Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.

8, No5, November 2012 609
A Study in the Changes in the Japanese Companies’ Performance
and the Efficiency of Capital and Labor
*


Hajime Misono
Former Deputy Director, Cabinet Office (Affiliated with the Director for Economic Outlook to the Director General for Economic
and Fiscal Management)

Abstract
Under the ongoing severe economic situations after the collapse of the so-called bubble
economy in Japan, the Japanese companies have been required to achieve good efficiency of
capital and labor instead of just pursuing higher sales volume or increasing market shares as
they had been doing since the rapid economic growth era. On the other hand, if we take a mid-
and long-range outlook, a perspective of how to make efficient use of capital and labor
becomes important as both are getting relatively scarce due to the decrease in the savings and
the shrinking working population that look certain to come.
Here we try to understand if the Japanese companies are still only pursuing higher sales
volume or if they are making decisions focusing on the importance of the efficiency of capital
and labor in determining their investment and employment strategies, and make a study by
focusing on the bubble economy era, when the performance of the Japanese companies
underwent a drastic change.
The background against which the Japanese companies have been required to change their
investment and employment strategies is the advent of the severe management environment
and the change of the Japanese economy. As a key to grasp those situations, we first confirm
the outline of the Japanese economy, and then make versatile approaches to understand the
Japanese companies’ revenues and costs.
In the process of our analysis, we realize that company performance varied depending upon
the size of companies both in the manufacturing and the non-manufacturing sectors, and thus,
we make a summarized analysis on the disparity according to company size, or the so-called
“dual structure” in our addendum.

*
We refer to the preceding research, “The Efficiency of Capital and Labor, Ohwada 2002.” We also got
useful advices from Keimei Kaizuka, director emeritus of the Policy Research Institute, the Ministry of
Finance, Motonari Kurasawa, professor at Graduate School of Yokohama National University, Hideaki
Miyajima, Graduate School of Waseda University and others at the review session hosted by the Policy
Research Institute, the Ministry of Finance. We would like to express our deep gratitude to them. The
opinions included in the following research are strictly personal ones of the author, and should not be
regarded as the official opinions of the Cabinet Office, The Ministry of Finance or the Policy Research
Institute.
610 H Misono / Public Policy Review
Our conclusions are as follows:
Since the end of the era of the rapid economic growth, the real GDP growth rate, the sales
growth rate and the employment number growth rate had been on the downtrend, and
especially since the collapse of the bubble economy, the pace of slowdown has been
unprecedented. Although the operating margin had stayed higher than the recurring margin, the
gap between them shrank after the bubble burst, and the recurring margin have overtaken the
operating margin since the middle of the 2000s. In the background there was a decrease in the
interest payment due to reduced corporate debt and a drastic drop of debt interest rates.
Besides, if we turn our attention to the relationship between the operating margin and the
personnel expenditure ratio, the operating margin have shown a decreasing tendency in
response to the increased personnel expenditure ratio, telling us that the increase in personnel
expenditures has been squeezing corporate profits. And the dropping rate of the operating
margin has been more drastic in the manufacturing sector than the non-manufacturing one.
When we analyze the trend of the ROA, or the Return On Asset, we can see that although
they did not necessarily have difficulty in selling products after the so-called oil shocks, the
cost increase due to the inflation and a drastic hike of personnel costs could not be fully
reflected upon prices, and as a result, the profit margin got smaller and the ROA slowed down,
while in the wake of the collapse of the bubble economy, the Japanese companies faced
difficulties as the margin got smaller and the product sales were also in the doldrums. Our
analysis of the ROA by year, corporate size and industry shows that the Japanese companies
make strategic investment decisions generally focusing on the sales growth, but in a case
contingency such as the aftermath of the bubble collapse and the sharp economic recession in
the wake of the world financial crisis, large companies made different decisions by drawing a
line under the pursuit of sales volume growth.
If we study the trend of the NLP, or the Nominal Labor Productivity, the manufacturing
sector showed a positive growth between 2000 and 2008, but the positive contribution of the
employment number factor and that of the real added value factor continued to be offset by the
price factor’s large negative contribution. The non-manufacturing sector did not seem to be
influenced much by the deflation as the size of the negative contribution of the price factor was
not so big after the bubble burst, but the real added value factor’s positive contribution
continued to be offset by the employment number factor’s negative contribution. And our
analysis of the real labor productivity by year, size of companies and industry shows that the
Japanese companies generally make employment decisions focusing on the importance of the
sales growth, but recently, they are showing the sign of growing out of that attitude.
If we look at the relationship between the labor productivity and the capital-labor ratio, the
manufacturing sector made more efficient investments that led to the increase in the added
value than the non-manufacturing sector, and our analysis by size of companies shows that
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 611
small companies achieved a higher Nominal Labor Productivity than large companies provided
that the capital-labor ratio were the same between them both in the manufacturing and the
non-manufacturing sector, but in the real world the capital-labor ratio of small companies was
much lower that than of large companies, and as a result, small companies were way below
large companies in terms of the Nominal Labor Productivity during the same period.
If we look at the relationship between the ROA and the capital-labor ratio, the
manufacturing sector’s capital marginal productivity went down more dramatically than that of
the non-manufacturing sector as the capital-labor ratio decreased, and small companies’ capital
marginal productivity decreased more drastically than that of large companies. That explains
reasonably that small companies had lower capital-labor ratio than large companies.
(Addendum)
The indicators that point to the “dual structure” such as the gaps in the wage, the Nominal
Labor Productivity and the capital-labor ratio had been dwindling since the rapid economic
growth era, but they turned upward after the collapse of the bubble economy. In the
background there may have been a changeover from the labor shortage to the labor redundancy.

I. Preface
Since the collapse of the bubble economy, the Japanese economy has been generally in the
doldrums. The “longest ever economic expansion,” or the Izanami boom, took place between
2002 and 2007, but the size of the GDP growth rate and its knock-on effect on household
economies were not compatible to those of the Iwato boom (1958-1961) or the Izanagi boom
(1966-1970) that took place in the rapid economic growth era, and the “lost two decades” has
now become the household name for the period between the beginning of the 1990s and the
present times
1
.
Under these severe economic circumstances, the Japanese companies have been required to
achieve good efficiency of capital and labor instead of just pursuing higher sales volume or
increasing market shares as they had been doing since the rapid economic growth era. On the
other hand, if we take a mid- and long-range outlook, a perspective of how to make efficient
use of capital and labor becomes important as both are getting relatively scarce due to the
decrease in the savings and the shrinking working population that look certain to come
2
.

1
The average real GDP growth rate was 10.4% for the Iwato boom, 11.0% for the Izanagi boom, 5.8%
for the so-called “bubble economy” and 1.9% for the Izanami boom, which took place between February,
2002 and October, 2007.
2
The savings rates were 22.7% for the national personal savings and 17.0% for the household savings.
They dropped sharply to 7.0% and 2.2%, respectively according to the Cabinet Office’s Annual Report
612 H Misono / Public Policy Review
Here we try to understand if the Japanese companies are still only pursuing higher sales
volume or if they are making decisions focusing on the importance of the efficiency of capital
and labor in determining their investment and employment strategies, and make a study by
focusing on the bubble economy era, when the performance of the Japanese companies
underwent a drastic change.
The background against which the Japanese companies have been required to change their
investment and employment strategy is the advent of the severe management environment and
the change of the Japanese economy. As a key to grasp those situations, we try to make a
versatile approach in exploring the situations surrounding their earnings as well as the changes
in the “dual structure.”
Here we use the released data from the “Financial Statements Statistics of Corporations by
Industry” published by the Ministry of Finance. It is a fundamental statistical survey that has
been implemented as a sampling survey since 1948 in order to grasp the reality of the corporate
activities of profit organizations and so on based upon the statistical law in Japan, and as of
now the data taken since 1961 is available. Here we use the most recent data (up to 2009) as
samples
3
.
Our study consists of the following sections:
II. The Outline of the Japanese Economy
III. The Efficiency of Capital
IV. The Efficiency of Labor
V. The Relationship between Capital Efficiency and Labor Efficiency
VI. The Summary
Addendum The Change in the “Dual Structure”
Ⅱ. The Outline of the Japanese Economy
Here we take a look at the macroeconomic situations in a time series. We use as indicators
such data as the real GDP (Gross Domestic Product) growth rate, the sales growth rate, the
employment number growth rate, the operating margin, the recurring margin and the personnel

on National Accounts. The labor force population peaked in 1998, and dropped to about 66.57 million in
2006. It is expected to lower to reach 62.17 million (minus 4.4 million) in 2017, and 55.84 million in
2030 according to the Employment Policy Study Group in 2007.
3
We make as long a period of the Japanese companies’ performance as possible a subject of our research
in order to contribute to the time-series analysis, but we sometimes get limited information from the
database due to the changes in the category of industries and the survey items. As the “Financial
Statements Statistics of Corporations by Industry” is a “financial year-based” statistics, the term “year” in
our research should be understood as “financial year.”
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 613
expenditure ratio.
Ⅱ.1. The Outline of the Japanese Economy since the 1960s
Here we take a look at the outline of the Japanese economy since the 1960s. The Figure1-1
shows the major economic indexes such as the real GDP growth rate, the sales growth rate
(year-on-year, 3-year moving average) and the employment number growth rate (year-on-year,
3-year moving average) in graphs. Generally those three indexes were in a downtrend since
the1960s. Especially after the collapse of the bubble economy in the 1990s, there were quite a
lot of years seeing a negative growth of the real GDP, which had taken place only during the
first oil shock so far, and the year-on-year sales and the employment growth rate were negative
for almost half of the entire 20 years, and now our tacit assumption that “an economy grows”
even seems now in question.
Even during the Izanami boom that took place between 2002 and 2007, the real GDP
growth rate and the sales growth rate were on par with those in the high-yen recession period
since the middle of 1985. Some years saw the highest employment growth rate since the rapid
economic growth era
4
, but it took place against the background of the increase in the number of
irregular workers such as dispatched employees, although we avoid detailed description of it,
and it coincided with the time when an “income gap society” became a household word, and
further, considering “Haken-giri,” or the downsizing of massive amount of irregular workers,
that took place in the aftermath of the “Lehman Shock” that broke out immediately after the
Izanami boom, it should not be simply judged in an optimistic way as a “recovery of
employment
5
.” It is reasonably said that Japan quite simply has underwent the “lost two
decades” since the 1990s.
Ⅱ.2. The Trend of the Earnings of the Japanese Companies, or the Relationship
between the Operating Margin and the Recurring Margin
Here we focus on the relationship between the sales operating margin, or simply the

