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Chapter 9: The Japanese Business and Industrial Relations
(Revised 2009)
Part I: Introduction to Japanese Business
One key to understanding the Japanese “economic miracle” that existed up to the early
1990s is to be found in the nature of the large Japanese corporations. The ability of these
corporations to create a competitive advantage was once admired and envied in the rest of
the world. In this chapter, we will examine these Japanese corporations and how they
differ from American corporations. First, we will examine ownership and control of the
Japanese corporations—who formally owns them and who actually makes the main
decisions. Here, we will consider the hypothesis that Japanese companies differ from
American companies because of their high reliance on banks to both finance their
investment spending and to participate in their management. Second, we will consider
the keiretsu—the groups of Japanese companies. Japanese reliance on groups of
companies created a blend of competition and cooperation that is quite different from
American liberal market capitalism. Third, we will consider the competitive strategies
of the successful Japanese corporations. We will consider their focus on market share as
more important than short-run profits, their bias toward continual growth, and their
emphasis on product quality and on differentiating their products. Fourth, we will
consider the differences in technologies between successful Japanese and American
corporations. Many Japanese companies employed a technology that was more flexible
than that found in comparable American companies—that is, they were able to adapt more
readily to market changes. One famous example of this flexibility is the Just-In-Time
system, pioneered by Toyota. We will consider why the technologies used were more
flexible in Japan and how this flexibility allowed Japanese companies to achieve great
success in the economic environment of the 1970s and 1980s. Fifth, we will consider the
role of small firms in Japan. Small firms have had a much more prominent role in Japan
than in the United States. Sixth, we will examine the situation for Japanese
corporations since 1990. What changes have been made? What additional changes
might need to be made?
(1) Ownership and Control of Large Japanese Corporations up to 1990
The role of the shareholders in Japanese companies is quite different from that found in
the United States. To see this difference, the following table illustrates the composition of
shareholders in large Japanese and American corporations in the early 1980s:
Table 1.
Japan—March 1981
Government
0.2%
Financial Institutions
38.6%
Inter-corporate Holdings 26.3%
Foreign Investors
4.6%
Others (Mainly Individuals) 31.9%
U.S.A.—December 1980
28.3%
15.4%
6.2%
51.1%
Several points stand out in this table. First, the importance of financial institutions
as holders of stock was much greater in Japan. (In the United States, the importance of
pension funds—managed by financial institutions—also grew considerably in the 1980s
and 1990s. But American banks do not own stock in companies.) Banks and insurance
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companies were among the largest stockholders of Japanese corporations, and thus
had considerable influence over their management. Second, inter-corporate holding (one
corporation owns another corporation) is much more extensive in Japan. Inter-corporate
holdings gave rise to two types of corporate groupings: the financial keiretsu, with large
corporations grouped together through shareholding or through being related to a
large bank, and the production keiretsu, with a dominant corporation connected to
many satellite companies as suppliers, subcontractors, and so forth. The production
keiretsu today is commonly called a “supply chain”. We will consider these types of
keiretsu in Part (2) below. Third, the importance of individual shareholders in Japanese
corporations was relatively small. Indeed, as of the late 1990s, of the more than 1,000,000
corporations in Japan, only about 2,000 even had their stock publicly traded. Viewed
another way, shares of stock represented a relatively small part of the wealth of
Japanese individuals. In the 1970s, only about 6% of Japanese people owned any shares
at all (compared to 14% in the United States). The Japanese individual shareholder had
little voice in corporate decisions. The Board of Directors of a Japanese corporation
consisted almost entirely of the senior management. Also dividends were quite low --by 1989, dividends in Japan averaged only 0.4% of the value of the stocks. The Japanese
corporation therefore could retain most of its profits for use in the company. The
price of the stock in the stock market and the dividends paid to the shareholders were of
little concern to Japanese executives.
One frequently noted point about Japanese corporations was their heavy reliance on
debt financing. As of 1981, about 3/4 of assets of Japanese corporations were financed
by debt, compared to about 1/2of the assets for American corporations. Reliance on debt
in Japan was encouraged by relatively low real interest rates. It also reflected the poorly
developed stock market in Japan (prior to the 1980s) that forced Japanese companies to
develop relationships with banks in order to gain access to money for expansion. Banker
representatives commonly sat on the Board of Directors of Japanese corporations. During
the 1980s and 1990s, as the stock market expanded. Japanese companies came to rely
more on financing by sale of stocks. But financing by banks was still dominant.
(2) Corporate Groups
As noted above, there are two types of corporate groups (keiretsu) in Japan. These
groups are not formal organizations (such as divisions of the same company). But they do
operate through extensive, long-term relationships. Let us first consider the financial (or
horizontal) keiretsu.
A. Financial (Horizontal) Keiretsu
There were six main financial groups in Japan. The names are familiar to many
Americans: Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa, and Dai-Ichi Kangyo. Each
group includes one central commercial bank (called a “main” bank), other financial
institutions, at least one general trading company (described in a later chapter), and a
large number of manufacturing companies in many different industries. (Mitsui,
Mitsubishi, and Sumitomo are direct descendants of the pre-war zaibatsu. However, they
were quite different after World War II.) Each group had at least one company in each of
the major industries. To illustrate, in 1995, the Mitsubishi group included one “main
bank”, a trust bank (a trust bank accepts trust deposits, makes long-term loans, and
manages pension accounts), a hazard insurance company, a life insurance company, a
construction company, a brewery (Kirin), a rayon producer, a paper mill, three chemical
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companies, an oil company, a glass company, a steel company, four metals companies,
one machinery manufacturer, an electric appliances company, an automobile producer, a
producer of heavy transport equipment, a camera company (Nikon), a commerce
company, a real estate company, and a few others. Most of these companies have
“Mitsubishi” in their name. Each group typically had only one company that produced the
same product (avoiding competition within the group). And most companies were
members of only one group. Within each group, there were three integrating
mechanisms: the Presidents’ Councils, structured economic relationships (such as
inter-group borrowing, cross-shareholding, directorships, and trade networks), and
group-wide projects.
Each of the groups had a Presidents’ Council. Here, the Presidents of the companies in
the group met each month. In 1995, some 185 of the largest companies in Japan belonged
to Presidents’ Councils. Their meetings were informal, with no specified agenda, and were
often mainly social. The Councils had no direct control over the individual companies.
However, the Presidents often discussed important problems, especially when there were
matters of extreme concern (such as the possible failure of one of the companies). For
example, one company of the Mitsui group was involved in a scandal for selling fake
antiques. The group pressured the President of that company to resign, loaned the
company money, and took other actions to help the company survive. As another example,
in 1974, Mazda was on the brink of bankruptcy, having been the least efficient automobile
company in Japan. Mazda’s Wankel rotary engine got only 10 miles per gallon in city
driving. At the Presidents’ Council of the Sumitomo group (of which Mazda—Toyo
Kogyo—was a member), it was agreed that all companies in the group would switch their
purchases to Mazda automobiles. Sumitomo Bank, which owned 4% of Toyo Kogyo
(Mazda) and was it “main bank”, sent its managers to replace several key managers of
Mazda. The new managers made many significant organizational changes. Sumitomo
Bank also announced publicly that it would lend funds to Mazda. This gave other creditors
confidence that loans due them would be repaid. After years of discussion, Sumitomo
Bank persuaded Ford to take an ownership share of Mazda. Ford did take finally a 20%
equity share in 1979, making it the largest shareholder of Mazda. By the end of the 1970s,
profits and productivity had improved at Mazda and it was a reasonably healthy company.
(In contrast, Chrysler was also in financial trouble at the same time. But Chrysler had to
turn to the American government for help in 1979.) It needs to be noted that while
keiretsu interventions tended to save the company, they did not save the management. In
almost all cases of keiretsu interventions, the management was replaced.
There were several “structured economic relationships”. First, each group was
centered around a bank. This bank was the main source of loans for the companies in
the group and was also a major stockholder. This bank was called the “main bank”. Of
the debt of a large Japanese company, typically 10% to 20% was loaned by the group’s
main bank. More importantly, by its willingness to lend to a company, the “mainbank” signaled to other banks the financial health of the borrower. This allowed the
company to gain access to loans from other banks as well. Studies showed that companies
that were affiliated with a main bank had an easier time raising funds than companies that
were independent. Several studies also showed that, because of their close connections,
main banks were able to monitor the behavior of the management of the corporation (in
contrast to the stockholders of American corporations). The main bank also helped group
companies to find customers and “came to the rescue” if group companies started to have
financial problems (as with the case of Mazda).
