Global Value Chain in Services: The Case of Tourism in Japan.

• Author: Konishi, Yoko

1. Introduction: Overview of the Japanese Economy

   Since the burst of the financial bubble in the early 1990s, the Japanese economy has grown at a stagnant pace, and productivity has continued to decline. A number of researchers have investigated what transpired during this "two lost decades" phase. The government has also been trying to answer this question in its quest for an effective policy that will boost the country's gross domestic product (GDP) growth. In 2015, the Japanese government set a goal of raising the nominal GDP to JPY600 trillion by 2020. This would require an annual growth rate of 3.5 per cent as nominal GDP stood at JPY486 trillion in 2014. Figure 1 shows Japan's nominal GDP and the growth rate over the years. Based on 2015 figures, the gap between actual and expected GDP was found to be JPY5 trillion, while the growth rate was merely 1 per cent.

   Why has growth kept on declining? According to Bosworth and Triplett (2004) and McKinsey (2015), one possible reason is low productivity of the services sector. Bosworth and Triplett (2004) used government data to measure productivity in the United States across a broad class of services and showed that retail and other personal services industries had low productivity in the 1990s. These findings were in relation to the macroeconomic situation and used labour productivity. (1) In 2005, the OECD reported that Japan ranked twentieth in terms of labour productivity among the then thirty member countries, but placed sixth in the manufacturing industry classification. This created the perception that weakness in the services sector was a drag on the country's overall productivity. A more recent comparison conducted in 2014 also showed that Japan ranked nineteenth among the thirty-four OECD nations, the lowest of the seven major economies in terms of productivity for all industries, but stood at the eleventh spot for manufacturing industries. (2) Paying heed to these and other related reports, in 2015 the Japanese government proposed to increase the growth rate of labour productivity in services from the prevalent 0.8 per cent to 2.0 per cent by 2020.

   In traditional economics, productivity measurement studies have mainly focused on manufacturing. Japan is no exception. Due to its reputation of excelling in certain technologies led by a handful of successful players, the manufacturing sector's capabilities have been perceived as the nation's primary source of growth. However, looking at the composition of the Japanese economy in recent years, it should be noted that non-manufacturing industries account for more than 75 per cent of GDP. More specifically, the service-providing industry's (3) share of GDP stands at around 20 per cent, and this figure rises to 35 per cent when the transport, wholesale, and retail trade industries are included, consistently exceeding the share of manufacturing since 2009 (4) (Figure 2). Also, the service-providing industry's share of the labour market has been on the rise since the 1990s, reaching approximately 30 per cent by 2009, while the share of manufacturing accounted for around 15 per cent in 2014. As evident from these figures, Japan's overall economic progress can no longer be explained simply in terms of the manufacturing sector.

   Despite the growing importance of services, very few studies have focused on the sector because of: first, difficulty in obtaining data; and second, the general perception of services not being recognized as a "major sector". Moreover, services is a very broad classification, which includes education, finance, insurance, transportation, logistics, food service and many other areas that exhibit distinct structures, and constructing a single, unified model does not appear to be an easy feat. This also suggests that not all services have been witnessing productivity decline, and a thorough investigation for the specific industries is needed.

   This study also looks at the role of services in trade activity. Figure 3 shows the value of Japan's exports of goods and services and the ratio of total exports to nominal GDP between 1994 (9 per cent) and 2014 (18 per cent). Since 1990, the percentage of goods exports has continued to account for the largest share (85 per cent or more) of Japan's total exports. Manufacturing constitutes the bulk of exports. However, on examining the annual growth rate from 1994 to 2014, the gain in services exports was 4.6 per cent, which is higher than the manufacturing gain of 3.2 per cent.

2. Understanding Japan's Participation in GVCs

   Services affect trade and the global economy in two ways. The first channel is based on exports of services directly to partner countries. As shown in Figure 3, the services exports share of Japan's total (gross) exports has been less than that of the manufacturing industry. Second, services are also embodied in the manufacturing of a number of parts, intermediate products or final goods--also known as indirect trade.

   As Johnson (2014) acutely pointed out while examining the share of export of goods and services in worldwide gross exports, the share of manufacturing and services exports were 67 per cent and 20 per cent, respectively. On the other hand, when using the WIOD (World Input-Output Database), the recalculated export ratio in terms of value-added trade for services exports was 41 per cent, larger than the share of goods exports (39 per cent). Francois, Manchin and Tomberger (2015) also used WIOD data and found that developed countries tend towards high-services intensity exports. Their analysis showed that Japan's share of services exports based on value-added had increased rapidly worldwide from 6.5 per cent in 1992 to 30 per cent in 2011.

   2.1 Degree of Participation in GVCs

   Each country integrates itself into GVCs to a different extent. In order to measure the degree of GVC depth integration, a participation index provided by OECD (2013a) is used. Figure 4 compares the participation in GVCs index across selected countries, emphasizing positions like backward and forward participation. All countries registered an increase in the participation index from 1995 to 2009, with Asian economies becoming more integrated into GVCs than developed countries. Another GVC participation index proposed by Koopman et al. (2010) also comprises forward and backward participation indices. While the forward index represents the ratio of domestic value-added (used as an intermediate input for production in the third countries) to the country's gross export value, the backward index denotes the ratio of the value of a country's imports from other countries (that comprise intermediate inputs in domestic production for export) to the country's gross exports.

   Based on Figure 4, the United States, EU and Japan have relatively higher forward participation, but backward participation tends to be higher in other Asian countries. The important point here is that Japan's forward participation index was highest of all the countries in 2009, with a ratio of about 33 per cent. Figure 5 shows Japan's industrial participation index in 2009 in which services, utilities and light manufacturing have larger share of GVC forward participation, which suggests that the manner in which firms participate in GVCs remains quite heterogeneous.

   Let us now look at GVCs in Japan from a different perspective that emphasizes forward participation. Gross exports can be classified on the basis of three types of goods: primary, intermediate and final. Intermediate goods include parts and components as well as processed goods. Final goods include consumption goods and capital goods. Table 1 indicates the export share according to the type of goods from 2001 to 2014. These export ratios represent the degree of GVC participation.

   The ratio of intermediate goods to gross exports increased from 2001 to 2014. The value-added of parts and components as well as processed goods accounted for 29.6 per cent and 29.3 per cent of gross exports in 2014, respectively. Figure 6 shows the change in the shares of parts and processed goods during this time. The share of processed goods rose steadily from 2001 to 2009, after which it remained at the same level...