Russia-Japan Society:
http://ru-jp.org/

Irina Timonina

Professor (Dr. Of Economics), Leading Researcher, Center of Japanese Studies, Institute of Oriental Studies, Russian Academy of Sciences

INFORMATION REVOLUTION AND RISE AND DEVELOPMENT OF NEW ECONOMY IN JAPAN

The turn of the century saw the formation in leading industrialized countries of the so-called "new economy" based on two interrelated processes - information revolution and globalization.

T. Sakaiya, head of Japan's Economic Planning Agency describes the new economy as "a society where the value of knowledge is a primary source of economic growth and corporate profits," or "a knowledge-value society" and thinks its rise and development is the dominant idea of postindustrial development.

In Sakaiya's opinion, such a society has taken shape now in North America and some European and Asian countries. At the same time, whereas in the United States the new economy is in a mature stage, the process in Japan is lagging behind 10 or 15 years. The main reason for the lag lies in the success of the Japanese model of "consumer industrial society" and the continuing support of it from the state [1].

In my address I will try to assess the progress of the information revolution in Japan and its impact on the shaping of a new economic growth model.

Information Technologies and their Proliferation

Japan is behind the United States with regard to the level and spread of information technologies (IT), but progress in this area is there. Leaving aside technological aspects of the problem, let us see how widespread information technologies are in Japan [2].

Companies sector. The proportion of companies that use the Internet, among the total number of major companies, has grown from 11.7 percent in 1995 to 88.6 percent in 1999 (according to a forecast, this proportion will reach 100 percent by the year 2005). High also is the degree of the use of other communication networks: LAN - 90.3 percent, e-mail - 86.0 percent; Inter-Company Network - 44.5 percent; Electronic Data Interchange (EDI) - 40.2 percent. 66.3 percent of the companies have their own Web pages.

The use of the Internet and other information systems is not as widespread among smaller companies and enterprises; it was 5.8 percent in 1996 and 19.2 percent in 1999 [3].

Information technologies are being used especially intensively in management units of major companies. According to a survey conducted by the Economic Planning Agency (EPA) all the surveyed companies use personal computers in their managerial structures, 80-90 percent of them use notebooks and Personal Handyphone Systems (PHS), 40-50 percent use cellphones with Internet capability; 40 percent of the firms have more than one e-address per every member of the administrative staff. The rates are lower in production units: a little more than half the companies use personal computers and/or notebooks; there are on the average 6 users per one computer there (against 2-3 users in administrative units), and one e-address is shared by 6-20 employees.

Information equipment and services are also spreading at a growing rate in the household sector. Whereas it took 75 years to provide telephone service to 10 percent of the households, it took 19 years to provide fax service to the same number of households, 15 years in the case of mobile and car phones, 13 years to install computers, and 5 years to provide Internet services. The number of households using the Internet grew from 3.3 percent in 1996 to 11.0 percent in 1999.

In 1999, the number of mobile and car phones users exceeded the number of users of conventional phones (56,900,000 and 55,500,000 users respectively). Once Internet services became available via mobile phones, the number of Web users soared (by 59.7 percent in 1999 to 27.100,000) and the number of i-mode system users exceeded 10,000,000 in 2000.

The volume of information on Web sites is also growing: it increased 6-fold between February 1998 and August 1999 alone.

Prospects of IT development depend largely on investments into this sphere and they began to grow intensively beginning in the fourth quarter of 1999. However, Japan is still behind the United States for their absolute and relative size.

The proportion of investments in IT in Japan in all private investments in machines and equipment in the 90s fluctuated between 14 percent and 27 percent. In 1999, they were worth 22.4 trillion yen (approximately $187 billion) against $510 billion (42 percent of all private investments in machines and equipment, more than 20 percent throughout the 90s).

Lagging behind in software (with the exception of animation and games), in 1997 Japan came level with the United States for the share of capital funds related to IT in its GDP (about 20 percent).

In the future, Japanese companies, primarily major companies, intend to increase investments in IT (data of a 2000 survey by questionnaire in %)[4]:

	Intend to up investments regardless of profitability	Intend to up investments taking account of profitability	Intend to up investments taking account of costs and results ratio	Do not intend to up investments
All companies	7.8	12.0	64.2	16.0
Major companies (with capital more than 1 billion yen)	7.5	10.7	70.8	11.0
Processing industry	8.2	12.2	73.8	5.8
Other industries (excluding energy companies)	7.3	12.0	64.2	16.0
Small joint ventures (with capital under 1 billion yen)	8.0	12.9	59.3	19.8
Processing industry	7.0	12.3	63.2	17.7
Other industries (excluding energy companies)	8.8	13.7	56.8	20.71

Development of e-Business and Forming Information-Communications Complex

Information technologies become embodied in the development of the so-called e-commerce where both business to commerce (B2C) and business to business (B2B) transactions are completed through webs. Furthermore, included in e-commerce are activities to create, run and provide access to webs (Internet-related business).