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As noted earlier, another “structured economic relationship” is the inter-corporate
shareholding in Japan. Much of this occurred within the groups, so that each company
owned a large share of the stock of the other companies within the group. As of 1994, the
percent of shares held by other members of the group was 23.4% for the Sumitomo group,
27.5% for the Mitsubishi group, 11.7% for the Dai-Ichi Kangyo group, 16% for the Sanwa
group, 16.5% for the Mitsui group, and 14.6% for the Fuyo group. A large portion of the
inter-corporate shareholding represented offsetting shares (that is, two companies
owned shares in each other). Although companies in a group rarely owned a large
enough share in other group companies to have a controlling interest, this crossshareholding did act to promote stable, long-term relationships between the
companies. It also tended to protect companies from hostile takeovers (which were
common in the United States, but were virtually unknown in Japan).
Related to the inter-corporate shareholding, but less extensive, was another “structured
economic relationship” -- a system of sharing directors. As noted earlier, in Japanese
corporations, the Board of Directors was dominated by the senior management. But
among the outside directors, it was very common to find people who were also directors
of other companies within the group. Usually, it was the main bank that sent its directors
to be directors of the other companies in the group. (In addition, there was an exchange of
employees within the group. Employees occasionally took a full-time position with
another company in the same group for a period of time. At the end of that period, they
would be re-employed in their original company.)
Another “structured economic relationship” resulted because companies within the
group had preferential trade networks among themselves. Each group has a General
Trading Company, which handled a large portion of exporting and importing for the
companies within the group. And in Japan, the companies tended to buy proportionally
more from other companies within the group (and proportionally less from outsiders).
Finally, companies within a group often participated in certain group-wide
activities. For example, companies occasionally came-together to start new companies.
These were usually large, risky projects in a new industry. Companies also engaged in
group public relations activities (such as having group exhibits at World Fairs.) There
were also group publications, group sporting events, group education centers, group health
centers, group marriage advising centers, and so forth.
These financial keiretsu allowed for stable, reliable business relationships. They
assured a steady source of funds to buy new capital goods. They protected group members
from the threat of a hostile takeover. And they had what are called “dedicated
shareholders”. In American companies, if stockholders do not like the performance of the
company, they simply sell their shares of stock. But in Japan, the stockholders were likely
to stay involved with the company (they were dedicated) and try to improve the
performance of the company. These groups reduced the so-called “agency problem”
that is found in so many American companies. The “agency problem” means that
managers have incentives to use company money in ways that meet their own interests
but not the interests of the stockholders. Since managers control information,
stockholders are not able to prevent this. In Japan, the fact that the major stockholders
were other companies within the group and that the main bank was also a stockholder
reduced the manager’s control over information and therefore reduced the ability of
managers to pursue their independent interests.
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Competition in Japan came to take-place between financial groups rather than
between companies. Groups pushed member companies to pursue increased market
share, to expand capacity (even in bad economic times), to improve products, to move
into new activities, and so forth. Since the profit rate of Japanese companies was not high
(one estimate is that the rate of return before taxes for large Japanese corporations in 1988
was only 4.92%), the amount of competition in Japan must have been substantial.
Finally, groups in Japan acted to reduce risk. This is perhaps their main
contribution to Japan’s economic success. Because of this ability to reduce risk, in Japan,
new industries were typically developed by existing companies. In contrast, in the United
States, new industries are typically developed by new, risk-taking entrepreneurs. The
independent entrepreneur is less significant in Japan than in the United States.
B. Production (Vertical) Keiretsu
Large Japanese corporations often have long-term relationships with the companies
that produce their parts or other raw materials or with the companies that sell their
products. In some cases, these other companies are subsidiaries (that is, the large
corporation owns some proportion of the smaller companies). In most cases, however, the
smaller company is independent. Many of these independent small companies were
originally part of the large (parent) corporation. They were “spun-off” to form the
independent companies and are usually owned by a former employee of the parent
corporation. Most of their business involves subcontracting with the parent corporation.
The relation between the large parent corporation and the smaller satellite company is
long-term.
Typically, when an employee of the parent corporation wishes to create a new
company, he receives “seed money” from the large corporation. The parent company
designs the product (a part or some material) and provides technical assistance in helping
the small company produce it. The large company also provides an assured market to the
small company. In return, the small company provides specialized technological
knowledge and an assurance that the part or raw material will arrive at the factory
of the parent company on time and with high quality.
As an illustration of these vertical groups, let us consider the Japanese automobile
industry. As of 1984, Toyota used ten main subcontractors who employed over 73,000
workers. Nissan used seventeen main subcontractors who employed about 46,000
workers. All of the subcontractors were partially owned by the parent company. Toyota’s
subcontractors began as departments within Toyota and were “spun-off” into new
companies. On the other hand, Nissan made stock purchases of already existing
companies and then transferred Nissan executives to manage them. Toyota’s
subcontractors were found in close proximity to the main Toyota plant in Nagoya (called
“Toyota City”). Nissan’s subcontractors were more dispersed. Both Toyota and Nissan
had associations, composed of the company and the smaller companies that subcontract
heavily with it. These associations acted to disseminate information from the
manufacturer, generate new technologies and make them available to all members, and
integrate delivery schedules. In general, the manufacturer designed the product to be
produced by the subcontractor and set the delivery schedule. The prices were set by
negotiation. The manufacturer provided technical and design assistance to the
subcontractor. But the technical cooperation was often a “two-way street”. When the
manufacturer had a new model or a technical problem, the technical people of the
subcontractor companies were asked to come and live at the manufacturer’s engineering
facility for an extended time period in order to work as part of a team.
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The subcontractors also subcontracted to other companies. In terms of capital,
these first-tier subcontractors were typically about fifty times larger than the second-tier
subcontractors. The first-tier subcontractors were almost all unionized, had full-time
workers, and paid wages equal to about 3/4 the wages paid by the parent corporation. The
second-tier subcontractors were about half unionized, had about 10% of their work force
as part-time workers, and paid almost the same wages as first-tier subcontractors.
The Japanese companies, by the creation of these vertical groups, developed a network
of very flexible suppliers. These flexible suppliers allowed the Japanese manufacturers to
make rapid changes in their products because they allowed rapid changes in parts and
materials. They also allowed for a reduction in inventory, as we will see later. And they
allowed the Japanese manufacturers to maintain a focus on quality. This is discussed in the
next section. It has been estimated that between 20% and 33% of the cost advantage that
Japanese auto companies had over American auto companies was related to these
production keiretsu.
(3) Competitive Strategies
The most important goal of each company has been continual growth through
increased market share. To try to continually increase market share, Japanese
companies competed on the basis of aggressive pricing, continual product development,
and quality. The flexibility provided by the production keiretsu allowed Japanese
companies to move from product development to production and then to marketing
faster than American companies could. As we will see later, it also allowed them to
produce small quantities and still keep the costs of production low. This ability to produce
small quantities at low cost allowed the companies to produce more varieties of a
product and still keep their prices competitive.
In the 1950s and 1960s, the Japanese companies learned that, as the quantity sold
increased, they could afford larger factories. These larger factories involved more
advanced technologies, usually “borrowed” from the West and then adapted. The
advanced technologies allowed costs per unit produced to fall. With lower costs, profits
would rise. Also, with lower costs, it would be possible for the Japanese companies to
lower prices in order to increase sales without reducing their profits. The rising profits
were then invested in more capital goods with the most advanced technologies. In
addition, the rising sales and profits signaled to outsiders that the company was healthy;
this brought-in even more funds to be invested in new capital goods. The risk of making
these investments was low because the financial group acted to lower the risk and because
the technologies were already known to be successful in the West. The result was a
virtuous circle: the drive for market share led to lower costs which led to increased
profits which led to investments in new technologies which led to an increase in market
share. (As we have seen before the reduction in costs per unit as the size of the plant
increases is called economies of scale.)
With so many companies consistently trying to increase production, it was common in
Japan to find “excess production”. Ordinarily, this would cause prices to fall and profits
to fall as a result. One way that Japanese companies avoided this was to try to expand
exports. Most of the successful Japanese export products were produced in large
quantity in Japan before exports began and were experiencing “excess production”. In
trying to export, the Japanese companies had to face superior competitors in both the
United States and Europe; this was a competition that the Japanese companies knew that
they could not “win”. So, their strategy was to seek market niches—segments of the
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market that the American and European companies were not serving well (for example,
small cars). Their strategy also was to continually develop new and “better” products.