4
The real GDP growth rate and the sales growth rate in the high-yen recession were both 1.9%. They
were 1.9% and 2.0% on average, respectively, in the Izanami boom (2002-2007). The employment
number growth rate (3-year average) was 4.8% and 4.5% in 2005 and 2006, respectively. They were the
highest 3-year moving average values since 1971.
5
The number of irregular workers such as temporary and part-time workers is gained by dividing the
total hours worked by the average work hours of regular employees in the “Financial Statements
Statistics of Corporations by Industry.” The number of dispatched workers and their personnel
expenditures are calculated respectively in each of the industries the dispatching business operators
belonged to.
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operating margin, and the sales recurring margin, or simply the recurring margin, and take a
look at the situations surrounding corporate earnings between the 1980s and the present times,
and consider their background. The trends of the operating margin and the recurring margin
since 1983 in the all-industry sector are described in Figure1-2, and those in the manufacturing
and the non-manufacturing sectors are described in Figure1-3 and Figure1-4, respectively, and
the trends of the non-operating income and the non-operating cost in the all-industry sector and
in the manufacturing and the non-manufacturing sectors are described in Figure1-5 and
Figure1-6, respectively, and the trends of the interest rate on debt and the debt ratio (the debt
divided by the sales volume) in the all-industry sector and in the manufacturing and the
non-manufacturing sectors are described in Figure1-7 and Figure 1-8, respectively.
(1) The Operating Margin
The operating profit is generally defined as the sales volume minus the cost of goods sold,
selling cost and administrative cost. The operating margin, which is gained by dividing the
operating profit by the sales volume, is an index that shows the competitiveness in core
business, which combines the contents of the commodities and the services a company offers
and the achievements of its sales activities.
The all-industry operating margin drastically dropped after reaching 3.5% in the bubble
economy and stayed at the level of 2.2% on average in the 1990s. The recovery came in the
2000s, and the average value between 2004 and 2007 was 3.1%, which was the level almost on
par with the time of the bubble economy. When the world-wide financial crisis broke out in
2008, it plummeted to 1.9% and remained at almost the same level in the following 2009 (see
figure1-2).
(Figure1-1) The trend of the GDP growth rate, the sales volume and the employment number

Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 615
(Figure1-2) The trend of the operating margin and the recurring margin

Notes: The sales operating margin is gained by dividing the sales profit by the sales volume, and the recurring margin
is gained by dividing the recurring profit by the sales volume.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure1-3) The trend of the operating margin and the recurring margin
(the manufacturing sector)

Notes: The sales operating margin is gained by dividing the sales profit by the sales volume, and the recurring margin
is gained by dividing the recurring profit by the sales volume.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
616 H Misono / Public Policy Review
(Figure1-4) The trend of the operating margin and the recurring margin
(the non-manufacturing sector)

Notes: The sales operating margin is gained by dividing the sales profit by the sales volume, and the recurring margin
is gained by dividing the recurring profit by the sales volume.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
The operating margin in the manufacturing sector reached 5% in the bubble economy, but
plummeted in 1993 to 2.4%. At the turn of the century, it recovered and recorded 4.5% between
2004 and 2007, almost on par with the level of the bubble economy. In 2008, it plummeted to
1.5%, and stayed there in the following year of 2009 (see Figure1-3). On the other hand, the
operating margin in the non-manufacturing sector reached 3% in the bubble economy, but
dropped sharply thereafter to 1.5% in 1998. It recovered gradually before reaching 2.6% in
2005, the level which was almost on par with the time of the bubble economy. It dropped
slowly after 2006 and reached 2.1% in 2008, but showed some recovery in 2009 (see
Figure1-4).
The operating margin in the manufacturing sector fluctuated violently and moved quickly.
That was probably due to the fact that the manufacturing industries contained more exporting
companies than the non-manufacturing ones, and were more exposed to the international
competition, with the movements of the business cycle including the overseas factors having
more impact on their profits.
(2) The Recurring Margin
The recurring profit is generally defined as the operating profit plus the non-operating profit
such as the received interest, the received dividend and the capital gain, minus the operating
cost such as the paid interest, the capital loss, and the appraisal loss. The recurring margin,
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 617
which is gained by dividing the recurring profit by the sales volume, is an index that shows the
earnings capacity of an entire company, which combines a company’s operating and financial
activities.
The all-industry recurring margin showed similar movements, although at a lower level,
with the operating margin from the 1980s to the era of the bubble economy. But after the
bubble-bust, the gap between those two margins dramatically converged and at the turn of the
century they were almost on par with each other, and in the middle of the 2000s, the recurring
margin overtook the operating one and that situation continued. And even after the 2008
world-wide financial crisis, which saw both margins plummeted, the positions of the two
margins stayed the same (see Figure1-2).
As is generally envisioned, if a company is exposed to an excess of investment, the net debt
is bigger than net credit. As a result, the financial balance, or the received interest minus the
paid interest, becomes negative, and the recurring profit is smaller than the operating profit.
Naturally, the recurring margin is also normally smaller than the operating margin. So we
analyze the background of the “anomaly” since the middle of the 2000s, where the recurring
margin has been bigger than the operating one.
(3) The Analysis of the Background
A possible explanation for the shrinking gap between the operating and the recurring
margin in the wake of the bubble burst and even for the reversal of their positions in the middle
of the 2000s was the decrease in the non-operating profit or the increase in the non-operating
cost, as the recurring profit is defined as the operating profit plus the non-operating profit minus
the non-operating cost. If we look at the all-industry non-operating cost and profit, they both
peaked immediately after the bubble-burst, and the non-operating profit and the non-operating
cost continued to drop generally until 2004 and until 2006, respectively. Since 2004, the
non-operating profit continued to overtake the non-operating cost (see Figure1-5). Naturally,
the timing coincided with the period when the positions of the operating margin and the
recurring margin reversed as we explain in 2-2. (2).
This relationship also held if we analyze it separately between the manufacturing and the
non-manufacturing sectors (see Figure1-6). However, although the non-operating profit
dropped immediately after the collapse of the bubble economy hitting the bottom in early
2000s both in the manufacturing and the non-manufacturing sectors, the manufacturing sector
showed a quicker recovery than the non-manufacturing sector, topping the level it recorded
immediately after the bubble burst in 2009. The non-operating cost decreased immediately after
the bubble burst hitting the bottom in the middle of the 2000s both in the manufacturing and the
non-manufacturing sectors, but it was noteworthy that the non-manufacturing sector showed a
drastic decreasing rate of the non-operating cost.
In order to study the relationship between the operating margin and recurring margin, we
618 H Misono / Public Policy Review
have to analyze the non-operating profit and cost in detail, but as the non-operating profit
comprises various items such as the capital gain from the current assets and the real estate
rental profit in addition to the received interest, the dividend, the purchase discount and the
financial profit such as the equity method investment gain, we have to give up on this analysis
partly due to the limited data. We should leave it to a later occasion. Likewise, the
non-operating cost also comprises the security appraisal loss due to the current assets and the
foreign exchange loss in addition to the paid interest, the corporate bond interest, the sales
discount and the financial loss such as the equity method investment loss, but as most of them
are financial costs, we can analyze them by making use of the debt interest rate (the paid
interest and so on divided by the debt and so on) and the debt ratio (the debt and so on divided
by the sales volume).
(Figure1-5) The trend of the non-operating profit and cost

Notes: The non-operating profit and the non-operating cost are gained by calculating the original data from the
“Financial Statements Statistics of Corporations by Industry” with the domestic corporate goods price deflator.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 619
(Figure1-6) The non-operating profit and cost
(the manufacturing and the non-manufacturing sectors)

Notes: The non-operating profit and the non-operating cost are gained by calculating the original data from the
“Financial Statements Statistics of Corporations by Industry” with the domestic corporate goods price deflator.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
The financial cost dramatically dropped against the background of the decrease in the paid
interest due to the reduced corporate debt a rapid drop in the debt interest rate (see Figure1-7).
Incidentally, the debt ratio shot up since 2008, but it was due to the rapid drop of the sales
volume (denominator) caused by the world financial crisis as we see in 2-1 and not due to the
increase in the debt volume (numerator). If we take a little closer look at the manufacturing and
the non-manufacturing sectors separately, there was a difference in the timing of the reversal of
the positions between the operating margin and the recurring margin as it took place in 2000 in
the manufacturing sector and 2005 in the non-manufacturing sector, respectively. That was
because the debt interest rate had been set lower in the manufacturing sector than the
non-manufacturing sector since 1997, and because the debt ratio had been relatively low in the
manufacturing sector since the middle of the 1980s (See Figure1-8).
Considering that the Japanese companies were struggling with the three redundancies of
personnel, capital and debt after the bubble-burst, the slashing of the debt, or the decrease in the
debt ratio, was a reasonable judgment. But if the risk-appetite, which is the attitude of taking
risks and aiming for higher profits, is the raison d’être of companies just unlike risk-averse
individuals, it may be rightly said that the companies’ excessively “cautious” attitude did
atrophy the Japanese economy. Seen from the perspective of macroeconomics, the “normal”
situations, where companies take appropriate risks, or where the operating margin tops the
recurring ones, is more favorable.
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Ⅱ.3. The Trend of Profits and Costs of the Japanese Companies, or the Relationship
between the Operating Margin and the Personnel Expenditure Ratio
Here we focus on the relationship between the operating margin and the sales personnel
expenditure ratio, or simply the personnel expenditure ratio, and confirm the situations
surrounding profits and costs since the 1960s to the present times and also analyze their
background.
(1) The Increase in the Personnel Expenditure Ratio and the Decrease in the Operating Margin
The sales personnel expenditure ratio (the personnel expenditure divided by the sales
volume), or simply the personnel expenditure ratio, has been in the uptrend since 1961. The
personnel expenditure ratio recorded 8.2% in 1961 and continued to increase, recording 14.5%
in 2001, and gradually dropped before it shot up after 2008 (see Figure1-9).
The most outstanding uptrend in the personnel expenditure ratio took place three times:
after the oil shocks, in the wake of the bubble-burst and since 2008 when the world-wide
financial crisis had an enormous impact. The personnel expenditure ratio was on the uptrend
since the era of the rapid economic growth before it increased further after the oil shocks,
reaching 12.6% in 1978. But it dropped thereafter and recorded 11.1% in 1980, returning to the
level before the oil shocks. It leveled off or only slightly increased throughout the 1980s before
it shot up after the bubble-burst in the 1990s and reached 14.7% in 1998, recording a 3.1%
increase margin compared with 1990.
Unlike the period after the oil shocks, the increase margin of the personnel expenditure ratio
was big in the wake of the bubble burst, and it lasted for a long time before it started to drop at
the turn of the century, and in 2007 it recorded a low level almost on par with the bubble
economy period. Then it shot up dramatically in 2008 after the drastic drop of the sales volume
due to the world-wide financial crisis before it reached 14.5% in 2009 closing in on the level of
1998. Considering that the Izanami boom (2002-2007) took place in the 2000s, it is possible to
summarize that the personnel expenditure ratio increased in the recession period and decreased
in the boom period. It was in line with the empirical wisdom that “the labor share decreases in
the boom time and increases in the recession time
6
.”

