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The culture and economics of Japan Essay

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Introduction

For nearly a decade, the industrialized world’s attention has focused on the ailments of its second-largest economy: Japan. Huge government debt, a sliding yen, a floundering stock market, a troubled banking system, and price deflation unheard of in a major industrialized country since the 1930s have combined to depress an economy and humble a business system that were, only 20 years ago, the envy of the world.
The Japanese system had always had its critics, of course; in their 2000 book Can Japan Compete?, Michael E. Porter, Hirotaka Takeuchi, and Mariko Sakakibara argued that the Japanese economy is made up of two distinct parts, highly productive export industries, and an uncompetitive domestic sector. Yet, with performance slipping even in the robust areas during the last decade, many executives, economists, and strategists began to believe that the Japanese were no longer a threat in the global marketplace. The IMD World Competitiveness Yearbook 2003 even ranked Japan 11th in competitiveness, a remarkable decline from its top ranking a decade earlier, and below all other large industrialized economies, including the United States, Canada, and the United Kingdom

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Culture

A. The culture of frugality

Culture and the diet A. The culture of frugality The resource-poor environments of Japan may have brought forth the culture of thrift and frugality among its population (living or doing with less, not so much by choice but more by constraints). Attempting a proof of the linkage between scarcity and a culture of frugality or knowing how long this observed culture might persist into the future is beyond the scope of this study. The notion of “recycling (haibutsu-riyo),” relatively new in most of the West, and the U.S. in particular, was popularized in Japan well before World War II. The term “culture” is used here as this habit or tradition of thrift seems to linger on even after the nation becomes more affluent, whether by choice, inertia, or perhaps by constriction as the houses, buildings, or social infrastructure already built are still there in use. The scarcity of land keeps land value high which affects how ordinary Japanese households allocate their income. Lesser land area and smaller homes mean fewer construction materials, not to mention smaller pieces of furniture, household appliances, and automobiles, as well as consumption of utilities (electricity and water).

Modest building accommodations for schools and business firms, and offices for government and non-profit organizations, plainly visible in Japan, are undoubtedly attributable to high land prices. The culture of thrift and non-waste seems to permeate throughout the country. The implications: i. At a given level of income, a family, living in a smaller house, constrained by high cost of land and of building materials, as in resource-poor Japan, can reasonably be expected to channel a larger proportion of that income to saving. This, however, would depend, in part, on the price elasticity of demand for land, since the total outlays for land will not necessarily fall when the demand is less than unit-elastic. Two comments are in order in this regard. First, the utility of land for residential use relative to other amenities of life (education, sports, travels, food, clothing and so forth) may be such that the share of income for land acquisition may be smaller with high land price, assuming a price elastic demand for land. Second, even in the inelastic demand (and thus the total outlay for land is larger at a higher price), as long as the demand is price-sensitive (as is certainly likely), we can envision lesser consumption of other goods that are complimentary to housing (utilities, furniture, household appliances – demand for automobiles are also affected, as noted). And this saving could more than offset the increment to outlays for land (with inelastic demand for land).

If so, we have reason to expect a suppressing effect of high land price on combined outlays for housing and related goods. The balance of disposable income over these combined outlays is divided between savings and other expenditures. Here, much of the “other expenditures” would go for broadly defined luxury goods and services, basically the non-necessity items, thus giving the savings a likelihood to claim larger shares in that balance. The chronic high household savings in postwar Japan can be more readily understood in conjunction with the preceding observations. We should, of course, not overlook Japan’s well known longevity as another factor to have bearing on high saving, given low pubic provisions the nation has to offer for the retired. A larger pool of saving and the resulting lower interest rates positively affect business investment and productivity. This is more important when there are impediments to mobility of capital across nations, as was the case in the prewar period and even during much of the postwar decades. ii. Lesser spending on schools, public buildings and infrastructures would allow lower taxes. iii. Lower living expenses (lower housing related expenditures and lower taxes) could, to some extent, have moderating effects on labor wage demand.

These are all favorable to the business sector and help lower unit costs of production and raise competitiveness of domestic firms in the global market. *The railroad tract and the width of train compartments, in surface and subway systems, are generally narrower than those seen in other countries. Four lane highways in many parts of Japan seem barely equivalent to a three-lane system in the U.S. The topography may have been a reason, but could it be an extension of the culture being described here? A recent work by Joseph Gyourko and Richard Voith, “Price Elasticity of Demand for Residential Land,” Lincoln Institute of Land Policy, Working Paper, June 1999) suggests that the price elasticity of demand for residential land (based on the study of the Montgomery County, Pennsylvania housing market) is around -1.0, implying that while the amount of land in use falls at higher price, the outlay for land acquisition remains largely unchanged. An earlier study by Sirmans and Redman provides estimates of the price elasticity of demand, based on 52 U.S. FHA housing market areas in 1967, 1971, and 1975, which indicate inelastic demand for residential sites for all housing areas and for all three time periods.