This strategy required flexibility, which was facilitated by the system of production
keiretsu. (Being able to produce many different products from a given machine is called
economies of scope. In this, the Japanese companies had a major advantage over
American companies.)
One example of this drive for market share involves Honda. In the early 1950s, there
were over 50 motorcycle producers in Japan. Honda was #2. Each company pushed to
increase the quantity sold. As they did, prices fell, profits fell, and some became bankrupt.
By 1969, there were only four companies left: Honda, Suzuki, Kawazaki, and Yamaha.
These four had survived due to the superiority of their products and their ability to
“borrow” foreign technologies. As the market for motorcycles became saturated, Honda
shifted its money and technical capacity into automobiles. Yamaha saw an opportunity
and began to increase its motorcycle production. By the early 1980s, it had about as many
models as Honda, compared to only half as many in the early 1970s. Finally, Honda
decided to respond to this threat to its top position. Its main weapon was to increase
product variety. In only 18 months, Honda introduced 81 new models, offering greater
technical and design appeal. Yamaha’s share of the motorcycle market fell by 50%. The
pressure from Honda continued, with many new models continually introduced. By early
1984, Yamaha faced bankruptcy. At that time, Yamaha announced that it would continue
producing motorcycles, but that it would no longer challenge Honda’s top position. It was
defeated.
In some industries, a way to overcome the problem of “excess production” was to form
cartels. Since these usually were formed when demand had fallen, they were called
“recession cartels”. In Japan, these were legal (in contrast to the United States) and even
encouraged by the government. In a cartel, the companies came together and acted to
reduce production and therefore to maintain prices and profits at a time when sales were
low. Cartels in Japan were also used to maintain a highly profitable market in Japan when
an export drive was begun. The highly profitable market at home in Japan allowed the
Japanese companies to lower their prices in a foreign market in order to begin selling
there. This is called price discrimination. One example of this use of cartels is consumer
electronics.
Consumer electronics in Japan were dominated by 7 companies. Together, Matsushita
(Panasonic and Technics), Hitachi, Toshiba, Mitsubishi, Sony, Sanyo, and Sharp produced
virtually all of the Japanese televisions, electric ranges, and hairdryers, and between 2/3
and 3/4 of Japanese radios, tape recorders, and stereo sets. All but Sony were members of
the Market Stabilization Group, formed in 1956 to control the prices of television sets.
There were also other groups. Through these groups, a classic price-fixing cartel
developed. Prices of televisions in Japan were about 50% higher than prices of
comparable televisions in the United States (which, of course, could not be sold in Japan).
And profits for the electronic companies were well above average. (A key to the ability of
the electronics companies to maintain this price-fixing cartel was their control over retail
distribution. Manufacturers set the retail price and the store was not allowed to lower it.
Most of the appliance stores in Japan became “affiliated” with manufacturers, much
as gas stations are “affiliated” with refiners in the United States.) Given the high profits,
the Japanese electronics companies felt very safe in making investments in new factories
and new technologies. They “borrowed” technologies from the West and grouped together
in joint research projects. With their domestic market secure, they were able to lower
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prices in foreign markets to gain increased export sales. In the 1970s, their share of the
American market rose substantially. By the 1980s, they totally dominated the American
market.
(4) Technologies
As noted, the Japanese success resulted from a strategy of continual development of
new and “better” products. A wide variety of products makes the production process more
complex and therefore adds to the costs of production. The secret of success of the
Japanese companies is that they were able to develop manufacturing processes to
produce a large variety of products without raising costs (economies of scope).
One reason that producing many different products is costly is that it takes
considerable time to shift from one task to another. The Japanese companies attempted
to lower this time. Machine tools that can be reprogrammed to do many different tasks
were more widely used in Japan than in the United States. Presently, the Japanese use
four times the number of industrial robots as do American manufacturers. These
machine tools allowed Japanese companies to produce efficiently in relatively small
quantities, since one arrangement of equipment could produce or assemble a variety of
products. The equipment did not have to be altered or rearranged; instead, it was merely
reprogrammed. With these computer-based technologies, Japanese manufacturers were
able to pursue their strategy of continual product change at low cost.
A second reason that producing many different products is costly is the high cost
of handling and storing the large number of parts that are needed. The Japanese
companies, desiring to pursue a strategy of continually changing their products, also set
out to lower these costs. The leader in organizing production to reduce these costs was
Toyota, with its development of the Just-in-Time (or Kanban) system in the 1950s and
1960s. In the Just-in-Time system, materials, parts and components are produced and
delivered just before they are needed, therefore lowering the amount of inventories that
need to be stored. In the original Just in Time system, production order cards (called
Kanban) connected one stage of production to the next. Parts arrived at the factory
just as they were to be used (for this system to work, it was necessary that the quality
of the parts be absolutely reliable). As each stage of production uses parts, it
“reorders” these from the previous stage. The coordination problem in this type of
system was immense, especially before the use of computers; the manufacture or
processing of parts in one section must be timed to equal the use of the parts of the next
section. Thus, when Stage B takes parts from Stage A, it “reorders” them on the kanban.
By the time Stage B has done its processing to the parts, Stage A has also done its
processing. Thus, the next sets of parts are ready, with no loss of time. Few inventories
were needed. Having the timing correct required enormous engineering skill; it was the
engineers at Toyota who were the first to master it. The Just in Time system meant less
need to keep inventories, allowing Japanese companies to build smaller factories.
According to one study, an American automobile company required 2-1/2 times as many
people to produce a vehicle as a Japanese company using Just in Time. The Just in Time
system spread from Toyota to other automobile manufacturers and then to manufacturers
of other products. Since many of the parts in Japan were produced by different
companies, the Just in Time system required close coordination between these
companies. It therefore reinforced the system of vertical groups. Toyota has taken this
the furthest; as noted above, most of its suppliers are located close to the manufacturing
facility at Nagoya (“Toyota City”).
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The Just in Time system is quite vulnerable to defects in parts. To remedy this
vulnerability without abandoning the system, the Japanese factories have no specialized
repair people. On-line production workers are expected to be able to reject defective
parts and to repair parts and machines.
The flexibility generated by the Just-in-Time system allowed the Japanese companies
to be able to focus on market niches, to design and introduce new products quickly, and to
respond rapidly to changes in market demand. This organization of production to achieve
flexibility was a main source of Japan’s competitive advantage and rise to economic
success. (Those familiar with it will notice that the story of Japanese companies is similar
to the success story of Wal-Mart. Wal-Mart also maintains few inventories, has
something resembling a Just-in-Time system, and pushes quality and delivery schedules
on its suppliers. That has been the main source of its success.)
(5) Small Companies in Japan
As has already been mentioned, small companies in Japan play a major role in the
economy. Small companies (fewer than 100 employees) employ about 2/3 of the labor
force, produce close to half of the GDP, and provide close to half of all investment.
Many small companies engage in labor-intensive manufacturing of products such as toys,
handbags, products catering to Japanese culture (kimonos), and so forth. Others are
subcontractors of larger companies, as noted above.
Many small businesses are in retailing. Japan has about twice as many retail stores in
relation to population as has the United States (and four times as many food stores).
Most stores have no more than four workers. Many are located in the family residence and
are worked by wives. Many stores are exclusive retail outlets for one manufacturer. Small
businesses dominate a very inefficient retail sector.
Why are there so many small businesses in Japan? One reason is that the cost of
beginning a small business is very low, especially if one uses one’s residence.
The “seed money” is usually provided by relatives or by borrowing from one’s employer.
A second reason involves the poor social security provisions (one’s business becomes
one’s security for retirement) and the poor job opportunities for married women. A
third reason is the practice of large companies of “retiring” workers at age 60. Many
of these workers “retire” to their own businesses. A fourth reason is the shortage of
living space. Japanese people cannot keep much in their small homes and apartments.
Therefore, they need to make frequent trips to the stores. The large number of small
stores, interspersed with residences, makes this possible. Finally, there are the
government policies that promote small businesses. Owners of small businesses have
been an important political constituency of the ruling Liberal-Democratic Party. Tax laws,
labor standards, and environmental rules are not vigorously enforced against small
businesses. Zoning laws are seldom proposed. There are many legal tax benefits and many
opportunities for tax evasion. And there is a law restricting the building of new stores with
large floor space to protect small businesses from competition from larger ones. (This law
is a major reason that Japan has far fewer department stores than does the United States.)
