The Japanese Distribution Sector in Economic Perspective: The Large Store Law and Retail Density

This paper compiles facts on the distribution sector of Japan and puts them in historical and international context, expresses in a coherent way the conventional view that the peculiar features of Japan? s distribution sector are due to distorting government regulations, and provides new evidence that bears on the truthfulness of that proposition. We find that regulation has indeed mattered, but that fundamentals like Japan? s geographic centricity, lack of private cars and smallness of dwellings have had a larger effect. A myriad of small stores is the crucial characteristic of the Japanese distribution sector, from which other peculiarities such as the complex wholesale marketing channels with multiple steps and ubiquity of vertical restraints also follow. And regulations inhibiting stores with large floor space, in particular the Large Store Law, have been identified by many as the fundamental reason for Japan? s proliferation of small stores. That law was relaxed in 1994 and in 2000 was completely replaced by a new law that shifts responsibility for regulating large stores from the national government to the prefectures. The new law may well lead to a perpetuation of regulatory barriers. But the regulatory limits on large stores have probably mattered a lot less than many suppose. Estimates presented here show that in the period 1985 to 1997 the variation in the number of stores per person across prefectures and over time exhibited little sensitivity to variation in the numbers of large stores per person. Japan? s proliferation of small stores is fundamentally due, not to regulation, but to its relative lack of private cars and to its small dwellings. Regulatory limits on large stores are themselves the result of the ubiquity of small stores, not the other way around. The Large Store Law could survive politically precisely because its distorting effects were small (There were bound to be a lot of small stores in Japan even without government protection). This is now changing. Increased private car ownership and suburbanization in Japan are favoring large specialty super stores and convenience stores and undercutting the small, family-owned non-self service stores. This process is not only reducing the overall number of stores in Japan, it is also enlarging the distorting effects of regulatory limits on large stores, and to just that extent it is eroding the political viability of such policies. JEL classifications L50,L81, P52. *North Carolina State University and Kyoto Institute of Economic Research (Kyoto University). This research was supported by a grant from the Abe Fellowship Program of the Social Science Research Council and the American Council of Learned Societies with funds provided by the Japan Foundation Center for Global Partnership. I also thank Tatsuhiko Nariu for many useful discussions, Anil Kashyap for his very helpful suggestions, and Gary Saxonhouse and others for their comments on the paper at the March 2002 conference in Tokyo sponsored by NBER. David Flath Kyoto Institute of Economic Research, Kyoto University Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501, JAPAN. Tel. +81-75-753-7137 Fax. +81-75-753-7198 E-mail. [email protected] The Japanese Distribution Sector in Economic Perspective The Large Store Law and Retail Density