The estimates of the elasticity ranged in value from -.35 to -.80. (See C.. F. Sirmans and Ronald L. Redman, “Capital-Land Substitution and the Price Elasticity of Demand for Urban Residential Land,” Land Economics, 55, 2, May 1979.) If we assume the demand elasticity for urban land to be greater at a higher price (a concave demand curve over higher price ranges), it is possible that for Japan’s major urban areas, the elasticity may be greater than in many medium-size U.S. citites which comprised a large majority of the 52 urban housing market areas. Relevant also, given the stringent building code of earthquake-prone Japan (that relates to wind design and seismic design, along with the “structural calculations” (Article 4-b of the nation’s Building Standard Law Enforcement Order), the cost of the structure (house), complimentary to land use, is higher and would tend to make the demand elasticity of land higher. Only in the case of inelastic demand for land and where, at the same time, savings from smaller outlays on house and related (complementary) goods are outweighed by the incremental spending on land, would this proposition be invalid. may be smaller with high land price, assuming a price elastic demand for land.

Culture and the diet A. The culture of frugality The resource-poor environments of Japan may have brought forth the culture of thrift and frugality among its population (living or doing with less, not so much by choice but more by constraints). Attempting a proof of the linkage between scarcity and a culture of frugality or knowing how long this observed culture might persist into the future is beyond the scope of this study. The notion of “recycling (haibutsu-riyo),” relatively new in most of the West, and the U.S. in particular, was popularized in Japan well before World War II. The term “culture” is used here as this habit or tradition of thrift seems to linger on even after the nation becomes more affluent, whether by choice, inertia, or perhaps by constriction as the houses, buildings, or social infrastructure already built are still there in use. The scarcity of land keeps land value high which affects how ordinary Japanese households allocate their income. Lesser land area and smaller homes mean fewer construction materials, not to mention smaller pieces of furniture, household appliances, and automobiles, as well as consumption of utilities (electricity and water).

Modest building accommodations for schools and business firms, and offices for government and non-profit organizations, plainly visible in Japan, are undoubtedly attributable to high land prices. The culture of thrift and non-waste seems to permeate throughout the country. The implications: i. At a given level of income, a family, living in a smaller house, constrained by high cost of land and of building materials, as in resource-poor Japan, can reasonably be expected to channel a larger proportion of that income to saving. This, however, would depend, in part, on the price elasticity of demand for land, since the total outlays for land will not necessarily fall when the demand is less than unit-elastic. Two comments are in order in this regard.

First, the utility of land for residential use relative to other amenities of life (education, sports, travels, food, clothing and so forth) may be such that the share of income for land acquisition may be smaller with high land price, assuming a price elastic demand for land. Second, even in the inelastic demand (and thus the total outlay for land is larger at a higher price), as long as the demand is price-sensitive (as is certainly likely), we can envision lesser consumption of other goods that are complementary to housing (utilities, furniture, household appliances – demand for automobiles are also affected, as noted). And this saving could more than offset the increment to outlays for land (with inelastic demand for land).

If so, we have reason to expect a suppressing effect of high land price on combined outlays for housing and related goods. The balance of disposable income over these combined outlays is divided between savings and other expenditures. Here, much of the “other expenditures” would go for broadly defined luxury goods and services, basically the non-necessity items, thus giving the savings a likelihood to claim larger shares in that balance. The chronic high household savings in postwar Japan can be more readily understood in conjunction with the preceding observations. We should, of course, not overlook Japan’s well known longevity as another factor to have bearing on high saving, given low pubic provisions the nation has to offer for the retired. A larger pool of saving and the resulting lower interest rates positively affect business investment and productivity.

This is more important when there are impediments to mobility of capital across nations, as was the case in the prewar period and even during much of the postwar decades. ii. Lesser spending on schools, public buildings and infrastructures would allow lower taxes. iii. Lower living expenses (lower housing-related expenditures and lower taxes) could, to some extent, have moderating effects on labor wage demand. These are all favorable to the business sector and help lower unit costs of production and raise competitiveness of domestic firms in the global market. The railroad track and the width of train compartments, in surface and subway systems, are generally narrower than those seen in other countries. Four-lane highways in many parts of Japan seem barely equivalent to a three-lane system in the U.S.

The topography may have been a reason, but could it be an extension of the culture being described here? A recent work by Joseph Gyourko and Richard Voith, “Price Elasticity of Demand for Residential Land,” Lincoln Institute of Land Policy, Working Paper, June 1999) suggests that the price elasticity of demand for residential land (based on the study of the Montgomery County, Pennsylvania housing market) is around -1.0, implying that while the amount of land in use falls at higher price, the outlay for land acquisition remains largely unchanged. An earlier study by Sirmans and Redman provides estimates of the price elasticity of demand, based on 52 U.S. FHA housing market areas in 1967, 1971, and 1975, which indicate inelastic demand for residential sites for all housing areas and for all three time periods.

The estimates of the elasticity ranged in value from -.35 to -.80. If we assume the demand elasticity for urban land to be greater at a higher price (a concave demand curve over higher price ranges), it is possible that for Japan’s major urban areas, the elasticity may be greater than in many medium-size U.S. cities which comprised a large majority of the 52 urban housing market areas. Relevant also, given the stringent building code of earthquake-prone Japan (that relates to wind design and seismic design, along with the “structural calculations” the cost of the structure (house), complimentary to land use, is higher and would tend to make the demand elasticity of land higher. Only in the case of inelastic demand for land and where, at the same time, savings from smaller outlays on house and related (complimentary) goods are outweighed by the incremental spending on land, would this proposition be invalid.

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