About 25 years ago, I looked into kimono, a traditional Japanese industry in which companies were relocating production facilities overseas. I was astonished to learn that most of the production centers, which included Kyoto for the renowned Nishijin textile, Amami Oshima for Oshima silk, and Ibaraki and Tochigi prefectures for Yuki-tsumugi silk, have moved between 90 and 100 percent of their production functions overseas, mainly to China. Struck by this reality, I penned a report predicting that Buddhist altars, also a traditional industry, would see a similar type of movement before long. At the time, there were no facilities outside of Japan in the Buddhist altar industry equipped to manufacture finished products, much less components. The president of a major manufacturer responded, “Unlike kimono, butsudan (Buddhist altars) are objects of faith enabling Japanese people to join hands with Buddha in a spiritual sense, and as such, they are not things that can be produced abroad.” Nevertheless, at the time, the expression “3D jobs” dirty, dangerous, and demeaning — was in vogue, and it was becoming increasingly difficult to secure personnel in Japan. At the same time, the transition from manual labor to mechanization was gaining momentum, increasing the potential for overseas manufacturing. Ultimately, it ends up coming down to labor costs. At the time, China’s GDP was about one-fifth that of Japan, and the disparity was proportionally reflected in labor costs.

Sure enough, years after the report was written, there was a rush for manufacturers to expand internationally. If rivals launch production in overseas factories, we cannot just sit back, twiddle our thumbs, and watch. Even if one says, “The yield rate is low and the quality is insufficient,” these are problems that will be resolved over time. Above all, production costs are completely different. I’ve heard from some business owners who have undertaken this expansion opinions such as, “We have a workforce of 300, each of whom is paid 5,000 yen. There’s no way we’d be able to hire as many people in Japan in this situation.”

Thus, today, even objects of worship such as Buddhist altars have for the most part shifted their manufacturing bases overseas. Looking at it rationally, it ends up happening, though with some discrepancies.

And now we get to the crux of the matter.

As is well known, globalization of the world economy got underway in the 1990s. Among the most significant changes was China’s incorporation into the market-based economy fold. Backed by inexpensive labor, the country played a role in supplying the world with a host of goods—from raw materials to finished products—at low cost, plentifully, and constantly. And the benefits extended not only to conglomerates like Apple and Walmart but to small industries such as Japanese Buddhist altars. During this period, the parallel progress in information technology also played a part in bringing costs down by making goods and services more efficient.

In Japan, an island nation that had not experienced much friction with the outside world and a dearth of instances in which it had to assert itself, if a company could produce goods at low cost, there would be no need to institute price hikes in a way that would generate backlash from business partners and consumers. Demand is somewhat less than robust due to the aging and declining population. The same applies to wages: with the advantage of lower labor costs overseas, the domestic supply and demand for human resources did not become tight. This meant that domestic wages did not rise either, which comes as no surprise. With neither prices nor wages climbing, deflation became the norm for an extended period.

Deflation, born of globalization and the unique characteristics of Japan, was set in motion by Bank of Japan Governor Haruhiko Kuroda, with prodding from former Prime Minister Shinzo Abe. In 2013, the government launched a different-dimensional monetary easing program, setting an inflation target of 2% in two years. But after a sluggish period of nearly a decade, the goal remained unachieved. However, it seems that we are on track toward realizing this target. But that is considerably different from the assumption that a booming economy will lead to increased sales of goods, demand will exceed supply, and prices will climb. This instance of inflation manifested itself in the form of cost-push price hikes, sparked by soaring raw material and resource prices, combined with the sharp depreciation of the yen. As costs continue their rapid incline, since most companies will not be willing to lift wages without securing the necessary resources, we are moving ever closer to an environment in which wage increases do not accompany price increases. This gap will work its way into people’s lives in the form of poverty.

Subsidizing gasoline, electricity, and gas prices might be feasible if the cost increase is only temporary. If the increase is structural, however, this is just another use of finances to postpone the crisis. From the perspective of the layman, economic globalization, which has been going on since the 1990s, appears to be starting to reverse its course in the wake of Russia’s invasion of Ukraine and U.S.-China tension. The impact of the ‘export of deflation’ from China and other countries through the use of low-cost labor has waned as those economies have grown. The world is no longer structurally able to produce goods at low cost, in other words, the mechanism that produces deflation has disappeared. Thinking about it, the current inflation may not be temporary, but a sea change from three decades of deflation. We may very well require a brand-new set of coping strategies. I hope this is just the groundless fear of a layman.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.