6
The relationship between the operating margin and the personnel expenditure ratio is identical to the
relationship between the labor share and the capital share provided that the ratio of the sales volume to
the added value were constant and the formula: the added value = the operating margin + the personnel
expenditure is valid.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 621
(Figure1-7) The trend of the debt interest rate and the debt ratio

Notes: The debt interest rate is gained by dividing the paid interest rate and so on by the short-term debt, the
long-term debt, the corporate bond and the bill receivable discount balance (on average between the beginning
and the end of a term).
The debt ratio is gained by dividing the short-term debt, the long-term debt, the corporate bond and the bill
receivable discount balance (on average between the beginning and the end of a term) by the sales volume.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure1-8) The trend of the debt interest rate and the debt ratio (the manufacturing & the
non-manufacturing sectors)

Notes: The debt interest rate is gained by dividing the paid interest rate and so on by the short-term debt, the
long-term debt, the corporate bond and the bill receivable discount balance (on average between the beginning
and the end of a term).
The debt ratio is gained by dividing the short-term debt, the long-term debt, the corporate bond and the bill
receivable discount balance (on average between the beginning and the end of a term) by the sales volume.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
622 H Misono / Public Policy Review
(Figure1-9) The trend of the operating margin and the personnel expenditure ratio

Notes: The operating margin is gained by dividing the operating profit by the sales volume, and the personnel
expenditure ratio is gained by dividing the personnel expenditure by the sales volume
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure1-10) The relationship between the operating margin and the personnel expenditure ratio

Notes: The operating margin is gained by dividing the operating profit by the sales volume, and the personnel
expenditure ratio is gained by dividing the personnel expenditure by the sales volume
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
As if responding to this uptrend of the personnel expenditure ratio the operating margin
showed a downtrend. The correlation coefficient between the two between 1961 and 2009 was
minus 0.563 with a strong negative correlation detected
7
.We can see that the increase in

7
The results of our regression analysis of the operating margin (explained variable) and the personnel
expenditure ratio (explanatory variable) are as follows: minus 0.563 for the coefficient, minus 16.131 for
the t-value, and 867139E minus 21 for the p-value, showing a strong negative correlation.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 623
personnel expenditures squeezed corporate profits.
(2) The Relationship between the Operating Margin and the Personnel Expenditure Ratio in
the Manufacturing and the Non-Manufacturing Sectors
Here we analyze the situations surrounding corporate profits from the viewpoint of
personnel expenditures. We proceed by comparing between the manufacturing and the
non-manufacturing sectors. As we note in (1), the increase in personnel expenditures is closely
linked to the decrease in profits, and so we focus on personnel expenditures as a cost factor.
Figure1-10 shows that the operating margin decreased in accordance with the increase in
the personnel expenditure ratio. However, the operating margin decreased more rapidly in the
manufacturing sector than in the non-manufacturing sector. Incidentally, at the turn of the
century there was a slight change in the trend of the increase in the personnel expenditure ratio
and the decrease in the operating margin, and some swing-over was detected in certain years,
but we should leave the analysis of this phenomenon to a later occasion.
If we take a note of the degree of change, or the slopes of the approximate straight lines, or
the coefficients, the slope in the manufacturing sector was minus 0.84, which meant that one
percent increase in the personnel expenditure ratio pushed down the operating margin
approximately by one percent. On the other hand, the slope in the non-manufacturing sector
was minus 0.21, showing that the increase in the personnel expenditure ratio decreased the
operating margin to a lesser degree there. It may be explained by the fact that the
non-manufacturing sector comprised many domestic and regulated industries which could shift
the increase in personnel expenditures onto their product and service prices, thus somehow
holding down the decrease in the operating margin, while in the manufacturing sector, which
was exposed to the overseas competition, the product and service price hikes were more or less
prohibited, and thus they couldn’t shift their increase in personnel expenditures onto their prices,
leading to a big drop in the operating margin.
Recently, in the manufacturing sector there has been little room for price hikes due to the
intensified competition, and in the non-manufacturing sector, too, it has been difficult to
transfer personnel expenditures onto their prices under the deflationary circumstances. Further,
the easygoing reduction of personnel expenditures may have a negative impact on the
consumer spending, leading to a possible shrinking of the entire Japanese economy. Taking a
look at the entire macro economy, it is indispensable for both the manufacturing and the
non-manufacturing sectors to offer excellent products and services that are resistant to the price
drop factors such as the overseas competition and the deflation rather than just to secure profit
by slashing personnel expenditures, if we want to take the Japanese economy back onto the
track of the stable growth.
624 H Misono / Public Policy Review
Ⅲ. The Efficiency of Capital
Here we focus on the ROA, or the Return On Asset, and confirm the changes in the profit
structure of the Japanese companies in the wake of the oil shocks and after the bubble-burst,
and then we study the factors responsible for the changes mainly in those two eras by breaking
down the ROA into the profit margin on sales and the capital turnover rate. Then we analyze
whether the capitals were efficiently distributed, or whether the capitals transferred to the
sectors with high ROA.
Figure 2-1 shows the trend of the ROA for the all-industry, the manufacturing and the
non-manufacturing sectors, and in Figure 2-2 to Figure 2-7 we conduct the factor analysis for
the changes in the ROA before and after the oil shocks and the bubble burst, respectively, in the
all-industry, the manufacturing and the non-manufacturing sectors, and accumulate the yearly
factors responsible for the changes. Table 1 and Table 2 show the results of our analysis of the
efficiency of the capital distributions, and Table 3 is the result of our analysis on the degree of
dependence on debt from financial institutions when they increased capitals.
Ⅲ.1. The Trend of the ROA
The ROA is gained by dividing the profit by the asset, and thus it is an index that shows the
profit structure of companies, or how efficiently assets as management resources are used to
produce profits, and the ROA can be dissolved into the formula of “multiplying the profit
margin on sales by the total asset turnover rate.” The concept of ROA is defined in several
ways depending upon the profits and assets used for analysis, but here we use the ROA gained
by dividing the net operating profit by the total asset
8
.
The all-industry ROA dropped sharply after the oil shocks and in the wake of the collapse
of the bubble economy and stayed low thereafter, and did not recover to the level before the
sharp drops. The average ROA in each period of the time was as follows: 10.6% in the rapid
economic growth ear (1961-1973), 7.6% from the stable economic growth era up to the bubble
economy era (1973 -1991), and 4.2% in the low economic growth era after the bubble-burst
(1992 - 2009) (see Figure2-1). All through those periods the ROA in the manufacturing sector
showed a higher reading than the non-manufacturing sector although they were both on the
downtrend.

8
The business profit is often defined as the operating profit plus the interest received and the dividend,
but here we define the business profit, due to the limited data, as the operating profit plus the
non-operating profit. As the non-operating profit contains the short-term profit on securities sold and the
purchase discount in addition to the interest received and the dividend, the value of the ROA is bigger
than when we calculate the ROA by only using the received interest and the dividend.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 625
Even if the ROA dropped sharply in the recessions after the oil shocks and the bubble burst,
it was not such a serious problem if it was temporary, or if the ROA recovered in the following
economic recovery periods. But in the case of the Japanese companies, the ROA did not
recover in the economic recovery periods after the recessions, and thus we must understand that
the oil shocks and the bubble-burst brought about the eternal changes onto the profit structure
of the Japanese companies. Here we analyze the factors responsible for the changes of the trend
of the ROA before and after the oil shocks and the bubble-burst, respectively, and study the
efficiency of the capital distribution from the viewpoint of the ROA.
Ⅲ.2. The Confirmation of the Factors Responsible for the Changes of the Trend of the
ROA
Here we dissolve the year-on-year changes in the ROA into the profit margin on sales (the
net operating profit divided by the sales volume) and the total asset turnover rate (the sales
volume divided by the total asset) and explore the reasons for the decrease in the ROA. The
total asset turnover rate shows how much sales volume is gained by invested capitals, and the
profit margin on sales shows how much profit is gained. By dissolving the ROA like this, we
can analyze the factors responsible for the decrease in the ROA from the viewpoint of the
decrease in the total asset turnover rate (did they not gain sufficient profits matching
investments?), and the decrease in the profit margin on sales (did profit margins get smaller?).
In our analysis in 2-1, we confirm that the Japanese economy underwent the eternal
changes of the falls and doldrums of the ROA in a relatively short period of time after the oil
shocks and in the wake of the bubble economy’s collapse, respectively. Then here we focus on
the 5-year periods before and after the oil shocks and the bubble-burst, respectively, which
were the two turning points of the performance of the Japanese companies, and conduct the
factor analysis of the changes in the ROA and accumulate the yearly factors responsible for the
changes (see Figure2-2 and Figure2-3).
When we observe the factors responsible for the decrease in the ROA after the oil shocks,
the negative contributions from the decreasing total asset turnover rate factor were not so big,
but the sharp drop in the profit margin on sales factor had a big impact. On the other hand, in
the aftermath of the bubble-burst, the contributions from the profit margin on sales turned from
positive to negative, and the total asset turnover rate increased its negative contributions.
From this we can infer that the sales on the products did not necessarily deteriorate in the
period after the oil shocks, but the inflation and the sharp increase in personnel expenditures,
which we confirmed in 1-3, and so on could not be fully reflected upon the prices, leading to
smaller profit margins and the slumping ROA, while after the bubble burst, the Japanese
companies faced sales slump in addition to smaller profit margins.
626 H Misono / Public Policy Review
(Figure2-1) The trend of the ROA (Return On Asset)

Notes: The ROA is gained by dividing the operating profit and the non-operating profit by the total asset (average)
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure2-2) The factor analysis of the ROA (before and after the oil shocks/ the all-industry
sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and
each factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average
between the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales
volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the
beginning and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 627
(Figure2-3) The factor analysis of the ROA
(before and after the oil shocks/ the all-industry sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and each
factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average between
the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the beginning
and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure2-4) The factor analysis of the ROA
(before and after the oil shocks/ the manufacturing sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and each
factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average between
the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the beginning
and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
628 H Misono / Public Policy Review
(Figure2-5) The factor analysis of the ROA
(before and after the oil shocks/ the non-manufacturing sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and each
factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average between
the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the beginning
and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure2-6) The factor analysis of the ROA
(before and after the bubble burst/ the manufacturing sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and each
factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average between
the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the beginning
and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 629
(Figure2-7) The factor analysis of the ROA
(before and after the bubble burst / the non-manufacturing sector)

Notes: The year-on-year gap of the ROA is dissolved into the profit margin on sales and the capital turnover rate and
each factor is accumulated by setting the 1968 (1986) as a standard.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average
between the beginning and the end of a term.
The profit margin on sales is gained by dividing the operating profit and the non-operating profit by the sales
volume.
The capital turnover rate is gained by dividing the sales volume by the total asset on average between the
beginning and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
In the manufacturing sector, there has been little room for price hikes due to the intensified
international competition, and in the non-manufacturing sector, too, it has become difficult to
transfer the personnel expenditures to the prices under the deflationary circumstances. Further,
the easygoing reduction of the personnel expenditures might have a negative impact on the
consumer spending, leading to a possible shrinking of the entire Japanese economy. Taking a
look at the entire macro economy, in order to take the economy back onto the track of the stable
growth, it is indispensable for both the manufacturing and the non-manufacturing sectors to
offer excellent products and services that are resistant to the price drop factors such as the
overseas competition and the deflation rather than just to secure profits by slashing the
personnel expenditures. And our factor analysis on the period before and after the oil shocks
and the bubble-burst, respectively, did not detect any significant difference between the
manufacturing and the non-manufacturing sectors (see Figure 2-4, 2-5, 2-6 and 2-7).
630 H Misono / Public Policy Review
Ⅲ.3. The Analysis of the Efficient Distribution of Capital
When we take a look at the situations from a mid- and long-range point of view of taking
into account the factors such as the aging society with a declining child birth rate and the
shrinking domestic market due to the declining population, the importance of the efficient
capital distribution and the limit of the policy of just pursuing larger sales volume are clear.
Here we analyze whether the Japanese companies still make investment strategic decisions
focusing on the importance of the growth of sales volume or whether they have shifted their
positions to make decisions based upon the efficiency of capital.
If the importance of the efficiency of capital was stressed in compiling investment strategies,
the capital volume may have increased in the industries with high ROA, and if, on the contrary,
the importance of sales volume was still stressed, the capital volume may have increased in the
industry with high sales growth rate. And if companies depended upon financial institutions for
investment money, the intentions of financial institutions may have had an impact on the
compiling of investment strategies. So we also make an analysis by size of companies on the
relationship between the total asset and the debt from financial institutions, or the degree of
dependence upon financial institutions when companies expanded their capital.



















Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 631
(Table 1)
The analysis by year of the relationship between the total asset, the ROA and the sales volume in the all-industry
sector
We use the 3-year, cross-section samples in 30 industries from 1975. We also categorize companies into big,
midsize and small ones as the ways of capital procurement (the debt from financial institutions, the issuance of
corporate bond and equities) seemed to be different depending upon the size of companies.
The Estimation Formula
GTA=α×ROA (3-year average) +β×GSL+C
GTA: 3-year growth of total asset (%)
ROA (3-year average): 3-year ROA average (%)
GSL: 3-year sales growth (%)
We conduct an analysis by company size by making use of ordinary least squares (OLS).
The “bold, italic, right-of-center” figures show a 1% significance level, and the “bold and italic” figures show a
5% significance level, and the “bold, italic and left-of-center” figures show a 10% significance level. The “shaded”
figures show negativity, and the others show positive coefficients. Ditto in all the tables through Table5.
All-industry Large Midsize Small
1975-77 p-value p-value p-value p-value
Intercept 0.069369758 0.183315237 0.290155449 0.129351034
α 0.876550736 0.379335891 0.290731264 0.439579478
β 0.000471828 0.083349991 0.010917355 0.356264704

1978-80 p-value p-value p-value p-value
Intercept 0.006991752 0.112243544 0.12394482 0.016968635
α 0.843076621 0.325539773 0.832993642 0.767061628
β 0.000401165 7.3875E-06 0.007310211 9.89551E-11

1981-83 p-value p-value p-value p-value
Intercept 0.015160979 0.778604981 0.001063811 0.988373199
α 0.427102727 0.864935944 0.008335276 0.968480599
β 7.1825E-10 9.8844E-10 9.26468E-10 1.70485E-12

1984-86 p-value p-value p-value p-value
Intercept 6.07712E-05 0.010626514 0.199095452 0.005903286
α 0.750825869 0.794016704 0.582337914 0.496867678
β 5.57684E-11 6.49482E-05 3.4102E-09 1.43641E-09

1987-89 p-value p-value p-value p-value
Intercept 0.18332755 0.307231779 0.453047588 0.897742739
α 0.629908846 0.853975107 0.529366133 0.478936305
β 2.56475E-07 7.05427E-12 3.85989E-18 8.77088E-07

1990-92 p-value p-value p-value p-value
Intercept 0.021345534 0.005080245 0.000797759 0.077418509
α 0.958383443 0.907002759 0.000281288 0.810630846
β 0.00024067 1.90231E-12 3.77602E-06 0.000269951

1993-95 p-value p-value p-value p-value
Intercept 0.111672024 0.058526678 0.853193185 0.064226609
α 0.840783163 0.381005783 0.781800181 0.736415185
β 0.188185482 0.543199153 0.015023954 0.00048947

1996-98 p-value p-value p-value p-value
Intercept 0.750545437 0.038249983 0.62540573 0.148324648
α 0.332100815 0.456879746 0.735320377 0.339365278
β 0.01481158 2.46763E-07 0.059645228 3.08192E-05

1999-2001 p-value p-value p-value p-value
Intercept 0.164379021 0.91794155 0.384353702 0.932699294
α 0.328001336 0.666527415 0.384045691 0.976818011
β 8.71804E-05 2.19801E-09 3.4339E-05 0.001384114

2002-04 p-value p-value p-value p-value
Intercept 0.219676198 0.1483924 0.646451241 0.737362835
α 0.474052957 0.689905061 0.67270697 0.760243413
β 0.011393287 2.15218E-17 7.6639E-08 2.72455E-25

2005-07 p-value p-value p-value p-value
Intercept 0.378988159 0.952642182 0.294319328 0.374920669
α 0.857654569 0.385201551 0.700531535 0.553397549
β 0.000226863 2.41587E-06 1.423E-05 0.002759168

2008-09 p-value p-value p-value p-value
Intercept 0.074093771 0.148074811 0.127792864 0.34899733
α 0.898597906 0.812626741 0.76665987 0.997988552
β 0.082282118 0.127115792 1.99177E-05 0.004718632
632 H Misono / Public Policy Review
(Table2)
The analysis by industry of the relationship between the total asset, the ROA and the sales volume
We use the 3-year samples in 30 industries between 1976 and 2009. The estimation formula is the same with the
Table1.
Food p-value Machine tool p-value Gas & water p-value
Intercept 0.455136951 Intercept 0.533804567 Intercept 0.586012069
α 0.150857278 α 0.992352721 α 0.099442555
β 0.003469483 β 3.78708E-08 β 0.076459046

Textile p-value
Other
manufacturing
p-value Haulage p-value
Intercept 0.205201462 Intercept 0.821237438 Intercept 0.950896097
α 0.285025977 α 0.375601166 α 0.721485921
β 2.49933E-10 β 5.76399E-05 β 4.1946E-05

Lumber p-value
Electric
appliance
p-value Water transport p-value
Intercept 0.465911472 Intercept 0.293007396 Intercept 0.094608129
α 0.67084543 α 0.09240822 α 0.117310346
β 0.000157981 β 8.30118E-08 β 0.000648181

Pulp p-value
Auto & auto
parts
p-value Wholesale p-value
Intercept 0.422496357 Intercept 0.143039125 Intercept 0.667251146
α 0.161391731 α 0.457749093 α 0.386643094
β 1.12731E-08 β 0.000557279 β 1.33714E-07

Chemical p-value
Other transport
equipment
p-value Retail p-value
Intercept 0.402290893 Intercept 0.933065085 Intercept 0.644567144
α 0.180634318 α 0.851005239 α 0.325869577
β 0.000526321 β 9.36854E-18 β 6.86894E-10

Oil product p-value
Agriculture &
forestry
p-value Real property p-value
Intercept 0.735939489 Intercept 0.864368844 Intercept 0.756965341
α 0.618995729 α 0.95391498 α 0.357164541
β 1.34595E-05 β 1.39698E-07 β 0.021276186

Ceramics p-value Fishery p-value Lodging p-value
Intercept 0.459583368 Intercept 0.89139115 Intercept 0.346092112
α 0.127045708 α 0.905528237 α 0.542106525
β 5.83419E-05 β 0.000442496 β 0.000269387

Steel p-value Mining p-value
Daily lives
service
p-value
Intercept 0.216941791 Intercept 0.941145063 Intercept 0.566263577
α 0.078814672 α 0.36323208 α 0.952452177
β 0.072881594 β 8.77155E-05 β 0.125423701

Non-ferrous p-value Construction p-value Leisure p-value
Intercept 0.244103174 Intercept 0.135410134 Intercept 0.80543653
α 0.715231921 α 0.090052055 α 0.70603235
β 7.79709E-06 β 5.17409E-09 β 0.308629588

Metal product p-value Electricity p-value Other service p-value
Intercept 0.919877983 Intercept 0.156699926 Intercept 0.882578314
α 0.572947031 α 0.003231027 α 0.321694106
β 1.26742E-05 β 0.002166279 β 0.018877695
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 633
(Table3)
The analysis by industry of the relationship between the total asset and the debt from financial Institutions, or the
degree of dependence on financial Institutions in the total asset expansion
We take the samples from 30 industries in the period between 1976 and 2009.
The Estimation Formula
GTA=α × GDB (3-year average) + C
GTA: 3-year Growth of Total Asset (%)
GDB (3-year average): 3-year growth of debt from financial institutions
We conduct a company-size analysis by making use of ordinary least squares (OLS).
Food p-value Machine tool p-value Gas & water p-value
Intercept 0.013294675 Intercept 0.006376593 Intercept 6.2907E-07
α 5.45765E-07 α 0.027073296 α 0.000198134

Textile p-value
Other
manufacturing
p-value Haulage p-value
Intercept 0.661994952 Intercept 0.001184615 Intercept 0.106131309
α 1.74808E-09 α 0.535467026 α 0.000573931

Lumber p-value
Electric
appliance
p-value Water transport p-value
Intercept 0.838754338 Intercept 0.000490876 Intercept 0.275443787
α 3.88106E-07 α 0.230739749 α 1.7402E-09

Pulp p-value
Auto & auto
parts
p-value Wholesale p-value
Intercept 0.23915994 Intercept 4.48579E-05 Intercept 0.136320508
α 6.90445E-06 α 0.898067042 α 1.63119E-10

Chemical p-value
Other transport
equipment
p-value Retail p-value
Intercept 0.000427473 Intercept 0.301088918 Intercept 0.004765776
α 0.120598586 α 4.71607E-13 α 4.82652E-11

Oil product p-value
Agriculture &
forestry
p-value Real property p-value
Intercept 0.043751342 Intercept 0.520137142 Intercept 0.01180263
α 6.84838E-11 α 1.66997E-08 α 1.05244E-11

Ceramics p-value Fishery p-value Lodging p-value
Intercept 0.036113195 Intercept 0.96949391 Intercept 0.205896749
α 8.32779E-05 α 1.37781E-11 α 4.0481E-19

Steel p-value Mining p-value
Daily lives
service
p-value
Intercept 0.112881143 Intercept 0.034843987 Intercept 0.196733204
α 0.714315228 α 0.005617486 α 8.66406E-06

Non-ferrous p-value Construction p-value Leisure p-value
Intercept 0.018296149 Intercept 0.040046365 Intercept 0.226034506
α 0.096717659 α 1.47936E-09 α 0.00021097

Metal product P-value Electricity p-value Other service P-value
Intercept 0.126532005 Intercept 6.64862E-10 Intercept 0.000925872
α 6.70908E-07 α 2.8412E-18 α 1.68496E-11
634 H Misono / Public Policy Review
(1) The Analysis by Year of the Relationship between the Total Asset, the ROA and the Sales
Volume in the All-industry Sector
We use the 3-year
9
, cross-section samples in 30 industries
10
from 1975. We also categorize
companies into big, midsize and small ones as the ways of capital procurement (the debt from
financial institutions, the issuance of corporate bond and equities) seemed to be different
depending upon the size of companies
11
.
The Estimation Formula:
GTA=α × ROA (3-year average) + β × GSL + C
GTA: 3-year Growth of Total Asset (%)
ROA (3-year average): 3-year ROA average (%)
GSL: 3-year sales volume growth (%)
We conduct the analysis by company size by making use of ordinary least squares (OLS).
The results are described in Table 1. We can hardly see a significant relationship between
the total asset growth and the ROA. On the other hand there was a strong correlation between
the total asset growth and the sales growth, enabling us to see the capital transfer to the
industries with high sales growth.
We see hardly any difference according to the size of companies, but notably in the periods
between 1993 and 1995, and between 2008 and 2009, we can see no correlations between the
total asset growth and the sales growth. These were the periods when a full-fledged impact of
the bubble-burst was felt and the world financial crisis had a big impact, respectively. We can
infer that large companies, unlike midsize and small companies, may have made investment
strategic decisions by drawing a line under the sales growth in the times of rapid economic
recession.
Our conclusion is that although the “importance of efficiency” has long been loudly
trumpeted, the Japanese companies are still making investment strategic decisions by stressing
the importance of the sales growth, not the efficiency of capital. But it was possible that in the
emergency period such as the bubble-burst and world financial crisis, large companies, which
might have been more sensitive to the efficiency of capital, may have made different decisions
by drawing a line under the growth of the sale volume
12
.

