Productivity in Japan, the US, and the Major EU Economies: Is Japan Falling Behind?

Using the recently released EU KLEMS Database (March 2007) and other statistics, we examined whether Japan experienced similar problem as the major EU economies with regard to the introduction of ICT to market services. The major results obtained through our analysis are follows: 1. It is not the gap in TFP growth but differences in factor input growth that underlie the large difference in the economic growth performance of France, the UK and Italy on the one hand and Japan on the other in the period after 1995. The four major EU economies (Germany, France, the UK and Italy) and Japan experienced a slowdown in TFP growth of a similar magnitude after 1995. The US was exceptional in accomplishing an acceleration in TFP growth. 2. TFP growth in the electrical machinery, post and communication sector was still highest in Japan among the six economies after 1995. However, the problem for Japan is that, like in other countries, the share of this sector in the economy overall is not very large. The largest declines in TFP growth in Japan occurred in distribution services (retail, wholesale and transportation) and in the rest of the manufacturing sector (i.e., excluding electrical machinery). The labor input shares of these two sectors were very large (23.4% and 16.8% respectively). The US and the major EU economies except Italy recorded high TFP growth in these two sectors. 3. In manufacturing sectors, productivity levels in Japan were on par with those in the US, Germany and France. However, they were very low in comparison with the three countries both in market services and other goods-producing industries. It therefore seems that there is large room for improvement in Japan's productivity in market services and other goods-production services through the adoption of already existing technologies and better resource allocation. 4. The US and the UK experienced a very rapid increase in ICT capital service inputs after 1995. In contrast with this, in Japan, the contribution of ICT capital service input growth declined in all sectors after 1995. Across the six countries, we can observe a positive correlation between ICT capital service input growth and TFP growth. This fact supports the conjecture that Japan's sluggish growth in ICT capital service inputs is at least partly responsible for the slowdown in Japan's TFP growth after 1995. 5. According to several recent studies, it seems that in order to fully realize the direct and indirect efficiency-improving effects of ICT capital, the simultaneous accumulation of intangible assets, such as human capital and organizational capital, is indispensable. Investment activity in intangibles is less active in Japan than in the US and the UK, although there are many high-skilled workers in Japan. The relatively low level of intangible investment may be a good candidate to explain why the accumulation of ICT capital and TFP growth stalled in Japan.