

women

○Development of new medical

care equipment, care robots,

automatic cradles, etc.

○Development and production

of energy-saving and

renewable energy

technologies and products

○Commercialization of energy

management services

・Exporting infrastructure systems and reviewing

the trade insurance

・TPP, Japan-China-Korea FTA, EU-Japan EIA, etc.

Bill to amend the Act on the Rational Use of

Energy

Act of Support for Strengthening the Management of Small and Medium Enterprises

34