9
1975-77, 78-80, 81-83, 84-86, 87-89, 90-92, 93-95, 96-98, 99-2001, 02-04, 05-07, 08-09. We use as
many samples as possible by dating back to 1975.
10
The 30 industries we take as sample are described in Table 2.
11
The companies with the capital of ¥1 billion or more are described as large companies, those with the
capital of between ¥100 million or more and ¥1 billion or less are midsize, and those with the capital of
¥100 million or less are small companies.
12
“Ohwada, 2002” says in the similar analysis, “There was not such significant relationship between the
total asset and the ROA between 1996 and 2008. On the contrary, there was a positive relationship
between the total asset and the sales volume, suggesting that the capital transferred to the industries with
increasing demand. But it is noteworthy that in the latter 1990s the relationship between the total asset
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 635
(2) The Analysis by Industry of the Relationship between the Total Asset, the ROA and the
Sales Volume
We take the samples from 30 industries in the period between 1976 and 2009. Estimation
formulas are the same as in (1).
The results are described in Table 2. As easily expected from the results of our analysis by
year in (1), there was little significant relationship between the total asset and the ROA in many
industries. On the contrary, there was a strong correlation between the total asset and the sales
volume, and we can easily see the capital transfer to the industries with a high rate of sales
growth. We can also detect among them some positive correlation in the steel, electric
appliance, construction, electricity, and gas and water industries.
Our conclusion is that the Japanese companies make decisions focusing on the sales growth
in many industries. But we can infer that as the steel, electric appliance, construction, electricity,
and gas and water industries needed a huge volume of capital investments and a prudent
investment planning, they may have made a decision by paying attention to the efficiency of
capital in addition to the sales volume growth.
(3) The Analysis of the Relationship between the Total Asset and the Debt from Financial
Institutions, or the Degree of Dependence on Financial Institutions in the Expansion of the
Total Asset
We take the samples from 30 industries in the period between 1976 and 2009.
The Estimation Formula:
GTA=α × GDB (3-year average) + C
GTA: 3-year Growth of Total Asset (%)
GDB (3-year average): 3-year growth of debt from financial institutions
We conduct the company-size analysis by making use of ordinary least squares (OLS).
The results are described in Table 3. We can see a strong positive relationship between the
total asset and the debt form financial institutions in many industries. It may prove that the
Japanese companies depend upon the debt from financial institutions for investment resources
in expanding the total asset, or that there is the so-called “indirect financing” regime. But we
can see no significant relationship in the chemical, steel and other manufacturing industries as
well as the electric appliance, automobile and auto parts ones.
Our conclusion is that although Japan’s “indirect financing” regime is solid, there are many
large companies in the chemical, steel, electric appliance, and automobile and auto parts
industries, and as they have various financing methods such as issuing corporate bond and the

and the sales volume weakened, and we can detect instead a positive relationship between the total asset
and the ROA. The capital transferred to the industries with high ROA, not with increasing demand.” The
different conclusion from that of our analysis may have come from the difference in the number of
samples taken, the survey period and the ranges of period adopted.
636 H Misono / Public Policy Review
rights offering, they do not necessarily depend upon financial institutions for debt.
Ⅳ. The Efficiency of Labor
Here we take note on the labor productivity and observe the change in the profit structure of
the Japanese companies in the wake of the bubble economy collapse, before analyzing the
factors responsible for the change by dissolving the NLP, or the Nominal Labor Productivity, in
the 1980s into the three factors of price, employment number and real added value. But we
must be cautious about the fact that the employment number factor’s positive contribution to
the Nominal Labor Productivity actually means the decrease in the employment number. Then
we conduct an analysis about whether labor is distributed in an efficient manner, or whether
labor transferred to the industries with high RLP, or the Real Labor Productivity.
There are two labor productivity indexes, the NLP, which uses nominal added value, and
the RLP which uses real added value, and in a macroeconomic analysis the latter is often
regarded more important, as the former gives us an impression that the labor efficiency
increases even when actually only the price hike brings up the nominal added value. But we
also use the NLP in addition to the RLP because the deflation is now regarded as a serious
problem in Japan, and we should like to have a precise grasp of the impact of the deflation. The
NLP can be dissolved into the three factors of real added value, employment number and price,
and we can identify the change in the origins of the productivity of the Japanese companies by
observing the movement of each factor.
(Figure3-1) The trend of the NLP (year-on-year)

Notes: The Nominal Labor Productivity is gained by dividing the added value by the employment number
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 637
(Figure3-2) The factor analysis of the NLP (the manufacturing sector)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
(Figure3-3) The factor analysis of the NLP (the non-manufacturing sector)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
638 H Misono / Public Policy Review
(Figure3-4) The factor analysis of the NLP (oil & coal product industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
(Figure3-5) The factor analysis of the NLP (electric & telecommunication appliance industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 639
(Figure3-6) The factor analysis of the NLP (automobile & auto parts industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
(Figure3-7) The factor analysis of the NLP (construction industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office.
640 H Misono / Public Policy Review
(Figure3-8) The factor analysis of the NLP (retail & restaurant industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
(Figure3-9) The factor analysis of the NLP (service industry)

Notes: We use the data gained after the 3-term moving average processing.
The NLP is dissolved into the price multiplied by the real added value divided by the employment number.
We use the GDP deflator by industry (calendar year value) as the price.
The number of irregular workers such as temporary and part-time workers is gained by dividing the total
hours worked by the average work hours of regular employees.
Dispatched workers and contract-based workers are regarded as belonging to the payers of salary.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 641
Figure 3-1 shows the trend of the Nominal Labor Productivity in the all-industry, the
manufacturing and the non-manufacturing sectors, and we dissolve the growth rate of the
Nominal Labor Productivity into the three factors of real added value, employment number and
price in the manufacturing sector (Figure 3-2) and in the non-manufacturing sector (Figure 3-3),
respectively. We conduct the same analysis for the oil and coal product, electric appliance
including communication appliance, automobile and auto parts, construction, retail,
restaurateur and service industries in Figure 3-4 to Figure 3-9. The results of the efficiency of
the labor distribution analysis are described in Table 4 and Table 5.
Ⅳ.1. The Trend of the Nominal Labor Productivity
Figure 3-1 shows the trend of the Nominal Labor Productivity in the all-industry, the
manufacturing and the non-manufacturing sectors. The Nominal Labor Productivity is gained
by dividing the added value by the employment number, and as a result, is understood to be the
added value produced by per worker.
The Nominal Labor Productivity in the all-industry sector recorded a high growth rate
exceeding 6% in the bubble economy era before dropping sharply and has fluctuated within the
range between plus 2% and minus 2% since the middle of the 1990s. This was not a high
reading compared with that in the high-yen recession period that came before the bubble
economy, as the growth rate of the Nominal Labor Productivity in 1986 was plus 0.5%. It
plummeted to minus 8.6% in 2008 but returned to a positive territory in the following year of
2009.
In the manufacturing sector the NLP showed a very high growth rate in the bubble
economy era before dropping sharply, but rose sharply again in the middle of the 1990s, and it
was on a mild recovery track in the 2000s before dropping sharply in the year of 2008.
On the other hand, the non-manufacturing sector’s NLP showed a similar pattern to that of
the manufacturing sector until the time of the bubble-burst, but then it failed to show the same
recovery pattern we can detect in the manufacturing sector, and it recorded a negative reading
in most of the years during the period since 1993, which tells us that they were in a serious
doldrums
13
. Here we analyze the factors responsible for the trend of the labor productivity in
the manufacturing and the non-manufacturing sectors, and the efficiency of the labor transfer
from the viewpoint of the labor productivity.



13
After the collapse of the bubble economy, the growth rate of the Nominal Labor Productivity in the
non-manufacturing sector turned positive only in the years of 1995 (3.0%), 2002 (3.0%), 2006 (2.7%)
and 2009 (2.6%).
642 H Misono / Public Policy Review
(Table4)
Analysis by year of the relationship between the labor, the PRO (Real Labor Productivity) and the sales volume in
the all-industry sector
Like Table1, We use the 3-year, cross-section samples in 30 industries from 1975. We also categorize companies
into big, midsize and small ones.
The Estimation Formula
GLA= α × PRO (3-year average) + β × GSL+C
GLA: 3-year growth of the employment number on average during the period (%)
PRO (3-year average): 3-year average Real Labor Productivity (%)
We conduct an analysis by company size by making use of ordinary least squares (OLS).
All-size Large Midsize Small
1975-77 p-value p-value p-value p-value
Intercept 7.7716E-05 0.045611115 4.08696E-05 0.012924541
α 0.184199125 0.020705706 0.833841709 0.982635839
β 4.75539E-06 0.155097703 9.96985E-09 9.13377E-08

1978-80 p-value p-value p-value p-value
Intercept 0.501834456 0.168392 0.463207847 0.009697609
α 0.064352658 0.554499742 0.351902354 0.786054893
β 0.041211154 0.196520631 1.22608E-06 1.88887E-08

1981-83 p-value p-value p-value p-value
Intercept 0.212540746 0.161071708 0.086380008 0.346393817
α 0.870995172 0.804754297 0.264138569 0.152128419
β 0.000611 2.72819E-07 1.43653E-06 0.364174292

1984-86 p-value p-value p-value p-value
Intercept 0.437142472 0.293096364 0.892785464 0.635226611
α 0.357932746 0.861128512 0.501258955 0.732679422
β 0.000854296 0.000142716 6.53285E-08 0.006752427

1987-89 p-value p-value p-value p-value
Intercept 5.05009E-06 7.33684E-05 0.500005885 0.005990322
α 0.102254017 0.263901459 0.543202045 0.31645274
β 9.7759E-12 4.26435E-13 1.1356E-10 8.31477E-09

1990-92 p-value p-value p-value p-value
Intercept 0.08537367 0.565966163 0.14047089 0.94895459
α 0.978157325 0.49712066 0.958665898 0.401911207
β 0.002806015 0.000189988 0.000430318 0.000481479

1993-95 p-value p-value p-value p-value
Intercept 0.016174092 0.014130777 0.607636042 0.129976056
α 0.227817958 0.099075726 0.710055092 0.235668355
β 7.80451E-06 0.006646609 0.012894048 5.31578E-09

1996-98 p-value p-value p-value p-value
Intercept 0.768533204 0.164908588 0.048214308 0.025145381
α 0.520395424 0.346072371 0.212687285 0.002256135
β 0.003110556 0.000313198 9.90488E-08 2.09937E-06

41999-2001 p-value p-value p-value p-value
Intercept 0.016456086 0.223519109 0.601927129 0.514649682
α 0.750687129 0.011695754 0.075982239 0.114783587
β 0.00264258 1.13119E-07 0.00484368 0.001109306

2002-04 p-value p-value p-value p-value
Intercept 0.541276437 0.473928805 0.435069258 0.89579624
α 0.335586362 0.544821648 0.231332928 0.82765187
β 0.116687576 0.353788908 1.83811E-05 0.34185141

2005-07 p-value p-value p-value p-value
Intercept 0.812730104 0.639726828 0.022461018 0.322309316
α 0.625307001 0.704001004 0.02765892 0.135201142
β 0.138645505 0.085230103 0.020301629 0.309207234