(6) The Situation for Japanese Corporations since 1990
The governance of Japanese corporations has changed somewhat since the Japanese
economy began to perform poorly in 1990. In fact, changes in the system began in the
1970s. The Japanese government increased its spending at that time to try to stimulate the
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economy. Because of the economic slowdown of that time, tax revenues were falling.
This generated government budget deficits for the first time in the postwar period. To
finance these budget deficits, the government had to borrow (sell government bonds). But
there was no market for the government to sell its bonds or for those lending to the
government to be able to resell their bonds. So the government started developing a bond
market. The development of this bond market in the 1970s began the period of deregulation. The changes were very slow. But by 1996, Japanese corporations could issue
bonds as freely as could American companies in the United States. So they could raise
funds for investment spending without going to the banks. This change was exacerbated
with a 1980 law that allowed Japanese companies to sell bonds in foreign bond markets.
There was a noticeable shift away from bank financing. However, that was shortlived. As a proportion of total debt, company reliance on bank financing declined from
70% in 1986 to 54% by 1991. However, by 2000, this had returned to 71%. Companies
did not abandon their banks. But they did negotiate better deals from the banks.
The story of the bubble economy of the 1980s and its bursting in 1989 was told in
Chapter 6. As the large corporations financed more of their investment spending in the
bond market or from foreigners, the commercial banks had to look for new customers.
They found these among small businesses for whom it is too expensive to issue bonds and
among stock and real estate speculators (people who buy in the hope that the prices of
these assets would rise). Between 1970 and 1996, loans to small business rose from 33%
to 57% of all commercial bank loans and loans to real estate developers rose from 4% to
over 12% of all commercial bank loans. As the economy went into recession in 1990,
many of the loans to small businesses could not be repaid. And the “bubble burst” for the
stock speculators (1989) and the real estate speculators (1990). They too could not repay
their loans in many cases. As of March of 2000, between 6% and 11% of total loans
were “non-performing” (depending on the definition of “non-performing” used). This
means that there was little likelihood that these loans would be repaid. Many of the large
commercial banks were in serious financial trouble because they had counted on the
repayment of these loans. They had been rolling over these loans, extending lines of
credit, and maintaining very low profit margins in order to help the companies. The large
banks tried to survive by merging together. Indeed there were so many mergers that the
number of very large banks (called “city banks”) dwindled from 20 to 8. Mitsui and
Sumitomo merged together. So did the Bank of Tokyo and Mitsubishi. And Fuji, Daiichi
Kangyo, and the Industrial Bank of Japan merged to form a mega-bank called Mizuho.
The proportion of shares of stock owned by the banks, other corporations, and the
government fell in Japan from 64.8% in 1990 to 52.8% in 2001. The proportion of
shares of stock owned by individuals, institutional investors, and foreigners increased
from 35.2% to 47.2% over the same period. Among the foreigners, mutual funds and
pension funds from the United States and Britain became much more significant. By 2004,
about ¼ (23.7%) of Japanese stock was foreign owned, up from 4.7% in 1990. Seiyu, a
supermarket chain, is now 66% owned by Wal-Mart. The result has been a reduction in
the ties within the financial keiretsu. Cross shareholding fell from nearly 20% of all
shares in 1987 to less than 10% by 2003. Individuals, institutional investors, and
foreigners are concerned with having the share price rise and with little else. They do not
come to meetings to try to improve the performance of the company. Instead, if they are
not happy, they simply sell their shares (“exit” rather than “voice”). This has tended to
make the share price more important to the management.
We should not exaggerate this change. Japan has changed but has not converged on
the shareholder model found in the United States. Labor still plays a stronger role in
Japan (see below). Management pay is still more modest in Japan but is moving
11
somewhat in the American direction. Performance-related pay and stock options still
represent only 13% of executive pay in Japan (1999) compared to 140% of executive pay
in the United States. And the role of the commercial banks is still significant (the percent
of total assets financed by borrowing from banks is still higher in Japanese corporations
that in American corporations).
But the monitoring role of the banks has been reduced. There are now fewer bank
representatives on the Boards of Directors of the large Japanese companies. And
foreigners are now found on the Boards of Directors and among Japanese CEOs. A
British citizen is now the CEO of Sony. Nissan is allied with Renault of France. The same
individual, Carlos Ghosn (of Lebanese descent), is currently the head of both Nissan and
Renault. He has turned both into profitable companies. As of the end of the 1990s, there
was evidence that the management of large Japanese corporations would have to pay
somewhat greater attention to the shareholders than was true before. For example, in
a 2000 survey, 60% of Japanese executives said that they give first priority to obtaining a
high return for the shareholders, up from only 25% in 1997. Finally, there has been a
series of legal reforms moving Japan toward the kind of laws regarding corporations found
in the United States or Great Britain (although most Japanese companies still do not have
outside Boards of Directors as would be found in the United States). These trends would
indicate that, years from now, the governance of Japanese corporations may become more
similar to that of American corporations. But the basic structure described in this chapter
is still largely intact.
Japanese companies have also maintained their relationships with their suppliers. But
they have not hesitated to squeeze them as a way of maintaining their profits. So they have
passed on some of the burden of adjustment to their suppliers.
Let us illustrate the change by returning to the case of Mazda (see Page 4 above for the
situation in 1974). By the early 1990s, Mazda was in financial trouble once again. It had
depended heavily on exports and was hurt by the appreciation of the Japanese yen
(making its cars expensive in foreign markets). Its sales fell greatly during the worldwide
recession that began in 1990. And it had over extended itself with expansion plans,
including plans for a new luxury car, the Amati, to compete with Lexus and Infiniti. But
this time, Sumitomo Bank could not help much as it had a large number of nonperforming
loans to contend with. So Ford took over control of Mazda. It increased its ownership
share to 1/3, enough to control the decision-making of the company. It placed Ford
directors on the Board of Directors of Mazda. It even named an American as President of
Mazda, the first non-Japanese to head a large Japanese corporation. Mazda has returned to
reasonably solid financial footing. The case of Mazda shows both the changes in the
keiretsu relationships and also how the Japanese companies’ traditional hostility to foreign
intervention in their domestic economy has dissipated.
(8) Summary and Conclusions about Japanese Businesses
Let us now summarize the major points from this section on Japanese business and the
major differences between Japanese and American corporations.
(1) Ownership of Japanese corporations by banks, insurance companies, and other
corporations is much more extensive than is found among American corporations. In
Japan, individual stockholding is less extensive, dividends are lower, and individual
stockholders have less voice in corporate management.
(2) Japanese corporations rely more on debt financing than do American
corporations.
12
(3) Large Japanese corporations are grouped into financial (horizontal) keiretsu,
centered on a “main bank”. This is a uniquely Asian form of collaboration. The
corporations are integrated through the Presidents’ Councils, through their relationships
with the “main bank”, through inter-corporate shareholdings, through preferential trade
networks, and so forth.
(4) Large and small Japanese companies are also grouped into production (vertical)
keiretsu. In these, the large companies maintain stable, long-term relationships with
smaller, satellite companies who are often used as subcontractors. These production
keiretsu facilitate flexibility, allowing a strategy of continuous product improvement.
(5) Japanese companies that produce consumer goods typically have more control
over the distribution of their products than do American companies.
(6) The main goal of Japanese companies has been growth for the purpose of
increasing market share. This has been more important than short-term profits. The
drive to increase market share has also manifested itself as a drive to export.
(7) Protection against business failure is more common in Japan than in the United
States. Cartels have been used for this purpose. Cartels in Japan were also used to
assure profits in the domestic market, allowing Japanese companies to charge lower prices
in foreign markets as a way of increasing export sales (price discrimination).
(8) From the 1970s to the 1990s, the competitive advantage of Japanese companies
was based on their flexibility. The Japanese were ahead of American companies in the
use of numerically controlled machine tools, robots, and so forth and in reducing
inventory costs (for example, through the Just-in-Time system). Because of this
flexibility, the Japanese companies were better able to focus their production on
market niches, design and produce new products quickly, and respond rapidly to
changes in consumer demand.
