Recent Socioeconomic Issues • 3

Japan’s Investment in Human
Resources & Innovation: Searchingfor Ways to Increase Productivity
Author Miho Takizawa

By Miho Takizawa
Achieving a New Normal in the Post-Corona Age

areas – digitalization, the creation of human capital, and innovation
will be the key to future growth. The outline also calls for “thoroughimplementation of wise spending through budget formation thattakes a stronger multi-year approach, with an emphasis on evidencebased policy making (EBPM) that gives budget priority to effective
measures that are backed by evidence and the collection of data”,
emphasizing the importance of data-based analysis.
In this article, I will present various data to demonstrate thecurrent situation with regard to Japan’s productivity, innovation, andinvestment in human capital, and consider measures to achieve
economic growth through enhanced productivity.

The Cabinet approved the Basic Policy on Economic and Fiscal
Management and Reform (Outline) 2020 on July 17, 2020. Facedwith the demands of a world undergoing major changes as a resultof the new coronavirus pandemic, the outline envisions a new, postcorona future and identifies three goals to be pursued to transformsociety for the future. Those objectives are: a society in which
individuals shine, and everyone can feel fulfilled wherever they are;an inclusive society in which everyone can feel a purpose to their life,
with no one left behind; and a country that is trusted and respected,
and deemed indispensable to international society.
To achieve a new normal in the post-corona age, the outline
presents five main policies. One of those is to “Strengthen
investment in ‘people’ and innovation”. Specifically, this is expressed
as promoting stepped-up investment in intangible assets in three

Japan’s Productivity
With a declining birthrate and aging population, increasing
productivity is indispensable to maintaining and expanding Japan’s

CHART 1

Japan’s productivity by industry (added value per work hour)& share of added value (2017)
Horizontal axis: Share of added value (%)

Vertical axis: Labor productivity (US = 100)
0

20

60

40

128.3

80

* Blue shading: Service industries portion
US productivity (= 100)

100
79.4

75.4
64.0

61.4

60.8

58.6
51.0

50

46.1

43.1

38.5

36.6

32.6

32.3

27.1

20.6
13.9 6.5

Farming, fishing, and forestry

Telecommunications
Mining* Manufacturing industries total: 69.8
Service industries total: 48.7

Oil and coal products

Real estate

Wholesale andretailFoodstuffs

Accommodation anddining services
Electricity, gas, water, andwaste processing

Transport and mail

Other services

Other manufacturing(textiles, pulp, paper, and processed
paper products, ceramics and stone
products, lumber and wood products,
rubber, plastics, etc.)

Specialist and scientifictechnologies, Businesssupport services

Transport equipment

Finance and insurance

General-use, manufacturing,and office equipment and machinery,
Electronic components and devices,Electrical machinery, Information andtelecommunications equipment

Primary metals andmetal products

Construction

Chemicals

2.90Source: Japan Productivity Center, “International Comparison of Labor Productivity (2017)”