2008-09 p-value p-value p-value p-value
Intercept 0.525300586 0.024953855 0.016364433 0.483550362
α 0.946057179 0.868045859 0.320797208 0.262341123
β 0.1096908 0.022162005 0.002385656 0.831247929
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 643
Ⅳ.2. The Confirmation of the Factors Responsible for the Change of the Nominal
Labor Productivity
(1) The Factors Responsible for the Change of the Nominal Labor Productivity (the
Comparison between the Manufacturing and the Non-Manufacturing Sectors)
First, when we make a summarized comparison between the manufacturing and the
non-manufacturing sectors, the Nominal Labor Productivity growth remained positive from
2000 to 2008 in the manufacturing sector (see Figure 3-2) but in the non-manufacturing sector,
it recorded a negative reading in most of the years during the same period (see Figure 3-3),
showing that the non-manufacturing sector was in a severer situation.
The growth rate of the nominal productivity in the manufacturing sector dropped into a
negative territory immediately after the bubble-burst in 1993 before recovering but dropped
into a negative territory again in 1999. Although it showed a mild recovery after that, it dropped
sharply in 2008. In the wake of the collapse of the bubble economy, the real added value factor
dramatically dropped, contributing largely to the drop of the nominal productivity into a
negative territory in 1993. In the following recovery process of the Nominal Labor Productivity
between 2004 and 2008, although the price factor remained negative, the real added value
factor and the employment number factor contributed largely in a positive way. In the mild
recovery process of the Nominal Labor Productivity between 2000 and 2007, the price factor
consistently contributed largely in a negative way, but the employment number factor and the
real added value factor contributed positively until 2003 and after 2004, respectively. In 2008
the real added value and the employment number factors contributed little, while the price
factor largely contributed in a negative way, bringing down the Nominal Labor Productivity
sharply. The Nominal Labor Productivity continued to drop in the following year of 2009, but
unlike in 2008 the employment number factor contributed in a positive way, while the real
added value factor contributed negatively.
Our conclusion is that in the 2000s the manufacturing sector kept a positive Nominal Labor
Productivity growth rate until 2008, but the positive contribution from the employment number
factor, probably due to lay-offs and the policy of switching from regular to irregular employees
in the form of dispatched workers and so on, in addition to the positive contribution from the
real added value factor due to quality improvement and so on, continued to be offset by the
large negative contribution from the price factor due to the deflation. Taking a look at the entire
macroeconomic picture, overcoming the deflation is the most prioritized policy agenda in order
to improve the Nominal Labor Productivity of the manufacturing sector.
The growth rate of the Nominal Labor Productivity in the non-manufacturing sector
dropped into a negative territory immediately after the bubble burst, and rarely showed a
positive growth rate, recording a negative rate in many years. In the wake of the bubble
economy’s collapse, the real added value factor dropped, contributing to the drop of the
644 H Misono / Public Policy Review
Nominal Labor Productivity into a negative territory. After that, basically until 2003, the real
added value factor contributed positively, while the employment number and price factors
contributed otherwise, but the absolute values for each of them were small, and consequently,
the growth rate of the Nominal Labor Productivity remained in the range between plus 1% and
minus 2%. From 2004 the real added value factor largely contributed positively, but the
employment number factor largely contributed in a negative way, and as a result, the Nominal
Labor Productivity growth rate remained negative. The picture changed in 2008 when the real
added value factor’s contribution turned negative.
The negative contribution of the price factor was not so big in the non-manufacturing sector
in the aftermath of the bubble-burst, implying a small impact of the deflation, but the positive
contribution of the real added value continued to be offset by the negative contribution of the
employment number factor. In a big macroeconomic picture, the improvement of the
employment number factor, or the redundancy of workforce is the most important policy
agenda for the improvement of the Nominal Labor Productivity in the non-manufacturing
sector.
(2) The Factors Responsible for the Nominal Labor Productivity by Industry
Figure 3-4 to Figure 3-9 show the trend of the dissolved factors responsible for the Nominal
Labor Productivity by industry from 1983. The “Financial Statements Statistics of Corporations
by Industry” by the Ministry of Finance collects data from across 52 industries, and here we
pick up the oil and coal product, electric appliance, and automobile and auto parts industries
representing the manufacturing sector, and the construction, retail and service industries as
representing the non-manufacturing sector.
In those three industries among the manufacturing sector, the factors responsible for the
Nominal Labor Productivity underwent a great change after the collapse of the bubble economy.
In the oil and coal product industry, the real added value factor’s contribution turned from
positive to negative, while in the electric appliance industry and the automobile and auto parts
industry the employment number factor’s contribution turned from negative to positive. There
may have been the fact in the background that the oil and coal product industry could not
transfer the increase in material prices onto product prices, while the electric appliance industry
and the automobile and auto parts industry successfully reduced their workforce in addition to
their policies of switching from regular to irregular employees in the form of dispatched and
contract workers and so on.
In the construction industry, the employment number factor contributed negatively after the
bubble-burst until the middle of the 1990s, but it contributed positively from the latter 1990s. In
the wake of the bubble burst, the construction industry was expected to play the role of
employment basis for the entire economy, but it faced a sluggish growth of the Nominal Labor
Productivity, and it was likely that they started slashing their workforce in the latter 1990s. In
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 645
the retail and service industries, we cannot detect such a big change as the construction industry,
but we can point out that the employment number factor consistently contributed negatively to
the growth of the Nominal Labor Productivity and that the price factor turned negative around
the year of 2000.
Ⅳ.3. A Study on the Efficient Distribution of Labor
It is necessary for us to confirm whether labor is distributed efficiently into each industry
when we study the efficiency of labor from the macroeconomic point of view. There are several
kinds of approach from this point of view, but here we start on the assumption that if labor is
distributed efficiently, labor increases in the industry with high RLP, or Real Labor Productivity.
But it is also possible in the real world that labor may have increased in the industry with high
sales volume, and thus we make an analysis based on the following premises.
If companies make an investment decision focusing on the efficiency of labor, labor will
increase in the industry with high RLP, while if they make a decision focusing on the sales
growth, labor will increase in the industry with a high growth rate of sales volume. We make an
analysis as follows.
(1) The Analysis of the Relationship between Labor, the RLP and the Sales Volume in the
All-industry Sector by Year
Like Table 1, we use the 3-year, cross-section samples in 30 industries from 1975, and we
categorize companies into large, mid-size and small ones.
The Estimation Formula:
GLA=α × RLP (3-year average) + β × GSL + C
GLA: 3-year average growth of the employment number (%)
RLP (3-year average): 3-year RLP average (%)
GSL: 3-year sales volume growth (%)
We conduct an analysis by making use of ordinary least squares (OLS).
The results are described in Table 4. There was not such significant relationship between
the growth of labor and the RLP. On the contrary, there was a strong positive correlation
between the labor growth and the sale volume suggesting that there was a transfer of labor into
the industry with a high sales growth rate, but we can detect a certain change in 2002 and
thereafter. In small companies there was no relationship between the labor and the sales volume
after 2002, and even in large and midsize companies the correlation was not so strong as before.
The period after the year of 2002 overlapped the Izanami boom, and the feature of this “longest
ever boom” was the delay of the improvement of the employment situation and the progress of
the switching from regular to irregular workforce, in addition to the fact that the size of the
646 H Misono / Public Policy Review
GDP growth and the penetration into the household were small. Our estimation results tell us
that the industries with high sales growth did not increase the labor force, and it was in line
with the employment feature of the Izanami boom
14
.
In our study of the “efficiency of capital,” we conclude that companies made a decision
focusing on the sales growth in the boom period, while they made a decision focusing on other
elements than the sales growth in an emergency such as the aftermath of the bubble economy
and the rapid recession time after the world financial crisis, but from the viewpoint of the
“efficiency of labor,” as far as employment strategy was concerned, companies of any size
were growing out of the decision-making focusing on the sales volume even in ordinary times,
which was contrasting to the decision-making of investment strategy.
(2) The Analysis of the Relationship between the Labor, the RLP and the Sales Volume by
Industry
We take the samples from 30 industries in the period between 1976 and 2009. The
estimation formula is the same as in (1).
Our results are described in Table 5. As we expect from the results of our analysis by year
in (1), there was not such significant relationship between the labor growth and the RLP. On the
contrary, there was a strong positive correlation between the labor growth and sale growth in
many industries suggesting that there was a labor transfer to the industry with high sale growth.
The correlations between the labor growth and the sales growth was rather weak in the pulp,
chemical, ceramic, mining, construction, electricity, wholesale and the retail industries, and
there was no correlation in the oil product, steel, non-ferrous metal, gas and water, and realtor
industries.
Our conclusion is that the oil product, steel and non-ferrous industries consumed a lot of
natural resources (mainly oil), and suffered the impact of the oil shocks more than other
industries, and they have been devoted to streamlining themselves since the middle of the
1970s. It was possible that they carried out the streamlining of their operations in this process
even when they enjoyed the sales growth, and as a result, labor did not increase. We also infer
that the gas and water was a typical infrastructure-intensive or facility-intensive industry, and
the sales growth did not demand the labor growth accordingly, while in the case of the realtor
industry, there was not a correlation between the labor and the sale volume as they underwent
an enormous change in the situations surrounding the land prices around the time of the
bubble-burst.

14
“Ohwada, 2002” says in the similar analysis, “There was a significant positive relationship between
the employment number and the sales volume. On the other hand, there was no positive relationship
between the employment number and the RLP growth rate all through the survey period. The different
conclusion from that of our analysis may have come from the difference in the number of samples taken,
the survey period and the ranges of period.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 647
(Table 5)
Analysis by industry of the relationship between the labor, the PRO (Real Labor Productivity) and the sales volume in
the all-industry sector
We use the samples in 30 industries between 1976 and 2009. The estimation formula is identical to the one in Table 4.
Food p-value Machine tool p-value Gas & water p-value
Intercept 0.204395389 Intercept 0.434133455 Intercept 0.021736458
α 0.191047695 α 0.591538922 α 0.02199074
β 3.80678E-05 β 0.007782468 β 0.482136215

Textile p-value
Other
manufacturing
p-value Haulage p-value
Intercept 0.994469174 Intercept 0.415063204 Intercept 0.543347736
α 0.655352872 α 0.610793626 α 0.597835535
β 0.009309202 β 1.51446E-05 β 1.18185E-05

Lumber p-value
Electric
appliance
p-value Water transport p-value
Intercept 0.651965519 Intercept 0.675023025 Intercept 0.90876142
α 0.811546166 α 0.827674021 α 0.699974876
β 0.00139798 β 0.002758848 β 0.00563518

Pulp p-value
Auto & auto
parts
p-value Wholesale p-value
Intercept 0.660490861 Intercept 0.685295365 Intercept 0.727591085
α 0.645969473 α 0.566893402 α 0.660616013
β 0.087569039 β 0.003052239 β 0.016958102

Chemical p-value
Other transport
equipment
p-value Retail p-value
Intercept 0.432120069 Intercept 0.037624936 Intercept 0.858415766
α 0.754033199 α 0.148762126 α 0.935564078
β 0.076801855 β 2.1697E-19 β 0.012944147

Oil product p-value
Agriculture &
forestry
p-value Real property p-value
Intercept 0.733833446 Intercept 0.50836251 Intercept 0.216626395
α 0.566365454 α 0.531570411 α 0.252536307
β 0.969388846 β 0.000658912 β 0.394410326

Ceramics p-value Fishery p-value Lodging p-value
Intercept 0.75772653 Intercept 0.575601278 Intercept 0.78037326
α 0.970019498 α 0.676278754 α 0.87993276
β 0.017286602 β 5.6863E-05 β 4.48954E-11

Steel p-value Mining p-value
Daily lives
service
p-value
Intercept 0.571805135 Intercept 0.684350254 Intercept 0.119609655
α 0.299029213 α 0.531690842 α 0.126532536
β 0.136632309 β 0.038184385 β 0.000163927

Non-ferrous p-value Construction p-value Leisure p-value
Intercept 0.615714458 Intercept 0.684900782 Intercept 0.381183159
α 0.441277554 α 0.698455622 α 0.425790292
β 0.169934347 β 0.010945816 β 0.001706737