Japan's e-commerce market is much less than the one in America [5]:

В2С

B2B

* in parenthesis - share in the overall production demand
** in parenthesis - share in overall consumer demand
*** Ministry of Economy, Trade and Industry forecast

The electronic form of transactions between companies is used most widely in electronic and auto industries. In spring 2001, for example, Sony adopted on-line services for 35 producers of electronic and information equipment, which buy from Sony semiconductors, boards and displays. Thanks to this innovation the company plans to sell in 2001 nearly two thirds of its products (at cost value). Matsushita Denki is planning a similar net with 40 consumers.

B2C services will grow in 2001 to 824 billion yen. The number of currently operating virtual stores in Japan has reached 27,300. Most of them deal in food and drinks (7,700 stores), culture and relaxation goods (5,700), trendy goods and accessories (4,300), household and hygienic goods (2,500), computers and software (1,400).

Internet-based commerce has been adopted by Japan's biggest round-the-clock supermarkets Lawson and Seven-Eleven and book-trading firms. This is the supermarkets' answer to the lack of floor space and a way to increase the number of potential customers. In the wake of deregulation in the mid-90s, these trading firms began to master e-commerce using what were new lines of goods for them - cosmetics, medicines, and they also began to provide banking services.

We can also see that banks are growing remarkably active in e-commerce. Beginning in 2000, there began a second boom of banks' investments in the IT sphere (the first boom came at the end of the 80s) when capital investments grew during the year by 33.2 percent (software accounted for 58 percent and hardware, for 41 percent) [6]. Nearly all major banks in Japan have set up "virtual branches." There has also appeared the first Internet bank (Japan Net Bank), which operates exclusively via the web.

The e-industry market operated by companies that provides access to the Internet is also rather dynamic: in 1997-1999 it increased by a factor of almost 2.5 - from 2.7 billion yen to 6.4 billion yen (it is expected to rise to 31.3 billion yen in 2005)[7].

Alongside with e-commerce, which is a new component of the information-communications complex, it has some other components like for example scientific research, mass media and, understandably, manufacture of various equipment for data reception, processing and transmission. The latter is part of the electrical engineering sub-sector of the processing industry where it is gaining an increasingly important position and directly effects the sectoral structure of public production. According to this author's calculations, the volume of production of semiconductors, integrated circuits, computers of all types, car navigation systems, computer games and printers (this is an incomplete list of IT-related types of equipment) amounted in 1999-2000 fiscal year to 9.2 trillion yen or approximately 9 percent of the total worth of processing industry products, or half the shipments of the electrical engineering sub-sector. This is twice the contribution of the metallurgical industry and is half as much again the contribution of the chemical industry [8].

Effects on Economic Model

In which ways can e-commerce and the emergence of the inter-sectoral information-communications complex influence the economy and can they help the economy pull out of the depression?

First, the adoption of information technology is having an effect on the organization of production. The most frequent answers in a poll conducted among managers on this matter were: "upgrading of customers service," "upgrading data exchange inside companies" and "broader planning possibilities." Assessments were rather reserved with regard to the end results of companies' activities - bigger sales, more customers, new types of services. And only a small proportion of those polled expected fundamental changes in companies' organizational structures.

Second, there is certain interrelation between information technologies, human capital and organization of workplaces. The use of personal computers will enable workers to focus on more intellectual tasks (data analysis, decision-making, talks with partners). Improved data processing cuts management costs, leads to decentralization and flexible organization of workplaces and this for its part creates a need for more independent and skilled workers.

Studies of correlation between information technology, human capital and organization of labor show that firms more advanced with regard to IT have better-quality labor resources and decentralized organization. Companies with higher information-support and human-capital parameters boast higher productivity. However, a firm cannot adopt information support without changing anything else, this would not do anything good. Changes are needed to bring forth the advantages of information resources [9].

One of such pressing changes seems to be giving up the keyretsu system because the system of transactions via the Internet calls for change of partners and the practice of renewable contracts reduces the effectiveness of the use of web-based transactions both in supply and sales logistics chains.

Furthermore, information technologies offer opportunities for decentralization of companies' organizational structures (which is especially important in conditions of globalization) and at the same time they compel it.

It is also necessary to give up the lifetime employment system because of the changing requirements to workers and increasing mobility of workforce. A rather important new problem in this connection, and especially in conditions of economic depression, is the effect of IT adoption on employment. The total number of employed in the country by the year 2004 is expected to increase by 3,670,000. IT will create 2,490,000 jobs, or two thirds of the total number (0.76 million jobs in the information-communications business; 0.65 million jobs due to new products and services using IT; 1.05 million jobs thanks to the adoption of e-business).

We can at the same time expect a 3,540,000 reduction in the number of jobs, 1,630,00 jobs will be lost to the spread of IT (the use of home computers, transactions via the Internet, and so on), or 46 percent of the overall employment reduction.