28 Japan SPOTLIGHT • September / October 2020

https://www.jef.or.jp/journal/

Recent Socioeconomic Issues 3(¥8.24 million), which was somewhat below the United Kingdom($93,482 / ¥9.48 million) and Canada ($95,553 / ¥9.69 million), andonly 21st among the 36 OECD member countries.
This shows that for Japan as a whole, the amount of added value
per work hour and per employed person is the lowest among theseven major countries. On this point, what are the results when wecompare by specific industries? Chart 1 shows a comparison ofJapan’s labor productivity by industry for 2017. The chart uses theaverage level of labor productivity by industry in the US as 100, andshows Japan’s labor productivity by industry (amount of value added
per hour [2011 basis], vertical axis) and share of added value(horizontal axis). The industries with the result unshaded are
manufacturing industries, and the results for service industries areshaded in blue. This shows that the only industry for which Japan’slabor productivity is higher than that of the US (a figure above 100)
is chemicals, and for most industries Japan’s level is below that of
the US. In particular and with the only exceptions being finance andinsurance, specialized and scientific technologies,
CHART 2business support services (research andMajor countries’ labor productivity –development services, advertising, leasing
service industries
services, etc.), and other services (including thepersonal services of laundry, barbers, beauticians,(2017; Japan = 100)
(1997; Japan = 100)
0
100
200
300
0
100
200
300
and bathing), productivity in tertiary industries is
264.8
238.3
Luxembourg 1
Luxembourg 1
less than half that of the US, and at 48.7 the figure
174.5
205.4
US 2
US 2
152.3
161.5
Netherlands 3
Italy 3for service industries as a whole was below half
149.3
156.8
Ireland 4
Germany 4
the level of the US.
147.8
154.8
Germany 5
Netherlands 5
146.6
153.3
Denmark 6
Denmark 6
Chart 2 shows a comparison with European
134.3
146.9
UK 7
France 7
Union countries as well as the US. This shows
133.4
143.1
Sweden 8
UK 8
125.2
139.6
France 9
Spain 9labor productivity for all service industries for
124.1
137.0
Italy 10
Sweden 102017 and 1997, with Japan used as a benchmark
123.1
123.7
Austria 11
Finland 11
118.6
121.7
Finland 12
Ireland 12
of 100. The first thing we can see is that the gap
120.2
114.6
Spain 13Austria 13
106.1
100.5
Slovenia 14
Greece 14
between the US and Japan in labor productivity for
100.0
100
Japan 15
Japan 15service industries is growing (with Japan at 100,
90.6
97.4
Czech Republic 16
Slovenia 16
89.6
93.9
Greece 17
Portugal 17
the US went from 174.5 in 1997 to 205.4 in 2017).
84.1
76.2
Portugal 18
Czech Republic 18
Second, although Japan’s rank was unchanged
22.4
13.5
Lithuania 19
Lithuania 19
from 1997 to 2017 at 15th, the gap with the US
Source: Japan Productivity Center, “International Comparison of Labor Productivity (2017)”
and many European countries is widening. Chart 3
shows the same comparison for all manufacturing
CHART 3industries. Japan’s rank from 1997 to 2017
Major countries’ labor productivity –remains the same at 11th. One difference frommanufacturing industries
service industries, though, is that except for a few(2017; Japan = 100)
(1997; Japan = 100)countries the gap is not widening.
0
20
40
60
80 100 120 140 160
0
100
200
300
400
500
432.1
137.6
US 1
Ireland 1
There are, however, certain things that need to
157.7
136.0
Finland 2
Finland 2
betaken into account in this type of international
143.3
125.7
Germany 3
US 3
137.8
Italy 4
Sweden 4
125.5
comparison. For example, comparisons of
130.1
France 5
France 5
119.4
productivity for service industries, which do not
122.9
Netherlands 6
Netherlands 6
116.7
120.5
Ireland 7
Germany 7
115.2
deal in the exchange of goods, need to be adjusted
104.8
Sweden 8
Denmark 8
111.6
for international differences in service “quality”
101.8
Luxembourg 9
Italy 9
102.1
100.4
UK 10
UK 10
100.2
and when making measurements there are no
100.0
Japan 11
Japan 11100
indicators sufficiently able to account for
88.1
Denmark 12
Austria 12
96.9
80.6
Austria 13
Czech Republic 13
81.5
differences in quality. Nevertheless, it would
79.8
Greece 14
Slovenia 14
79.6
72.6
Spain 15
Luxembourg 15
59.2
probably be difficult to account for the large
71.3
Greece 16
Spain 1659.2
differences in productivity between Japan and the
52.5
Czech Republic 17
Greece 17
45.0
34.1
Portugal 18
Portugal 18
36.9
US indicated above (and for services in particular)
8.4
Lithuania 19
Lithuania 19
3.9
as being entirely due to differences in quality.
economic activity. This raises the question of how Japan’s
productivity compares with that of other countries. Since 1981, theJapan Productivity Center has published an International Comparisonof Labor Productivity (domestic productivity, calculated as grossdomestic product per employed person per hour) based on OECDand World Bank data. The most recent results, published in 2019 andbased on OECD data for 2018, show that Japan’s hourly laborproductivity (added value per work hour) was $46.8 (¥4,744 /purchasing power parity (PPP) equivalent basis), which was slightly
more than 60% of the figure for the United States ($74.7 / ¥7,571)
and ranked 21st of the 36 OECD member countries. Looking at
Japan’s labor productivity on a nominal basis, although there was a
1.5% increase from 2017, Japan’s ranking was unchanged, andamong the seven major countries, data going back to 1970 (theoldest available) show that Japan has continuously ranked last.
Looking at labor productivity as added value per person, for 2018 thefigure for Japan (added value per employed person) was $81,258

Source: Japan Productivity Center, “International Comparison of Labor Productivity (2017)”
Japan SPOTLIGHT • September / October 202029

Recent Socioeconomic Issues 3

Practically speaking, there is a pattern in international differences in
productivity that cannot be ignored, and this is an issue for Japan’s
economy that needs to be addressed quickly.