Metal product p-value Electricity p-value Other services p-value
Intercept 0.666513954 Intercept 0.760555042 Intercept 0.191057197
α 0.599901236 α 0.377633414 α 0.213816044
β 0.002700758 β 0.075056807 β 0.000521457
648 H Misono / Public Policy Review
Ⅴ. The Relationship between Capital Efficiency and Labor Efficiency
In our analysis of the efficiency of capital (Section 2) and the efficiency of labor (Section 3),
we study about the efficient distributions of capital and labor by making use of the ROA and
the RLP. However, as those two efficiencies are closely linked to each other in the real world, it
is important to analyze the relationship of the two in order to confirm the performance of
companies. In this section, we conduct the analysis by making use of the capital-labor ratio, or
the capital stock per labor in order to understand the relationship between the capital and the
labor efficiency.
Taking into account the fact that the low productivity of the non-manufacturing sector was
noted after the bubble-burst, and that the disparity of capital stock according to the size of
companies since the rapid economic growth era was regarded as the source of the “dual
structure,” which was specific to Japan, here we conduct an analysis separately between the
manufacturing and the non-manufacturing sectors, and also according to the size of companies.
We refer to the “dual structure” in our addendum.
Figure 4-1 shows a scatter plot of the relationship between the labor productivity and the
capital-labor ratio in the manufacturing and the non-manufacturing sectors between 1961 and
2009, and the same scatter plot by size of companies in the manufacturing sector is shown in
Figure 4-2, and the one in the non-manufacturing sector is shown in Figure 4-3. We can judge
by using these plots whether the increase in the level of the capital stock per labor led to the
improvement of the labor productivity, or in other words, whether efficient investments leading
to the increase in the added value were implemented during that time.
Figure 4-4 shows a scatter plot of the relationship between the ROA and the capital-labor
ratio in the manufacturing and the non-manufacturing sectors between 1961 and 2009, and the
same scatter plot by size of companies in the manufacturing sector is shown in Figure 4-5 and
the one in the non-manufacturing sector is shown in Figure 4-6. Taking note of the fact that
much of the total asset, which is the denominator of the ROA, is capital stock, we can judge by
using these plots whether the increase by one unit of capital stock led to the improvement of the
profit per unit of capital stock, or in other words, how the trend of the marginal productivity of
capital was.
Although, desirably, the labor productivity and the capital-labor ratio should be described in
real terms when we try to identify these relationships, but the capital stock and the labor
productivity by size of companies are described in nominal terms here, as it is hard to turn the
nominal series of stocks and the nominal labor productivity by size of companies into the real
ones.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 649
Ⅴ.1. The Relationship between the Labor Productivity and the Capital-labor Ratio
(1) The Trend of the Labor Productivity and the Capital-labor Ratio in the Manufacturing and
the Non-Manufacturing Sectors
According to the Figure 4-1, the labor productivity went up as the capital-labor ratio
increased
15
. And the manufacturing sector achieved higher labor productivity than the
non-manufacturing sector if the capital-labor ratio were the same, leading us to judge that the
manufacturing sector’s investment was efficient and led to the increase in the added value.
(Figure 4-1) The relationship between the labor productivity and the capital-labor ratio
(the manufacturing and the non-manufacturing sector)

Notes: The nominal labor productivity is gained by dividing the added value amount by the employment number.
The real labor productivity is gained by dividing the nominal labor productivity by the industrial deflator
(calendar year value).
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
In order to make clear the relationship between the nominal and the real labor productivity and capital-labor
ratio, the four groupings are adjusted so that they are set in the same level as those in the manufacturing sector
in real terms as of 1970.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office

15
Here we conclude that “the labor productivity was increased” by making analyses in the
manufacturing and the non-manufacturing sectors, separately. But as it is suspected that there was a big
gap in the labor productivity between different industries, it may be necessary to make analyses within
the same industries in order to reach a more accurate conclusion. We must leave it to a later occasion.
650 H Misono / Public Policy Review
(Figure 4-2) The relationship between the NLP and the capital-labor ratio
(the manufacturing sector)

Notes: The nominal labor productivity is gained by dividing the added value amount by the employment number.
The real labor productivity is gained by dividing the nominal labor productivity by the industrial deflator
(calendar year value).
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
In order to make clear the relationship between the nominal and the real labor productivity and capital-labor
ratio, the four groupings are adjusted so that they are set in the same level as those in the manufacturing sector
in real terms as of 1970.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office.
(Figure 4-3) The relationship between the NLP and the capital-labor ratio
(the non-manufacturing sector)

Notes: The size gap is described in the ratios gained by dividing large companies (with the capital of ¥ 1billion or
more) by small companies (with the capital of ¥100 million or less).
The wage is gained by dividing the personnel expenditure by the employment number.
The NLP gap is gained by dividing the added value by the employment number value.
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 651
(Figure 4-4) The relationship between the ROA and the capital-labor ratio
(the manufacturing and the non-manufacturing sector)

Notes: The capital-labor ratio is gained by dividing the average tangible fixed asset (excluding the construction
suspended account) by the employment number.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average
between the beginning and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
(Figure 4-5) The relationship between the ROA and the capital-labor ratio
(the manufacturing sector)

Notes: The capital-labor ratio is gained by dividing the average tangible fixed asset (excluding the construction
suspended account) by the employment number.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average
between the beginning and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
652 H Misono / Public Policy Review
(Figure 4-6) The relationship between the ROA and the capital-labor ratio
(the non-manufacturing sector)

Notes: The capital-labor ratio is gained by dividing the average tangible fixed asset (excluding the construction
suspended account) by the employment number.
The ROA is gained by dividing the operating profit and the non-operating profit by the total asset on average
between the beginning and the end of a term.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance and the “System
of National Accounts” by the Cabinet Office
If we especially take note of the relationship between the real labor productivity and the
capital-labor ratio, the approximate straight line was almost horizontal in the
non-manufacturing sector, telling us that the efficient investment that led to the increase in
added value did not materialize there.
(2) The Trend of the Labor Productivity and the Capital-labor Ratio by Size
According to Figure 4-2 and 4-3, if the capital-labor ratio were the same, small companies
achieved higher Nominal Labor Productivity than large ones both in the manufacturing and the
non-manufacturing sectors. It means that if small companies were given the same level of the
capital-labor ratio, they could have achieved higher Nominal Labor Productivity. However, as
in the real world the capital-labor ratio in small companies were much lower than in large
companies, the Nominal Labor Productivity of small companies fell far below that of large
companies during the same period. It was possible that small companies did let the opportunity
to achieve higher Nominal Labor Productivity slip by, but it may also have been possible that
the small companies could not have improved profits even if they had been equipped with
better capital. So we conduct a following analysis from the viewpoint of the “marginal
productivity of capital.”
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 653
Ⅴ.2. The Relationship between the ROA and the Capital-labor Ratio
(1) The Trend of the ROA and the Capital-labor Ratio in the Manufacturing and the
Non-Manufacturing Sectors
According to Figure 4-4, the ROA decreased as the capital-labor ratio increased. And the
manufacturing sector achieved higher ROA than the non-manufacturing sector if the level of
the capital-labor ratio were the same. That tells us that the investment in the manufacturing
sector was more efficient leading to more profit than that in the non-manufacturing sector. This
tendency was in line with the downtrend of the ROA that we confirmed in Section 2-1.
If we take note of the co-efficient of the approximate straight lines in the manufacturing and
the non-manufacturing sectors, they were minus 0.9177 in the manufacturing sector and minus
0.6664 in the non-manufacturing sector, showing that the marginal productivity of capital
gradually decreased. A point increase in the capital-labor ratio, or the increase in the capital
stock per labor by ¥1 million, led to the decrease of the ROA by approximately 0.9% in the
manufacturing sector, and approximately 0.7% in the non-manufacturing sector, telling us that
the diminishing marginal productivity of capital in the manufacturing sector was more drastic
than the one in the non-manufacturing sector.
In the background there may have been a difference in the situations surrounding the
manufacturing and the non-manufacturing sectors. The manufacturing sector produced the
goods and traded goods that faced the overseas competition through trading, while the
non-manufacturing sector produced the non-traded goods that barely faced the overseas
competition. Besides, the non-manufacturing sector was generally made up of the industries
protected by the government regulations, while the manufacturing sector’s industries were
rarely regulated. The comparison between the manufacturing and the non-manufacturing
sectors meant the comparison between the industries that faced severe overseas and domestic
competitions and the industries that did not. The degree of competition they were facing
seemed to have an impact on the company profit, and eventually, the marginal productivity of
capital. If surrounded by many competitors, it was difficult for individual companies to decide
for themselves the prices of their goods, or to gain high profits, and as a result, the marginal
productivity of capital dropped sharply. On the contrary, if companies were faced with few
competitors, it was all right for them to provide goods at higher prices, thus leading to a milder
drop of the marginal productivity of capital.
(2) The Trend of the ROA and the Capital-labor Ratio by Size of Companies
According to Figure 4-5 and 4-6, the ROA decreased as the capital-labor ratio increased,
and it was true of our analysis by size of companies. And almost all through the period, the
level of the ROA was higher in the manufacturing sector than the non-manufacturing sector,
654 H Misono / Public Policy Review
and the same was true of our analysis by size in the all-industry sector as well as the
manufacturing and the non-manufacturing sectors.
The co-efficient was negative in all sizes of companies, but the smaller the size was, the
lower the value of the co-efficient was in both the manufacturing and the non-manufacturing
sectors. It meant that the gradual decrease in the marginal productivity of capital was more
drastic in small companies. As we raise the question in Section 5-1. (2), small companies
equipped with better capital would not have produced the matching profit increase. We can
infer that small companies were concentrated in the industries where better stock capital would
not necessarily led to the improvement of the productivity, and also that they had difficulty in
securing human resources that could link better capital stock to the improvement of
productivity.
As we see from the level of the capital-labor ratio, there was a big gap in the capital stock
per labor between large, midsize and small companies, and some identify this as the origin of
the “dual structure.” However it may have been reasonable, from the viewpoint of the
judgment of individual companies, for large companies, whose marginal productivity of capital
decreased mildly, to improve their capital stocks, and for small companies, whose marginal
productivity of capital decreased drastically, to refrain from expanding stocks
16
.
Ⅵ. Summary
Our analysis based upon the data from the “Financial Statements Statistics of Corporations
by Industry” gives us the following conclusions about the efficiency of capital and labor and
the performance of the Japanese companies.
(1) Since the end of the rapid economic growth era, the real GDP growth rate, the sales
growth rate and the employment number growth rate had been on the downtrend, but they have
been showing an unprecedented sluggishness especially since the bubble-burst. The period
since the 1990s should be rightly called the “lost two decades” for the Japanese economy.
Since the end of the rapid economic growth era, the operating margin had been higher than
the recurring margin, but in the aftermath of the bubble burst, the gap between the two shrank,
and since the middle of the 2000s, the latter margin has been above the former one. In the
background, there was a decrease in the paid interest due to the downsizing of the corporate