(9) Small companies have been of greater importance in the Japanese economy. They
are an important reason for the greater flexibility in production there. They are also a main
reason why Japan has experienced such low unemployment rates. Small companies in
Japan have been heavily supported by the government.
(10) Since 1990, Japanese companies have less connection to the large banks. They
get more of their financing from bondholders and foreigners. They are becoming
more like American or British corporations. But they are still quite different.
The thesis put-forth here is that high profit rates created an environment conducive
to large amounts of investment spending in new capital goods. These investments
reduced production costs and increased production, thereby contributing to further
profits. It became a “virtuous circle”. The expansion of production by so many
companies led to “overproduction”. This led to cartel-like arrangements and to export
drives. To export effectively, especially in the American market, Japanese companies
had to develop a strategy of continual product improvement— attempting to reach
niches in the American and European markets that were not well met by domestic
producers. To succeed with this strategy, Japanese companies were forced to develop
the flexibility to produce many different products in small quantities at costs that would
be competitive with the domestic companies. Their ability to develop this flexibility
became the main source of their competitive advantage. From the early 1970s to the
1990s, as consumers came to desire new and different products and as technological
changes were occurring rapidly, the Japanese companies, with their flexible production,
were better prepared to succeed than were the American companies. But the system
began to break-down in 1990.
13
Test Your Understanding
a. Some people see the differences in Japanese business practices (the nature of the
corporation) as the key to the Japanese economic success. Name some ways that the
Japanese corporation is different from the American corporation? (You might consider
here such points as: ownership, control, relations with other businesses, competitive
strategies, the careers of managers, the role of small companies, and so forth)
b. How might these differences have contributed to the competitive advantages of
Japanese companies in certain industries? How might these differences have contributed
to the economic problems faced by many Japanese companies, especially since 1990?
c. Imagine there is a company in a country that has just emerged from communism.
The company has just become privately owned. What could this new company learn
from the good and bad aspects of Japanese business practices?
Part II: Introduction to Japanese Labor Relations
Many people argued that there was a unique system of industrial relations in Japan and
that this system contributed greatly to Japan’s high rates of economic growth. Here we
will compare the Japanese system of industrial relations with that of the United States. The
first section will consider “seniority wages”, whereby male blue-collar workers in large
companies receive regular increases in wages as their tenure with the company increases.
We will evaluate the relative importance of seniority and merit in the determination of a
worker’s pay. And we will consider the relation of the seniority wage system to the ways
work is organized in Japanese large companies. The second section will analyze
arguments concerning the existence of a dual labor market in Japan. The argument is
that Japanese “regular” workers obtain “seniority wages” and “permanent employment” at
the expense of other workers. In considering the dual labor market, we will consider the
labor market for women. The third section will discuss “permanent employment”,
meaning that a worker begins employment with a company directly after completing
school and expects to continue employment with that same company until a mandatory
retirement age of 60. We will determine to what extent this exists in Japan. We will also
evaluate the labor market for older males as well as the responses of Japanese corporations
to recessions. The fourth section will discuss enterprise unions, meaning that the unit that
collectively bargains with the management is restricted to all workers who work in the
enterprise. We will examine the structure of Japanese unions, the way that collective
bargaining takes place in Japan, the role of joint labor-management consultation and
quality circles, and the effects of Japanese unions on wages. We will also evaluate the
ability of Japanese unions to represent their workers effectively. The fifth section will
discuss the argument that the Japanese system of industrial relations enhances flexibility
in both wages and hours worked. This flexibility allowed Japan to maintain low
unemployment rates until the 1990s. Finally, we will consider how the Japanese system of
industrial relations has changed since 1990. The last section will present a summary of the
basic points and some conclusions.
(1) Seniority Wages
For Japanese male blue-collar workers, real wages (adjusted for inflation) rise
continuously as the worker ages until peaking at about age 50. In contrast, for American
and European blue-collar workers, real wages peak in one’s thirties. Having real wages
increase as one gets older is known as “seniority wages”. In Japanese companies, the
growth of wages between the beginning of employment and the year of peak earnings is
14
greater than in similar American companies. The determination of wages of blue-collar
workers in Japan is similar to that of white-collar workers in the United States.
(a) How Are Wages Determined?
Unlike American blue-collar workers, Japanese blue-collar workers are paid on a
monthly salary basis. (American blue-collar workers are usually paid on an hourly basis.)
Typically, about three-fourths of this salary is a basic wage, which includes starting pay,
annual increases usually tied to seniority, and an across-the-board increase negotiated in
the “Spring Offensive” by the enterprise union (see below). About 2% involves incentive
pay. The rest comes from various fringe benefits —for commuting, for supervisor
positions, for special skills, and so forth. The basic wage is determined by age, education,
and experience with the company. In Japan, experience within the company was much
more important than outside experience. As an example of the importance of
experience within the company, a man hired at age 17 and staying with the same company
would (on average) have his pay triple by age 40.
There was considerable conflict between workers and managers over the criteria to be
used in determining the basic wage. The workers desired to keep the system whereby the
basic wage was determined exclusively by age, experience, and education. Management
desired changing the system so that job-related characteristics (occupation, job skills, and
so forth) and individual merit would be more important. It would appear that employers
have at least partially prevailed; today, most employers rely more on job related factors
and individual merit than they once did (see below on the situation since 1990). However,
age, education, and experience are still more important in determining the pay of blue
collar workers in Japan than in the United States.
A worker’s pay could rise over time for three reasons. First, as noted above, there
was an across-the-board increase negotiated by the union during the “Spring
Offensive” (see the section on unions below). Second, also noted above, there was an
annual increase in the basic wage. And third, there was the possibility of promotion.
For the second and third of these, even prior to 1990, merit rating by employers was
very important. For the annual increase, at least half depended on merit rating. For
promotion, supervisor assessment was also very important; there was no strict seniority
system, as there often is in the United States. Japanese companies were concerned with
evaluating employees. And Japanese evaluations were likely to be very subjective,
including items such as “contribution to the enterprise”, ”attitude toward learning after
hours”, “relations with others in the workshop”, and so forth.
Two other features of a Japanese worker’s wages are worthy of notice. First, unlike
the United States, a considerable portion of a worker’s pay comes as a semiannual
bonus. The bonus depended on the performance of the company, but usually equaled
about two months’ salary. Up to 1973, bonuses were rising as a percent of total earnings;
since then, they have been falling. Second, fringe benefits in Japan are more extensive
than provided by employers in the United States. They typically include company
housing, insurance policies, recreational facilities, and so forth. In Japan, these could be
seen as a form of “profit-sharing”—they could be reduced quickly when revenues fell.
(b) Differences in Wages
Wage differentials within a company are narrower in Japan than in the United
States, at least for men below age 50. Whether one was a manager is of much less
15
importance to one’s pay in Japan than in the United States—that is, the pay gap
between managers and other workers was smaller in Japan. Changes in rank in Japan
often involved little change in authority, responsibility, or pay. In addition, the symbols of
management status are less noticeable in Japan. There are no separate management
parking lots, dining rooms, bathrooms, and so forth. All workers are paid a monthly
salary. All dress similarly and use informal patterns of speech when communicating. One
can conclude that there is greater equality within the Japanese company than within the
American company. Japanese management has deliberately sought this as a goal in that it
fosters company loyalty. As we will see below, it is a goal that has been realized in part by
excluding the lowest paid and least educated workers from the company.
(c) Job Organization and Skill Acquisition
For blue-collar workers, several aspects of job organization in Japan are different from
that of the United States. First, in most large Japanese companies, there is a widespread
practice of job rotation. Workers commonly perform several technologically-related jobs.
The training of young workers is done by the older workers who work next to them. Use
of vocational schools is very limited. Because they are trained in many different tasks,
Japanese blue-collar workers can more easily adapt to the introduction of new products or
new technologies. They are also able to do “unusual operations”—such as repairing
broken machinery, eliminating defective products, and so forth — operations that are
normally done by specialists in the United States. This allows Japanese companies to
get-by with fewer workers. (Also because workers are trained in many different tasks,
companies do not have to hire substitutes for those who are absent.)
Second, average working hours per week have been substantially higher in Japan. .
About 25% of Japanese workers work six days a week. In all, 75% average more than 5
days. Many work 60 hours a week or more. This is NOT the result of the dedication-of
Japanese workers; they report themselves are working more hours than they desire. It
would appear that the long workweek results from low growth in real wages combined
with very expensive housing (one must work more to make the payments), the
inadequacy of recreational facilities (thus, there is less desire for leisure), the
importance of subjective merit evaluations, and the weakness of Japanese labor unions
(described below).
