To stay competitive, both countries had to move up the value chain of production and to the frontiers of innovation, making more and more high-tech, skill-intensive products. More important, they also had to improve productivity steadily. They certainly managed to do this in the sectors that exported or competed with imports, the so-called tradable sector. But problems eventually emerged in the domestic nontradable sector, in areas like construction, retail, and hotels, where foreign competition was often naturally absent and sometimes deliberately kept out.
Germany and Japan post-WWII both able to grow rapidly in exportable industries, productivity grew rapidly and were free to compete globally. Non-importable industries (e.g. construction) did not have this same pressure to improve however, so they did not improve as much.
Wage growth forced productivity gains and moving up the value chain to the point where they drove innovation in several industries.
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