16
Here we make separate analyses of the manufacturing and the non-manufacturing sectors and
conclude that “the marginal productivity of capital gradually decreased.” But as it is possible that there
were big differences in the marginal productivity of capital between industries, we should conduct
analyses within the same industry to reach a more exact conclusion. We should leave it to a later
occasion.
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 655
debt and the sharp drop of the debt interest rate. Considering that the Japanese companies were
struggling with the three redundancies of personnel, facility and debt after the bubble-burst, it
was a reasonable decision to shrink the size of debt, or lower the debt ratio, but we could say
that too “prudent” an attitude of the Japanese companies have atrophied the Japanese economy.
If we look at the relationship between the operating margin and the personnel expenditure
ratio, the operating margin decreased as if responding to the increase in the personnel
expenditure ratio, showing us that the increase in personnel expenditures squeezed corporate
profits. And the operating margin decreased more rapidly in the manufacturing sector than the
non-manufacturing sector. We can infer that the non-manufacturing sector contained many
domestic and regulated companies, which could transfer the increase in personnel expenditures
onto their prices, and therefore could rein in the decrease in profits, while in the manufacturing
sector, which faced the overseas competition, they could not raise the prices or transfer the
increase in personnel expenditures onto the prices, thus leading to the much sharper decrease in
the operating margin.
(2) The ROA decreased in the wake of the oil shocks and in the aftermath of the bubble-burst,
and it did not recover in the following economic recovery periods. The reason for that was that
after the oil shocks the sales did not necessarily deteriorate but they could not fully transfer the
cost increase coming from the inflation and the soaring personnel expenditures onto the prices,
leading to smaller margins and the dwindling ROA, while in the wake of the bubble-burst, the
Japanese companies were faced with both small profit margins and sluggish sales at the same
time. There was no difference detected between the manufacturing and the non-manufacturing
sector over this phenomenon.
And our analysis by year, size and industry shows that the Japanese companies make
investment strategic decisions generally focusing on the sales growth, but in a contingency
period such as the bubble-burst and the recession immediately after the world financial crisis,
large companies made a different decision by drawing a line under the sales volume growth.
(3) If we analyze the trend of the Nominal Labor Productivity, they remained positive
between 2000 and 2008 in the manufacturing sector, but the positive contribution from the
employment number factor and the real added value factor continued to be offset by the
negative contribution from the price factor. And in the non-manufacturing sector, the impact of
the deflation seemed small as the negative contribution from the price factor was not so big, but
the positive contribution from the real added value factor continued to be offset by the negative
contribution from the employment number factor.
Our analysis of the Nominal Labor Productivity by year, size of companies and industry
shows that the Japanese companies made an employment strategic decision generally focusing
on the sales growth, but recently, there was a sign that they were growing out of the attitude of
656 H Misono / Public Policy Review
stressing the importance of the sales growth.
(4) If we look at the relationship between the labor productivity and the capital-labor ratio, the
manufacturing sector made more efficient investment leading to the more increase in the added
value than the non-manufacturing sector, and small companies achieved higher Nominal Labor
Productivity both in the manufacturing and the non-manufacturing sectors if the capital-labor
ratio were the same, but as in the real world the capital-labor ratio in small companies was
much smaller than that of large companies, the level of the Nominal Labor Productivity during
the same period was much lower in small companies than in large companies.
As to the relationship between the ROA and the capital-labor ratio, the marginal
productivity of capital decreased more rapidly in proportion to the decrease in the capital-labor
ratio in the manufacturing sector than in the non-manufacturing sector. That reasonably
explains a low capital-labor ratio in small companies.
Addendum. The Change in the “Dual Structure”
As we conduct the analysis by size of companies according to the theme of each of the
sections, we find out that there was a big gap in performance according to the size of
companies. Therefore we make a comparison here between large and small companies and
make more detailed analysis of the trend of the performance by size of companies.
1. The Turning Point in the Trend of the Gap by Size
The gaps between large and small companies were gained by dividing the wage, the
Nominal Labor Productivity and the capital-labor ratio of large companies by those of small
companies, respectively, and they are described in Figure 6-1 to Figure 6-4. Figure 6-1 shows
the all-industry results, while Figure 6-2, Figure 6-3 and Figure 6-4 show each of the gaps both
in the manufacturing and the non-manufacturing sectors.
According to Figure 6-1, all gaps in the wage, the Nominal Labor Productivity and the
capital-labor ratio were relatively big in the former half of the rapid economic growth era, but
after the 1960s they continued to shrink. The gaps began to widen again in the aftermath of the
bubble economy’s collapse, before shrinking again at the time of the world financial crisis
17
.

17
We divide the gaps in the wage, the Nominal Labor Productivity and the capital-labor ratio into 6
periods between 1962 and 2009 as follows:
Year Wage gap NLP gap Year Capita-labor ratio gap
62-69 1.85 2.65 62-70 5.85
70-77 1.73 2.26 71-79 4.75
78-85 1.62 2.24 80-87 4.60
86-92 1.59 2.03 88-95 4.33
93-2001 1.61 2.09 96-2002 4.52
02-09 1.69 2.34 03-09 5.10
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 657
(Figure 6-1) The trend of the gap by size (all-industry) (large & small companies)

Notes: We gain the gap by size by dividing large companies (with the capital of ¥1 billion or more) by small
companies (with the capital of ¥100 million or less).
The wage is gained by dividing the personnel expenditure by the employment number.
The Nominal Labor Productivity is gained by dividing the added value by the employment number.
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure 6-2) The trend in the wage gap (the manufacturing & non-manufacturing sectors) (large
& small companies)

Notes: We gain the gap by size by dividing large companies (with the capital of ¥1 billion or more) by small
companies (with the capital of ¥100 million or less).
The wage is gained by dividing the personnel expenditure by the employment number.
The Nominal Labor Productivity is gained by dividing the added value by the employment number.
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
658 H Misono / Public Policy Review
(Figure 6-3) The trend of the Nominal Labor Productivity gap (the manufacturing &
non-manufacturing sectors)

Notes: We gain the gap by size by dividing large companies (with the capital of ¥1 billion or more) by small
companies (with the capital of ¥100 million or less).
The wage is gained by dividing the personnel expenditure by the employment number.
The Nominal Labor Productivity is gained by dividing the added value by the employment number.
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
(Figure 6-4) The trend of the capital-labor ratio gap (the manufacturing & non-manufacturing
sectors) (large & small companies)

Notes: We gain the gap by size by dividing large companies (with the capital of ¥1 billion or more) by small
companies (with the capital of ¥100 million or less).
The wage is gained by dividing the personnel expenditure by the employment number.
The Nominal Labor Productivity is gained by dividing the added value by the employment number.
The capital-labor ratio is gained by dividing the tangible fixed asset on average between the beginning and the
end of a term (excluding the construction suspended account) by the employment number.
Data: The “Financial Statements Statistics of Corporations by Industry” by the Ministry of Finance
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 659
If we refrain from making a certain conclusion about the impact of the world financial crisis
as it is an ongoing phenomenon as of now, the trend of the gaps according to the size of
companies made an only turning-point since the era of the rapid economic growth when the
bubble economy collapsed. Our agenda here is to analyze the trend of those gaps from a
historical perspective.
2. The Background of the Shrinking Gap by Company Size between the Rapid
Economic Growth Era and the Bubble Economy
A large gap by size in conditions such as the wage, the Nominal Labor Productivity and the
capital-labor ratio in the former half of the rapid economic era was described in the Economic
White Paper published in 1957 as the “dual structure
18
,” where modern large companies and
pre-modern small and midsize companies coexisted. Some attribute the origin of this structure
to the government’s almost compulsory wartime policy of enhancing Japan’s “keiretsu”
corporate networks
19
, and this structure was sometimes even subject to the criticism by those
arguing that it was a pre-modern system that was particular to the Japanese economy.
This gap according to the size of companies was caused by Japan’s labor market structure
20
.
After WW2 the redundant labor force in the rural areas flowed into the urban areas, resulting in
low-wage workers in small and midsize companies. The reason why this gap continued to exist
until the latter half of the rapid economic growth era was explained by the division of the labor
market. In large companies, wages increased according to the length of service under the
lifetime employment system, while in small and midsize companies the wage hike was
restrained as labor was redundant. Further, it was difficult for workers to transfer to small and
midsize companies from large companies, while the other way around was more or less

18
The “dual structure” theory originated with Hiromi Arisawa, who argued, “the Japanese economy does
not have an economic structure of single and homogeneous nature like that of the western developed
countries. The Japanese economy is made up of a two-tear, hierarchical structure. Its economic structure
is divided into a modernized and a pre-modernized areas, and there is a big gap between them. The
modernized area is making a rapid progress, while the pre-modernized area is stagnant. The stagnation in
this pre-modernized area is a ground upon which our employment structure itself is stagnated.”
Arisawa, Hiromi, “Japan’s Economic Structure and Employment Problem,” Japan productivity Center,
1957
19
Okazaki, Tetsuji & Okuno, Masahiro, “The Origin of the Modern Japanese Economic System, Series
Modern Economic Studies Vol.6,” Nikkei Press, Nakamura, Takahide, “The Economic System in
Modern Japan,” Tokyo University Press and so on
20
In order to study the labor redundancy and shortage and the “dual structure,” we should essentially
analyze the 1920s, when Japan was suffering from constant recessions with labor redundancy, and the
Second World War period, when Japan was faced with the shortage of adult male workers because of war,
and the period between the latter half of the 1940s and the 1950s, when the labor redundancy continued
because of the surge of the war returnees, but as here we focus on the period after the rapid economic
growth era, these periods are not our agenda here. We should leave it to a later occasion.
660 H Misono / Public Policy Review
possible. This labor market structure made possible a big wage gap according to the size of
companies
21
.
Low-wage workers in small and midsize companies meant that the labor cost was kept
relatively low compared with large companies. Accordingly, small companies had a
labor-intensive structure. On the other hand, large companies could keep the cost of capital
relatively cheap, and thus they came to have a capital-intensive structure. This caused the gap
in the capital-labor ratio, leading straight up to the productivity gap.
The “dual structure” neared an end in the latter half of the rapid economic growth era in the
1960s. The labor redundancy, which mainly supported this structure, turned into the labor
shortage. An upward wage pressure on small and midsize companies caused the gap to come
close to an end. The disappearance of the wage gap meant a relative decrease in the capital cost
for small companies, leading to the accumulation of capital stocks and resulting in the
shrinking of the Nominal Labor Productivity gap. Although gaps in the wage, the Nominal
Labor Productivity and the capital-labor ratio were shrinking, a certain amount of it remained
even in the 1980s. Especially the gap of the capital-labor ratio was 6 to 1 in the manufacturing
sector and 3.5 to1 in the non-manufacturing sector as of the year of 1990, showing that the gap
remained still large. But it was also possible, as we discuss in Section 4-2. (2), that it was the
gap due to individual companies’ reasonable judgment based upon the gap of the marginal
productivity of capital.
3. The Background of the Widening Gap after the Bubble Burst
Until the 1980s the disparity according to company size kept on shrinking, but in the wake
of the collapse of the bubble economy, the gap widened in reversal. Although the wage gap did
not expand much in the non-manufacturing sector after the bubble burst, about1.6-fold gap as
of immediately after the bubble burst widened to almost 2-fold in the middle of the 2000s in the
manufacturing sector, and the gap of the Nominal Labor Productivity widened from about
1.7-fold to about 2.8-fold in the manufacturing sector, while from about 2-fold to about 2.5-fold
in the non-manufacturing sector, and the capital-labor ratio gap widened from about 5.3-fold to
about 7.1-fold in the manufacturing sector, while from about 3.3-fold to 4.0-fold in the
non-manufacturing sector during the same period, with almost all indicators showing an
increasing gap. Since 2008, when the world financial crisis had an impact on the economy,
each indicator has shown a complex reading, but we will refrain from making a certain
conclusion as we understand that the crisis is an ongoing phenomenon as of right now.
The background against which the “dual structure” was shrinking before the time of the

21
Shinohara, Miyohei, “The Centralization of Capital, the Dual Structure and the Rapid Growth,” in
“The Structure and Policies of the Japanese Economy,” Chikuma-shobo, 1987
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.8, No5, November 2012 661
bubble-burst was the fact that the labor redundancy turned into the labor shortage as we point
out in Section 6-2 while we infer that there was a reversal once again from the labor shortage
to the labor redundancy as a background against which the revival of the “dual structure” took
place
22
. As we confirm in Section 2-1, a negative year-on-year employment number growth
had never been recorded before the 1990s, but since 1990s a negative reading has occupied
almost half of the following 20 years, possibly proving that there was indeed a reversal from
the labor shortage to the labor redundancy.

22
In order to analyze the present employment situation, it is essential to study the “employment
mismatching” in addition to the labor redundancy and shortage. We should leave it to a later occasion.
662 H Misono / Public Policy Review
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