Third, absentee rates in Japanese companies are very low. And workers take only
50% to 60% of the paid holidays due them. These facts have been used to argue that
Japanese workers must be extremely dedicated. But the explanation would seem to be
different. In most companies, sick pay is only 60% of regular pay; this provides a major
penalty for workers who are ill. To compensate for this, workers accumulate their vacation
days to use when they are ill. And Japanese companies have few workers to serve as
substitutes. The workgroup leader must take over the tasks of an ill or vacationing
employee in addition to doing his own tasks. This generates considerable workgroup
pressure to minimize absences. Finally, as noted above, merit evaluations are very
important in Japanese companies; “excessive absence” is an important criterion on
which merit is determined. Although one got a contrary impression from American
newspapers and magazines, surveys reported lower commitment to the company and
lower job satisfaction among Japanese workers than among American workers.
(d) Explanations of Seniority Wages
There have been many attempts to explain the existence of seniority wages and the
Japanese system of skill acquisition. Why are there these differences in work and pay
16
between Japan and the United States? Two economists explained these differences as
the result of a production strategy that requires the progressive introduction of
technological innovations. Because new technologies are continually being introduced,
workers need to be able to adapt well and to be able to do many different tasks. And as a
worker learns to do new tasks, his skills improve, and so does his pay. Hence, the seniority
wage system. This explanation is consistent with the fact that workers “retire” relatively
early in Japan and that their real wages fall after age 50—older workers are harder to
retrain. This explanation is also consistent with the section above on Japanese business
where it was shown that many large Japanese companies pursued a strategy of rapid
product change through rapid technological change. This explanation works well for the
period up to 1990. But in the 1990s, the technological change was massive. Workers’
skills developed from job rotation and on-the-job training could not keep up with this
extreme technological change. For the first time, Japanese companies underwent
significant competition for young workers who were able to handle the new technologies.
Another explanation is that seniority wages are used in Japan to reduce turnover (by
creating a significant pay penalty for those who leave the company) and therefore to
keep a work team together. The argument here is that many of the skills that workers
develop are specific to that company. If the worker left that company, the skills would not
be useful in another job. And if the worker left the company, the company would have to
hire and completely train someone new. Company specific skills involve familiarity with
co-workers (forming a good team) and with machines or production methods unique to the
company. Once a worker has these skills, the company does not want the worker to leave.
So, by this explanation, it has seniority wages to create a financial penalty for leaving.
Other economists have interpreted seniority wages as paying workers according to some
notion of fairness (older workers “should” receive higher pay) or as increasing the power
of employers over workers by creating a serious pay penalty if one quits. There is no
consensus on an explanation.
(2) The Dual Labor Market Theory
There are two different versions of the dual labor market theory for Japan. In one,
there is a “core” of large, capital-intensive, oligopolistic companies and a “periphery”
of smaller companies. The core companies provide high and rising wages, good working
conditions, and regular employment. The periphery companies have lower wages, poorer
working conditions, and high rates of turnover. For Japan, this version of the dual labor
market theory does not apply now, although it did apply until the mid-1950s. Starting
wages for young workers are actually higher now in the smaller companies. In Japan,
wages rise as a worker gains experience in the smaller companies as well as in the larger
ones. (This is not true in smaller companies in the United States.) Productivity also
increases as fast in the smaller companies as in the larger ones. Employees who work in
the smaller companies do so for a substantial part of their lives, and are no more likely to
be laid-off during recessions than workers in large companies.
The second version of the dual labor market theory focuses on skill development.
There is a primary sector. Here skills are low when one is first employed but develop
with experience, as noted in the previous section. Wages and responsibility increase the
longer one is employed – the seniority wage system. Tenure with the same employer is
long. This was the sector described in the last section. Secondly, there is a lowerprimary sector. Here skills are relatively high when one is employed, but do not develop
much over time. These are the craft workers. And finally, there is a secondary sector.
Here, skills are low when one is employed and do not improve over time. These workers
17
have low wages, no promotions, no raises, and high rates of job turnover. In Japan,
many of those who are secondary workers are temporaries or part-time workers.
Temporaries are employed by a large company for a limited period of time. They are
not classified as “regular workers” and do not have seniority wages or permanent
employment. Most do unskilled or semiskilled work. Part-time workers earn only 51%
(for men) and 44% (for women) of the wages of full-time workers; this wage differential
has been increasing. Those who take these jobs are usually older men and women, farm
housewives, and seasonal farm workers. In some industries (iron/steel, shipbuilding, and
chemicals), these workers cannot become regular workers; in other industries, they are
considered probationary and can be promoted to the status of regular worker. Their
benefits are also low in comparison to regular workers. In the recent poor economic times,
part-time and temporary employment has risen significantly – becoming ¼ of all workers
(up from 18% in 1990) – a rate much higher than that found in the United States or
Europe. Japan now has one of the most “dualistic” systems in the world with high
employment protection for permanent workers and very insecure employment for more
and more temporary workers.
The situation for Japanese women is quite different from that of Japanese men. The
wage gap between men and women in Japan is much greater than in the United States
or Europe, and has been increasing. As of 2003, Japanese full time female workers
earned 66% of the amount the full time Japanese male workers earned, compared to over
80% in the United States and a higher percent in Europe (90% in France). Like men,
Japanese women are usually employed directly from school. But they often work until
marriage or shortly thereafter. Their wages increase very little as they gain job experience.
They are likely to drop out of the labor force between their mid-20s and mid-30s, and then
re-enter later as basically unskilled workers. They then become a major part of the
temporary or part-time work force. For Japanese women over 40, 46% worked in parttime jobs in 2001, up from 26% in 1980. Only 49% of Japanese women were in the labor
force in 2001 compared to more than 2/3 in the United States. Given the limited
opportunities in paid employment, it is not surprising that many women workers are
either self-employed or work in family businesses.
In Japan, women are the main group in the secondary work force, although men
over 60 who have “retired” from a large company must also be included. By American
standards, this secondary work force seems rather small. This may be true because there
is no large immigrant group in Japan, because there is no large “underclass” in Japan,
because government subsidies have allowed people to remain in agriculture rather than be
forced into the cities, and because government support to small businesses has given
options to women and young people other than to work in the secondary sector.
(3) Permanent Employment
Those males who work in the primary sector with continual skill development and
seniority wages also tend to have permanent employment. About 1/3 of Japanese males
works in such a system. In this system, they are hired directly from school. They expect
to maintain their employment with the same company until the mandatory
retirement age of 60. The company is expected to do everything possible to avoid
layoffs.
Let us start by examining the labor market for young people. For people age 16 to 24,
the labor market in Japan is quite different from that in the United States. Young
Japanese people have only half the number of jobs and stay on each job twice as long as
18
young Americans. This suggests that, unlike the United States, there is no separate labor
market for young people in Japan. Japanese young people are not likely to work while
in school. Upon leaving school, they begin their work careers. They may experience a
relatively short period of “job shopping”. Then they accept a job in which they will spend
their careers. In recent years, the employment problems of young workers have increased.
For example, the unemployment rate for people age 20 to 24 was 3.8% in 1990. By 2002,
it had risen to 9.3%. (For those age 15 to 19 and not in school, the unemployment rate
rose from 6.6% in 1990 to 12.8% in 2002.) Partly, this difference results from the different
role played by formal education in the two countries. In Japan, formal education is less
important in skill development; most skill development occurs on the job. However,
Japanese formal education plays a major “screening” role; getting the “right job”
depends more on educational performance than it does in the United States.
Now let us turn to what are called “prime age males”. For males age 25 to 49,
turnover rates in large Japanese companies are very low. Studies find that separation
rates in manufacturing companies in Japan are only about 25% of those in American
companies (for workers with similar characteristics). Japanese workers in the primary
sector expect to be employed by the same company for a long time. This phenomenon is
true in both the large and the small companies. They do not leave the company and the
company will do everything in its power to avoid layoffs. (One frequently mentioned story
of 2008 involved a Toyota plant in San Antonio Texas. When truck sales declined and the
company had to close the plant, all of the workers were assigned to do community projects
--- with full pay and benefits.)
Finally, let us turn to males age 60 and over. Permanent employment seems to end
around age 60. Most large companies have a mandatory “retirement” age at 60. Those
forced to retire get a lump-sum payment that usually averages about three years’ income.
