Services Struggle In Japan, Why?

Japan's unproductive service industries are holding back its improving economy from achieving even better performance.

For a country that boasts some of the best manufacturers in the world, Japan's service sector remains strikingly poor. In recent years precious little has been done to improve things—businesses and individual consumers must struggle with outdated and inefficient services. Yet the sector represents a huge opportunity for Japan. Reformed and galvanised, it could take up the slack of future economic slowdowns and lessen the burden on export-led manufacturing. Why are service industries so backward and what might be done to improve them?

For more than a decade after a financial crisis in 1989 plunged once-booming Japan into a long period of slow growth, weak companies and wobbly banks clung to each other in mutual defiance of reality. Troubled borrowers needed the banks to overlook their problems and keep open the flow of money; the banks, too short of capital to admit that their loans had soured, obliged. Over time, this led to the emergence of so-called “zombies”—companies that are competitively dead, but, sustained by their banks, continue to walk the Earth and give healthier firms nightmares. And zombies are most prevalent in the service sectors of the economy, especially construction, property and wholesale and retail distribution.

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