Thus, with the overall net increase in employment of 130,000, IT will provide 860,000 new jobs.

We should note, among the macroeconomic changes attributed to the progress and spread of IT, the changing structure of investments in favor of information-oriented sectors and types of activities. However, such investments can pay off in a meaningful way only on the medium- or long-term basis because realization of IT's advantages calls for structural reform, and multiplier effect here is beyond comparison with processing industry sectors.

As for e-business, we should exercise caution appraising its possible effects on economic growth. The matter is that not all e-businesses create new demand and supply sectors. Trading via the Internet, for example, simply changes the system of distribution and under conditions of a saturated domestic market its effect on economic growth can be taking place by way of cutting the number of links in the trading chain and lowering the level of prices. At the same time, as such a system of trade expands, Japan's consumers get direct access to foreign markets of goods and services and in this way the competitive environment becomes tougher for national producers.

In other cases, progress in e-commerce is attended by the emergence of new services or a fundamental change in their quality. This is typical of, for example, the tourist business (with the use of special "electronic guide" location systems, transportation services (computerization of urban transport), banking (virtual banks). Analysts see the importance of the latter in the context of general structural reform of credit and financial and changes in the entire system of financing in the accumulation of private deposits in investment funds intended among other things for funding venture businesses, something traditional financial institutes cannot cope with at the present time.

As for the "web industry," its effect on economic growth is in a more obvious form because proliferation of information technology in any event brings about demand for hardware, software and infrastructure.

Based on all that has been said above, we can argue that the possibilities for an accelerated economic growth and greater productivity offered by the use of information technology have not been realized yet. Furthermore, we should not overestimate potentials of IT especially in terms of its ability to pull the economy out of depression considering the fact that IT's influence can be traced more on the qualitative level [10].

A possible counterargument to this standpoint is the 80s-90s "information boom" in the United States. I would think that this phenomenon has to do in may ways with the special factors of development of the US economy - its economy and population were better prepared for embracing IT, there were R&D achievements in this sphere and the monopolist position of US transnational corporations.

Japan does not still have all these conditions and there are many problems and hurdles. For example, despite the current reform, administrative regulation continues to exist in spheres that include communications [11], and this justly explains the relatively high cost of using the Internet (In Tokyo they pay 8,050 yen a month, in New York, 5,195 yen a month).

The venture business regarded as the motive force of the "new economy" is developed weakly. Depression has slowed down even the formation of new ventures. For example, as little as 3.3 percent of all newly-formed companies were venture companies, which is less than the share of those that went out of business.

Although the number of patents in the area of e-commerce registered in Japan began to grow in the mid-90s, this area continues to lag behind the United States in the standard of technological advancements and in the extent of the development of information-communications infrastructure.

Progress of e-commerce in all spheres is hindered by the absence of sufficient guarantees of safety of transactions and the lack of laws in this sphere (for example, legitimacy of electronic signatures).

All these things, including the continuing operation of the lifetime employment system; keyretsu and other traditional trappings of the Japanese market economy model and the country's difficult financial and economic position reduce the possible effect of IT as a new resource of economic growth.

References

[1] Sakaiya T. Rebuilding the Japanese Economy for a "Knowledge-Value" Society. - Japan Quarterly. April-June 2001, p. 3; Sakaiya T. The Future of the Japanese Economy and the IT Revolution. Lead speech at the 39th Council Meeting at Ministerial Level. - http://www5.cao.go.jp/2000/b/0626b-daijinkouen-e.html.
[2] Data from: The Age of Information Technology Revolution. Special Report. - Japan Almanac. 2001, pp. 9-23.
[3] The Effect of IT (Information Technology) on Productivity: IN Search of Japan's "New Economy." The Economic Planning Agency. - http://www5.cao.go.jp/2000/f/1031f-seikakukoka4-e/main.html; Asahi Evening News. 21.03.2001.
[4] Japan Almanac 2001, p. 23.
[5] Japan Almanac 2001, p. 16-17.
[6] Toyo keidzai tokei geppo. 2001, No. 7, p.7.
[7] An aggregate cost of third-generation cell communication, Internet and interactive television services will amount to 3.5 trillion yen.
[8] Calculations based on Japan Almanac. 2001, pp. 150, 155, 157, 158.
[9] The Effect of IT (Information Technology) on Productivity: In Search of Japan's "New Economy." Economic Planning Agency. - http://www5.cao.go.jp/2000/f/1031f-seikakukoka4-e/main.html.
[10] N. Tanaka, president of the 21st- Century Public Policy Institute, believes that the Internet can decentralize and disperse organizational structures of companies, but it is a mistake to think this business as profitable and being a model of the new business - The Nikkei Weekly. 19.03.2001.
[11] According to studies, there is a close link between relaxed regulation and the number of cellphone subscribers.