Japan’s Innovation
Having demonstrated Japan’s low productivity, we will next look atdata to assess trends in “innovation”, the source of productivity
enhancement and economic growth. The leading survey for trends ininnovation in Japan is the Japanese National Innovation Survey(J-NIS), carried out by the Ministry of Education, Culture, Sports,
Science and Technology’s National Institute of Science andTechnology Policy (NISTEP). This survey covers private sector
companies with 10 or more employees (with some industries
excluded), and has been carried out five times since 2003. The
following is a summary of the results of the latest survey, carried out
in 2018.
The 2018 survey covered the three-year period from 2015 to 2017
and was designed to ask about innovation activities that had been
“implemented” and “achieved”. For example, with regard toinnovation activities (all activities that had been undertaken with the
expectation of producing innovation for the company), 38% ofcompanies carried out activities. In addition, as the size of thecompany becomes larger, the implementation rate tends to rise, with
36% of small companies, 47% of medium-sized companies, and
60% of large companies responding that they had carried out
innovation activities. Another feature is that the implementation rate
for manufacturing industries (47%) is higher than for service
industries (37%). In terms of the specific details of their innovation
activities, 68% of companies that carried out innovation activities
selected “Yes” for “Employee training activities”. This was followedby the percentages of companies that responded “Yes” for“Acquisition or lease of building, equipment, machine, or othertangible assets” and “Engineering, design and other creative work
activities”.
Using this survey to determine the amount of input invested toachieve innovation, let us look at the percentage of companies that
achieved the output of innovation. The percentage of companies
having achieved innovation (having “New or improved goods orservices which have been introduced on the market by yourenterprise” or “New or improved business processes which havebeen implemented within your enterprise”) was 34% of allcompanies. Again, we can also see that the achievement rate rises as
the size of the company becomes larger. As a simple summary of theresults, 38% of companies carried out innovation activities and 34%
of companies achieved innovation, which suggests that most of thecompanies that carried out innovation activities achieved some formof innovation. It is also significant that 41% of manufacturing
companies achieved innovation, which was again higher than forservice industries’ achievement rate of 32%.
Taking a closer look at the achievement of innovation, 12% of all
respondents replied that they had achieved product innovation (“Anew or improved goods and services which has been introduced on
the market”). With regard to product innovation, it is possible to
make time comparisons by referring to previous surveys. Compared
30 Japan SPOTLIGHT • September / October 2020

with the three-year period from 2009 to 2011, the percentage of all
respondents having achieved product innovation declined in the
period from 2012 to 2014, and declined further in 2015-2017. The
rate of decline in the achievement rate for product innovation wasparticularly large at medium-sized companies. The survey also
analyzes the correlation between innovation and the age of thecompany, but does not show a difference in the number of years a
company has existed between those that carried out innovation andthose that did not.
Taking all of this together, we can surmise that close to 40% of thesurveyed companies carried out innovation, and roughly one-thirdachieved some type of innovation. It is also clear that both theimplementation rate and the achievement rate rise as the size of thecompany becomes larger, and that the rates for manufacturingindustries are higher than for service industries.
How do these percentages of companies implementing innovation
activities and achieving innovation in Japan compare with those ofother countries? In the OECD report Innovation Indicators 2019,Japan ranks 27th of 38 countries in its percentage of innovative
firms (companies implementing innovation activities continuously
during the survey period, including abandoned activities) for theperiod 2014-2016, at 42%. The highest figure was for Switzerland, at
73%, and the US ranked 7th at 65%. Japan also ranked low in termsof the percentage of companies having achieved an innovation in a
product or business process, coming in 27th of 38 countries at 38%.
In this ranking, Canada was highest at 79%, and the US ranked 7th
at 62%. Looking at the seven major countries, the percentage ofcompanies in Japan implementing innovation and achieving
innovation is the lowest, as with international comparisons of
productivity (data for the percentage of companies implementing
innovation in Canada is missing).
There is some criticism of the innovation surveys we haveexamined to this point, however, because the replies are madesubjectively by persons within the responding company and are
therefore not necessarily objective. Nevertheless, J-NIS is conductedaccording to an international standard (the “Oslo Manual; Guidelines
for Collecting, Reporting and Using Data on Innovation”), so we canassume that a certain degree of international comparability is
maintained.
Respective countries’ data confirms that the more active a country
is in terms of innovation activities, the higher its rate of innovationachievement. Why, then, are the figures for Japan so low? J-NIS
asks about factors hampering innovation activities. For the three
years from 2015 to 2017, the main factor hampering innovation was“Lack of skilled employees within your enterprise,” with 61% of all
respondent companies citing this as a factor. This was followed by“Different priorities within your enterprise” and “Uncertain market
demand for your enterprise’s ideas”. On the other hand, thepercentage of companies citing “Lack of credit or private equity byfinancial institutions or investors” was relatively low at 22%. Thisshows that a lack of capable human resources is the problem thatneeds to be addressed for the implementation of innovation
activities.

