Why Corporate Governance is Central to Japan’s Growth Strategy

Just to add a few additional points in addition to Nick’s insightful comments–>  Given (a) evidence that productivity in Japan is very strongly influenced by investment-specific technology, and (b) evidence that services sectors in the non-IT sector were “left behind” while manufacturing and IT sectors were able to capitalise on the technology boom, it makes sense to focus efforts on structural reform in the services sector.

Still, as Fukao, Miyagawa and Hisa demonstrated in their 2012 paper,increasing intangible capital alone has proven no indicator of rising TFP in the services sector.  This may explain why policies designed to promote growth via intangible investment in services sector in the early 2000’s were misplaced.

So what are the policy alternatives?  The second TFP paper gives us some key policy ingredients:

1. As argued in TFP paper 2, incentives designed both at once to decrease “dead weight capital” as well as to increase investment in innovative capital (a subset of intangible investment) are more appropriate.

2. Given productivity in the services sector in particular is sensitive to deregulation (in a way manufacturing is not), policy incentives to achieve better asset allocation need to be consistent with deregulation, even though deregulation alone has its limits.

If so, what is the determining factor?  Corporate governance.

Corporate governance is one major determinant of capital allocation in a market-determined economy, and where “good governance” results in good capital allocation, the hypothesis is that TFP should also recover. Pending data, further empirical analysis on characteristics of “good corporate governance” could complement existing analysis on productivity. Where able to obtain consistent empirical data on “good corporate governance” we might engage in econometric analysis to test this hypothesis empirically.

Development of trackable metrics at firm and industry level would be desirable. Perhaps it is time to resuscitate and enhance the “Deregulation White Paper” series (規制緩和白書)with a ガバナンス白書series (with data, please).


  1. Absolutely spot on. It is heartening to know that the more experts analyze the numbers in depth, they always come with very similar conclusions: growth in Japan requires a big productivity boost; but Japan has a major asset allocation/reallocation/metabolism problem (i.e., it is slow); and the only realistic way to address that with significant impact is in the services sector, with better corporate governance unfortunately Japan still lacks enough.

    Incidentally, one does not have to be an econometric genius like Naomi to strongly suspect that Japan must focus on it services sector. Non-manufacturing (which is mainly services) accounts for 80% of its GDP, and productivity growth in the services sector has been extremely slow (as compared to vigorous productivity growth for manufacturing) for decades. At the same time, labor productivity is running at only 60% of the US level, and stopped catching with the US about 20 years ago. In recent years, it has been losing ground. Services is the long handle of the lever. Or said another way, if Japan cannot productivity in services, it faces an impossible task.

    This is all why I proposed and led the “Growth Strategy Task Force” analysis and White Paper project in 2010. Based on analysis by Professor Fukao at Hitotsubashi and Professor Eberhart (then Stanford, now Santa Clara), this White Paper arrived at essentially identical conclusions to Naomi’s and served as one of the most significant bases for the LDP’s Third Arrow themes set forth in 2013. The only problem is that the LDP has not followed through with many of those themes except corporate governance. Here is the White Paper, which for the most part is still as relevant as it was then:

    Charting a New Course for Growth ~ Recommendations for Japan’s Leaders

    成長に向けた新たな航路への舵取り ~ 日本の指導者への提言

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