As noted earlier, most then take jobs in the secondary sector with pay similar to men in
their twenties. The proportion of men age 60 to 74 still in the labor force is much higher
in Japan than in the United States. For men over 60, the job market is very poor. They
represent about 20% of all of the unemployed people in Japan.
Many have wondered whether the permanent employment system would hold-up
during a recession. One recessionary period that has been studied was 1975 to 1978. In
that period, employers did indeed try to maintain their commitment to permanent
employment. Those companies in financial trouble would first try to reduce work hours,
especially overtime. If this was not sufficient, the next step was to try to effect
“temporary” transfers of workers to other companies in the keiretsu. (Fewer than half of
those transferred ever returned to their original employer.) If these steps were not
sufficient, redundancies were initiated. (Redundancies mean that the job is permanently
eliminated, but that no fault is assigned to the worker. This is called “downsizing” in the
United States.) Unlike American companies, Japanese companies had no strict seniority
system to determine who is made redundant; employers had considerable choice. As an
illustration, in 1978, one company asked for 1500 workers to volunteer for redundancy;
otherwise there would be “designated dismissals”. Those “volunteering” would receive a
separation payment, while those dismissed would not. Those encouraged to “volunteer”
were (1) those whose work performance was not good, (2) those who had not shown a
very high degree of cooperation with measures taken by the company, (3) those who
would have a hard time conforming to the tough measures the company may have to take,
and so forth. This example illustrates not only the role of “merit” but also the subjectivity
of merit. Point (3) also illustrates that older workers are more vulnerable to
19
redundancies. The Japanese system places the burden of layoffs on those for whom the
cost would be most severe (the older workers); this is the reason that workers are most
militant in dealing with dismissals and the reason that companies strive to maintain
permanent employment as long as they can. The most recent recessionary period began in
1990 and will be considered below. Again, companies have tried to maintain permanent
employment. Companies decreased their employment primarily through natural attrition
(not replacing people who left or retired).
In summary, the evidence seems to show that the permanent employment system has
certain key characteristics. There is no separate job market for young people. Formal
education is less important in the development of job skills than it is in the United
States. For Japanese workers up to age 50, there is much more job commitment than
there is in the United States. After age 60, men leave the large company and work in the
secondary sector at lower pay. The permanent employment system the first test of
recession in the 1970s; companies maintained their commitment to use redundancies
only as a last resort. Redundancies are not determined by seniority.
Why the system of permanent employment exists has been the subject of some
disagreement. Some see it as resulting from company-specific skills: workers who learn
these skills need to stay with the jobs on which these skills are useful. Company-specific
skills were discussed in the section on seniority wages. Still others see it as a trade-off
between stockholders and workers: workers gain employment security in exchange
for lower wage increases. Lower wage increases help increase profits. Finally, others
describe this system as “paternalism”: workers gain employment security in
exchange for loyalty. A worker cannot quit because to do so would show disloyalty—a
trait that would be condemned by other potential employers. There has been no precise
study to determine the reasons for the permanent employment system of Japan.
(4) Enterprise Unionism
Unions in Japan organized about 25% of the wage and salary earners as of 1990,
compared to only about 16% in the United States but compared to over 70% in some of
the European countries. This percent (called the “union density”) has been falling in Japan
since the 1960s, as has also been occurring in the United States. Unions in Japan are a
weak force in representing the separate interests of workers. Let us examine these
enterprise unions.
(a) Structure of Unions in Japan
Several features of Japanese unions are unique. First, the unions are organized on an
enterprise basis, with an average of fewer than 400 members per union. Collective
bargaining over wages and job conditions is done basically at the enterprise level. Many
enterprise unions have affiliated into the one large industrial federation, similar to the
AFL-CIO in the United States. But like the American AFL-CIO and unlike the European
federations, this federation limits itself mainly to political activities and does not engage in
collective bargaining. In Japan, the dominant level is the enterprise union.
A second unique feature of Japanese unionism involves the composition of the union
membership. All members of the enterprise—including blue-collar workers, whitecollar workers, foremen, and some lower-level managers—belong to the same union.
(In the United States, by contrast, foremen and managers are excluded from the union by
law.) However, part-time workers and temporaries do not belong to the enterprise union.
20
A third unique feature of Japanese union is the lack of professional union employees.
Union leaders are elected by the membership. They work full-time in the union and are
paid by the union. But they serve in the union only temporarily and maintain their
employment relationship with the company. Many union leaders are foremen. When they
return to the company, they are often promoted—especially into upper management. They
will be promoted of course, only if their policies as union officials were in line with
company policies. Given these practices, it is doubtful that union leaders are truly
independent and willing to act freely on behalf of workers’ interests.
Bargaining is typically done in April during the “Spring Offensive”. At this time, all
unions bargain over wage increases and other matters. The wage demands follow a form
of “pattern bargaining”, with most unions following the lead of the International Metal
Workers’ Federation. Prior to the “Spring Offensive”, there are public exchanges of
demands between the major employer federations and the union organizations. Since all
unions bargain at the same time, there is less desire for one union to try to “leap frog”
another union (as happened commonly in the United States). Thus, the Japanese system
leads to lower wage demands than does the system of staggered wage demands in the
United States. The “Spring Offensive” was often accompanied by strikes. These strikes
typically lasted less than 1/2 day and were well-announced in advance. These strikes
appeared to be mainly for demonstration purposes only. Union-organized strikes became
militant only when the issue involved discharges of regular employees. In recent years,
especially as the economy suffered severe recession, the Spring Offensive shifted from
demanding wage increases to demanding greater job security and the number of strikes
has fallen.
(b) Joint Labor-Management Consultation and Quality-Control Circles
Another unique Japanese labor market institution is the system of joint labormanagement consultation that runs parallel to collective bargaining. Joint labormanagement consultation teams are found in the majority of Japanese companies
that are unionized. Generally the workers (or the union) elect worker representatives,
although some representatives may be appointed by management. In matters relating to
production methods, labor problems, shop floor environment, safety, fringe benefits,
and so forth, most companies either require consensus with the workers or, at least,
some negotiation. In matters relating to investment decisions, new product development,
and the financial situation, the workers may get some information or explanations but
do not have a say in the decisions. In matters of business policy, employment, or
discharge, managers often make unilateral decisions. The line between collective
bargaining and joint labor-management consultation is not clear.
Quality-control circles are also important labor market institutions. A typical company
has dozens of circles; each averages about ten workers and meets every week or two for
about one hour. They discuss product quality improvements, cost reductions, worker
safety, maintenance, inventory policy, and so forth. Management adopts most of the
worker suggestions. The personal financial benefit to the worker making the suggestion
is small. Yet, participation in these circles is an important part of supervisor
evaluations. This indicates that the quality-control circles are more likely to be desired by
management, rather than something imposed by workers.
Grievances in Japan are settled internally, without use of outside arbitrators or courts,
as would be found in the United States. While most unionized Japanese companies do
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have grievance procedures, the joint labor-management consultation procedures are used
to resolve the types of matters that typically give rise to grievances.
(c) Effects of Unions on Wages
The few studies that have been done on Japanese wages show that the unions have at
most a small effect in increasing the wages of workers beyond the wages they would
have otherwise been received. In most years, wages have risen less than productivity has
risen; that is, wages have not risen in accordance with the employer’s ability to pay. And,
the share of national income paid to workers as wages is considerably lower in Japan
than that found in either the United States or Europe. Given these facts, plus the fact
that wages rose faster in the small companies that are less likely to be unionized, the fact
that “merit” has increased in importance in determining one’s wages, and the fact that the
number of strikes has fallen, it would seem most likely that Japanese unions have not
had much effect on workers’ wages.
(5) Wage and Hours Flexibility
Research has shown that wages in Japan are more downwardly flexible than in the
United States (that is, they can fall more readily). As a result, companies can adjust to a
decline in sales by lowering wages rather than by increasing unemployment. Partly, this
downward flexibility reflects the payment of a considerable part of total wages
(averaging about one fourth) in the form of bonuses that, to some extent, are related to
profits. Partly, this downward flexibility may reflect the “Spring Offensive” which
eliminates the effect of one union trying consistently to get ahead of the others. And
partly, it may reflect the weak bargaining position of workers and their unions.
