It hurts in Japan just as much as here

IN JAPAN the government's answer to the recession is to bring in a package of public spending that will, in theory at least, add a couple of percentage points to economic growth. Money will be spent on such things as education, hospitals and research institutes at major universities; there will be help for small- and medium-sized businesses hit by recession, and subsidies to companies to help pay for shorter working hours and retraining; for individuals there will be tax breaks for private house purchase; and for the rest of us outside Japan, there will be schemes to encourage imports.

All this must, to recession- battered Britons, seem like a wish-list for what the Government might do, or might have done, here. As with all things Japanese, one needs to be aware of the gap between the statement and reality - this is, after all, the third reflation package the Japanese government has produced in less than a year, and the economy has continued its downward plunge into recession - but one is left with a nagging doubt that Japan has managed to cope better than Britain.

We were not too worried yesterday by seeing producer prices rise by only 3.7 per cent over the last year; in Japan wholesale prices were down by 1.2 per cent. We were relieved that unemployment fell in February to 10.5 per cent of the working population; in Japan the comparable figure was 2.3 per cent.

Why, then, do they seem to be doing better than us? First, it is not yet clear to what extent they are, for the Japanese recession is less mature than the British: ours is clearly over, theirs almost certainly not. In any case, on some measures the Japanese recession is actually deeper than ours: their retail sales have been down 3 per cent year-on-year, while ours, published today, should be up by the same margin; their industrial production is down by nearly 8 per cent, while ours should be up by about 0.5 per cent. What Japan is good at is stopping big swings in output from throwing people out of work.

But there is another, more interesting answer. The Japanese economy has a number of built- in buffers that absorb the shocks that can jolt any economy. These buffers are very useful, but they carry a price.

There are at least four important buffers. First, wages are much more flexible than in Britain. Large companies typically pay out a quarter of their wage bill in the form of overtime or bonuses. They are able, therefore, to cut their wage bill by cutting pay, rather than making people redundant as they would in the UK.

When the wage bill can no longer be trimmed in this way, they turn to the second buffer, the small-firms sector. Less than 40 per cent of Japanese employees work for the large firms that offer lifetime employment. The rest work for smaller firms, often family owned, which operate in loose partnership with the large ones. In the past, these smaller firms have helped absorb shocks, such as the surge in the yen, by cutting their own costs, often by displacing workers who were beyond normal retirement age. ('Lifetime' employment usually ends at 55 with an inadequate pension, forcing older workers to seek less-well-paid jobs in small companies.)

In the present recession some large firms have gone further and asked the smaller ones to take on their surplus labour. They pay them to do so, either directly, or in the form of contracts that offer a fatter-than- usual margin.

Many of the smaller firms are in the service sector, the third main buffer. The service sector in Japan is highly protected and inefficient in ways that seem ludicrous to a North American or European. Example: I was told during a visit last month that there were no self-service filling stations in Japan. This was a safety regulation: cars should not be filled by unauthorised people because of the fire risk.

Of course, it is not that at all. Garages are a protected species. They are also granted the lucrative business of annual vehicle safety checks, which cost more than pounds 1,000 for older cars and so also encourage people to buy new ones.

Other forms of protection abound: small shops have been preserved by restrictions on the size and location of supermarkets. Use of automatic teller machines has been restricted to business hours because the small banks were worried they would lose business.

All this enables the service sector to mop up the labour that is not absorbed by the manufacturing sector. People take the jobs, which are not at all well paid, because of the social pressures against going on the dole. Other people who do not appear on the unemployment register include young women who leave jobs to get married and the early retired.

There is a fourth buffer, as important as any of these. Japan has statistically high savings that have helped fund its high investment. But these have social as well as economic significance, for they mean that individuals have a buffer against hard times. Not everyone is so fortunate, but in a society where more than 90 per cent of the population considers itself middle class, the habit of thrift is deeply rooted. The pain of recession in Japan is as great as in the UK, but individuals tend to have a fatter financial cushion.

Of course, nothing in economics is without cost. In Japan the cost is living standards that are lower than they ought to be given the level of GDP per head. People pay more for services. They work 10 to 20 per cent longer hours than in other industrial countries (and on average take only half their holiday allowance). They have only some two-thirds the living space per person of Americans, four- fifths of Europeans. This is not only a result of Japan's land shortage but also a function of building regulations. And there are the social pressures that encourage the disadvantaged to suffer in silence, rather than march in the streets.

The result is a wonderfully ordered society with the appearance of coping well with economic change, which in a way it is. But if Japan is to continue to get richer it must change tack and start encouraging the same sort of efficiency in its service sector as in its manufacturing.

Fortunately, the sense of order has the further virtue of facilitating a discussion of radical economic change in a less confrontational way than is possible in Britain. One example is in the new five-year plan for the economy produced by the Japan Center for Economic Research. This argues that the highly regulated service sector needs greater freedoms if it is to make its proper contribution to economic growth. Many of the areas where it seeks deregulation are familiar: domestic airlines, telecommunications, finance, retailing.

The more Japan deregulates its service sector, of course, the harder it will be for that sector to act as a buffer in the labour market. Japan is good at managing change, but it is no easier there than it is in Britain.

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