THE fluctuations of Japan's Nikkei stock market index and the price of the yen have people wondering about Japan Inc. They shouldn't. Since 1988, Japan's capital investment per person has been more than double that of the United States. As a percentage of gross national product it grew from 15 percent in 1977 to 24 percent in 1989. Compare this with the US 1986-89 average of about 10 percent. The investment gap is large and growing larger. Japanese investments are flowing into four areas critical to international competitiveness. Unless corporate America picks up its lagging investment rate, this investment boom will make Japan the world's preeminent economic power by the year 2000.
Investments in plant, property, and equipment by all Japanese companies in 1987 and '88 increased by 18 percent and 15 percent, respectively, far outstripping increases in domestic demand. PP&E investments in the manufacturing sector were up by an even stronger 28 percent in '87 and 20 percent in '88. While domestic demand is growing briskly, industrial capacity is increasing even more rapidly.
Major investments in more efficient production technologies have led labor productivity to increase 7 percent a year in manufacturing. One result: Unit labor costs for Japanese manufacturers have declined 15 percent since 1986, despite wage increases.
Workerless factories underscore the advantages of Japan's new production technologies. Whole sections of Nippon Steel's Kimitsu steel works are empty. A handful of engineers monitor production via computer. Yield and quality rates are among the highest in the world; production costs among the lowest. Yet Nippon Steel will invest $1.1 billion this year to further automate Kimitsu and its other plants.
Twenty-four percent of capital investment is now dedicated to new product development and basic R&D, up from 14 percent in 1980. Products are spilling out of Japanese laboratories with increasing speed. In most industries the Japanese advantage over the West is widening. Take automobiles: Toyota engineers are now working to reduce new model development time from three years to 24 months. Detroit averages five to six years. Or electronics: Think there's a market for a machine that translates conversational Japanese into English and vice versa? NEC has a prototype today.
Investments are flowing into areas the Japanese don't yet dominate (aerospace, for example). International alliances and major investments in basic research are being made to challenge established leaders. It is no coincidence that the first fruits of the Mitsubishi-Daimler pact will be a joint effort to develop a new passenger plane.
Even marginally profitable companies are investing more than ever. One firm that saw profits fall dramatically over five years, increased R&D budgets by over 10 percent each year. Explained an executive: ``This is Japan. No one will complain. R&D spending for us is like defense spending for you: It is our national security.''
Japan itself is financing much of this investment. Strong domestic demand since 1987 has led to stronger corporate profits. The household savings rate rose from 17 percent in 1977 to 19 percent in 1989, quadruple the US rate.
The result of these investments is fourfold:
One, Japanese capacity to produce products is growing faster than the domestic economic demand. Hence, more products for export.
Two, improvements in production processes have allowed Japanese manufacturers to remain low-cost producers in spite of rising labor costs. (Ford, America's most efficient carmaker, faces a cost disadvantage against Japanese ``transplants'' and an even larger cost disadvantage against made-in-Japan models.)
Three, the variety of new Japanese products threatens to overwhelm competitors. As economist Kenneth Courtis at Deutsche Bank (Asia) put it: ``Japan is positioning itself to become the new-product laboratory of the 1990s, much like America was in the '50s and '60s.''
Four, Japanese firms are developing the capacity to challenge world leaders in any high-tech industry, bar none.
The competitive battles of the 21st century are being decided by today's investment decisions. Unless corporate America increases its capital investment rate, those battles will soon be over.