Secondly, research has shown that hours are also more flexible in Japan than in the
United States. Companies can respond to a decrease in demand by reducing hours of work
rather than laying-off workers. Partly, this reflects the large amount of overtime and the
long work year in Japan (that is, there are more hours to be cut when demand falls). And
partly, it reflects the greater use of part-time workers, temporaries, and outside contractors
in Japan (who are not part of the system of permanent employment).
Finally, research has shown that employment is less flexible in Japan than in the
United States. During a decline in demand, Japanese companies try to maintain
employment by reducing hours and wages rather than laying-off workers. Given the
militancy of unions when the issue is dismissals and the weakness of unions when the
issue is wages, it seems that both workers and employers in Japan are willing to
trade-off wage increases to gain employment security. The fact that unemployment in
Japan did not rise greatly during times of recession is partly attributable to this response. It
is also attributable to the ability of small companies (especially family-owned companies)
to absorb unemployed people, to the tendency of many to drop out of the labor force rather
than stay unemployed, and to the low labor force participation of teenagers.
(6) The Situation of Japanese Labor Markets Since 1990
As has already been noted, some Japanese labor practices have changed since the
economic problems began in 1990. However, much of the system described in this chapter
is still in place. First, beginning in the middle of the 1990s, Japanese companies were
forced to layoff workers as a means of restructuring. Before laying-off the workers,
they did try to find them other jobs. In most cases, they found the workers jobs with other
companies in the financial keiretsu. So in effect, permanent employment no longer means
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lifetime employment with the same company; it is coming to mean lifetime employment
with some company within the financial keiretsu. But the use of layoffs at all was a new
practice. Second, the Japanese companies have reduced their use of the seniority
wage system and made greater use of performance-based wages. As of 2002, nearly
half of Japanese companies used a merit wage, up from only 30% of companies in 1999.
Yet as we saw, most of a worker’s wage is not determined by the merit rating. Third,
while most Japanese companies still practice lifetime employment, they did reduce
the number of workers who can take advantage of it. Instead, they have hired more
part-time or temporary workers who do not receive lifetime employment. From 1994 to
2004, the percentage of “non-regular” workers increased from 20% of the Japanese work
force to 31.5%. Part-time wages (paid mainly to females) were only about 40% of the
wages of regular workers. In addition, non-regular workers rarely receive health care or
social security benefits. As a result of the greater use of part-time and temporary workers,
income inequality and poverty have increased greatly in Japan and now are among the
highest among the industrial countries. Japan is no longer the egalitarian society that it
used to be. Yet studies have shown that those Japanese companies that adhered to the
long-term employment model performed better than those that did not. Therefore,
retaining employees must have been a major reason for their success.
(7) Conclusions about Japanese Labor Markets
A. Summary of Major Points
(1) Seniority wages do exist in Japan for blue-collar workers as well as white-collar
workers. Wages rise with internal experience more than is found in other countries.
(2) Job-related factors and “merit rating” are more significant in the determination of
pay than they were previously. But age and education are still the most significant
factors.
(3) No system of strict seniority exists in Japan for decisions on promotions, transfers,
or dismissals.
(4) Unlike American companies, Japanese companies devote a considerable part of
labor cost to voluntary fringe benefits (housing, recreation, and so forth). These are
readily reduced during recessions.
(5) Wage differences within a company, including between managers and workers, are
narrower in Japan than in the United States.
(6) For blue-collar workers in Japan, skills are acquired through a process of job
rotation. Workers are expected to learn many tasks and to be able to handle unusual
situations. Japanese management has more flexibility in worker deployment as a result.
(7) The work year is longer in Japan than in Western countries. This seems to be related
to the low level of real wages plus expensive housing and inadequate recreational
facilities.
(8) Absentee rates are very low in Japan, with workers not taking all of the vacation
time to which they are entitled. This is related to the system of sick pay, the lack of
substitutes for workers, and the emphasis on loyalty.
(9) There is no compelling evidence that organizational commitment and job
satisfaction are higher for Japanese workers than for similar American workers,
contrary to popular opinions.
(10) The description of a “dual labor market” by size of firm is not appropriate. Small
firms treat employees similarly to large ones.
(11) The description of a “dual labor market” by type of skill is appropriate for Japan,
but is different from the United States. In Japan, the secondary labor force is composed
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mainly of married women. There is no segregated market for young people and no large
group of minorities or immigrants. Temporary workers are outside of the regular work
group of the company. The situation of Japanese women in the labor force is worse
than that of American women.
(12) Permanent employment does exist in many Japanese companies for men up to age
60. Most hiring is done directly from school or shortly thereafter. Between the ages of
25 and 49, job turnover is very low. In times of recession, companies have been able to
maintain their commitment to use dismissals as a last resort.
(13) Formal education in Japan is not commonly used to provide vocational skills. Its
role is to provide general skills (especially mathematics and science) and to screen
potential workers according to abilities and personal characteristics.
(14) The situation for men age 50 and older is different in Japan than in America. The
“retirement age” is very early. The worker “retires” from the company but not from the
labor force. The older worker moves to a small company and continues working at
much lower pay. The labor force participation rate of older workers (age 60 and up) is
much higher in Japan than in the United States.
(15) Enterprise unions are very weak in representing the independent interests of
workers, except when the issue is dismissals. It is doubtful that unions have achieved a
large wage premium. Union leaders are too closely intertwined with management to
represent an independent interest.
(16) Joint labor-management consultation and quality-control circles may have had
some small effect in raising productivity.
(18) Relations between companies and workers put a premium on cooperation and
loyalty.
(19) Wages and hours appear to be more flexible in Japan than in the United States.
For wages, part, but only part, of this greater flexibility is due to the system of bonus
payments. Employment is less flexible in Japan
(20) The system of labor relations has changed somewhat since 1990. Fewer workers
are able to benefit from the system of lifetime employment. More employment is parttime or temporary. And a greater percentage of workers are subject to merit wages
rather than seniority wages. Permanent employment is now more likely to be within the
keiretsu rather than with just one employer.
(21) The Japanese system of industrial relations reinforces a system of production that
focuses on product differentiation, continual introduction of new technologies into
products and manufacturing processes, low inventories, and high quality.
B. Vulnerabilities
How the Japanese system of industrial relations will change can only be speculated
upon. In making this speculation, one can see that the system has several vulnerabilities.
First, the system is highly dependent upon low rates of unemployment. In the long
period of slow economic growth and recession from 1990 to the present, Japanese
companies had difficulty keeping their pledge to avoid dismissals. If workers come to
believe that they can no longer count on the permanent employment, much of their
cooperation may be removed.
Second, the Japanese system places the greatest strain on the oldest workers. This
is likely to become a major problem as the Japanese work force is aging rapidly. Japanese
companies will have to make some accommodation to the increased number of older
workers.
Third, the system is very dependent on worker “loyalty”. This makes it vulnerable
to a new generation, one that does not remember the deprivation of the immediate postwar
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period. There is some evidence that the younger generation is more individualistic and
materialistic; if true, this generation will be harder to fit into the existing system.
Fourth, the system is very dependent on exports. This makes it vulnerable to (1)
foreign protectionism, (2) foreign recessions, and (3) the improved competitiveness of
foreign companies. With a reduced ability to export, the high degree of competition in
Japan could force major changes on the system of industrial relations. The world recession
that began in 2008 makes this a real possibility.
Finally, the system is very dependent on women to take positions in the secondary
labor force. This makes it vulnerable to a “feminist movement” similar to the ones that
have developed in nearly all Western countries.
Given these vulnerabilities, it is not at all clear what adaptations will be needed, or
whether the Japanese companies will be able to make them. But it must be noted that,
through the period of economic difficulties that has existed in Japan since 1990, the
industrial relations system has remained more or less intact.
Test Your Understanding
a. Some people see the differences in labor relations systems as the key to the
Japanese economic success. In what ways are labor relations in Japan different from those
in the United States? (You might consider such points as wage determination, training,
employment tenure, job organization, unions, flexibility, worker participation, income
distribution, maintenance of full-employment, and so forth)
b. In what ways is the labor relations system of Japan similar to or different from that
of the Social Market Capitalist Economies of Europe?
c. How might the differences have contributed to the competitive advantages of
Japanese companies in certain industries? How might the differences have contributed to
the economic problems faced by many Japanese companies, especially since 1990?
c. Imagine there is a company in a country that has just emerged from communism.
The company has just become privately owned. What could this new company learn from
the Japanese system of labor relations?