Recent Socioeconomic Issues 3

Japan’s Investment in Human Capital
Innovation can be seen as a useful means of achieving increased
productivity and economic growth. Unfortunately, Japan’s level ofproductivity and percentage of companies achieving innovation are
the lowest among the seven major countries. Given that countries
with high rates of innovation activities also have high rates ofinnovation achievement, invigorating innovation activity can be seen
as what Japan should do first. As noted previously, however, there isa problem of a drastic shortage of capable human resources who areable to propose and implement businesses related to innovation(human capital).
The accumulation of this human capital requires a discussion ofwhat needs to be done before an employee is hired and what needs
to be done after they are hired. First, prior to employment, theimportance of human resource training in the STEM (science,technology, engineering, and math) fields is recognized in countries
around the world. In the US, for example, in anticipation of a future
shortage of STEM-related human resources, elementary andsecondary school teachers are being trained in the STEM fields. In
the EU as well, targets were set 10 years ago to increase the numberof college students graduating with strengths in the natural sciencesand engineering. In Japan, on the other hand, the number ofstudents entering university in the STEM fields is among the lowest
among OECD countries.
What is important for the development of human capital after
hiring? For this, we have useful data for Japan’s investment in
human capital in the Japan Industrial Productivity (JIP) database.
The JIP database estimates human resource investment as a sum of
the expenses incurred for off-site training (Off-JT) and hours lost foroff-site training (opportunity cost). Chart 4 shows an international
comparison of human resource investment as a percentage of GDP.
As a percentage of GDP, Japan’s human resource investment from1995 to 2005 averaged 0.39%, and from 2006 to 2015 was only
CHART 4

Investment in human resource
development as percentage of GDP
2.5%
1995-2005

2006-2015

2.0%

1.5%

0.33%, significantly lower than in other countries. It is also
important to note that Japan’s relative investment in humanresources is declining. In contrast, human resource investment as apercentage of GDP was 1.9% in the US and roughly 1.4% in
Germany, which is roughly five to six times the level in Japan.
In this article, I have used publicly available international data on
investment in intangible assets compiled by INTAN-Invest forinvestment in human resources outside Japan. It is important tokeep in mind that these international comparisons are
generalizations based on limited data, and different methods ofcoverage are used for the US, Europe, and Japan. Some details arealso left out because of space limitations; for example, because oflimited data for Japan only the narrowest scope of human resource
investment is counted for comparisons with other economicallyadvanced countries. In addition, the JIP database has the problem of
not including on-the-job training (OJT) as human resource
investment. Using data for the percentage of overall work hours
spent on OJT from the Corporate Awareness Survey Regarding Work
Styles and Training conducted by the Cabinet Office in February
2018, we can estimate that as a percentage of macro added value,for 2015 Off-JT was 0.33% while OJT was roughly 11 times higher,
at 3.76%.
Although these points need to be taken into account, it isimportant to recognize the fact that expenditures by Japanesecompanies for employee training are declining. This reduction inhuman resource investment after hiring is constraining Japan’s
accumulation of human capital, and could be part of the reason
behind Japan’s low percentage of companies implementing
innovation activities relative to other countries.

Conclusion
Having fallen into a long period of stagnation, Japan is expected to
face further economic deterioration from the spread of infections of
the new coronavirus. To overcome this, innovation can be seen as away to stimulate the economy. Japan’s investment in research anddevelopment and in information and communications technology
compares favorably with that of other countries, but data indicatesthat this is not leading to higher productivity or innovation. For thisinvestment to yield results, it is essential to develop capable humanresources who are able to incorporate and use these newtechnologies quickly. Policies to cultivate human resources withSTEM backgrounds prior to hiring, and to promote and support
investment in people within the company after hiring, need to beconsidered proactively going forward.

1.0%

0.5%

0.0%

US

UK

Germany

France

Italy

Japan

Note: Figures for Europe and the US are for all industries excluding real estate, public sector,
medical, education, etc. Figures for Japan are for all industries.

Sources: Europe and the United States: INTAN-Invest, April 2020; Japan: JIP Database (2018)

Dr. Miho Takizawa is a professor of the Department of Economics at
Gakushuin University. She gained her Ph.D. in Economics from Hitotsubashi
University. Her research interests include macroeconomics, productivity, anddata analysis.

Japan SPOTLIGHT • September / October 202031