Corporate Reforms: Japan Needs to Learn from Its Past

In the 1980s, Japanese-style management was in the limelight. Business schools in the United States competed with each other to make it the subject of their case studies. However, after the bubble economy burst in the mid-1990s, "capital efficiency and shareholder-oriented management," emerged. Examples can be seen in General Electric, Microsoft, and Hewlett-Packard. In the name of globalization, there was growing momentum for corporate reforms, turning away from the traditional Japanese system to emulate US financial and accounting systems.

Changes in Employment

Japanese business practices have changed dramatically through repeated deregulation and privatization. Western corporate executives and research institutions had focused on Japan's lifetime employment system and promotion through seniority as a factor in Japan's economic success. However, in the 1980s when the bubble burst, this underwent a complete turnaround. 

This tradition was seen as an impediment to corporate development, forcing a major paradigm change. However, the economic malaise continued. The topics discussed about Japan in the US business schools shifted from success stories to analysis of its downfall.

Legal revisions concerning non-regular workers followed the collapse of the traditional employment system. That then led to a rapid increase in non-regular workers. This has greatly impacted Japan's employment structure. 

Higher Turnover Rate

In the past, the Worker Dispatching Act was limited to specialized occupations. However, the 2004 amendment lifted the ban on the dispatch of simple workers in the manufacturing industry. This caused the number of non-regular workers with fixed employment periods to increase rapidly. 

In fact, today 36.7% of all workers aged 15 and older are non-regular workers. This is more than double the 15.3% in 1989. The turnover rate of regular workers has also increased. In 2022, 7.6% of regular employees (20s to 50s) changed jobs, which is double the rate of 3.7% in 2016. 

The turnover rate among young workers in particular is also increasing rapidly. According to the Ministry of Health Labor and Welfare, 31.5% of those who graduated college in March 2019 quit their jobs within three years of joining a company. 

Lower Employment Engagement

In the past, lifetime employment was a fixed concept for Japanese people. In other words, once they found a job, they would work until retirement and "bury their bones" in the company. However, after the bursting of the bubble economy and the financial crisis, this concept began to disappear. 

Employment engagement is an indicator of the strength of the relationship between the employee and the company. The higher this value, the more proud and loyal the employee is toward the company. At the same time, the more committed they are to their job. According to a report published by Gallup in 2022, Japan had a low engagement rate of 5%. In comparison, the United States and China had rates of 34% and 18%, respectively.

Aeon Hewitt, a human resources consulting firm, surveyed companies in the Asia-Pacific region in 2013. In their survey, Japan had the lowest engagement rate at 8%. It also had the highest rate of antipathy toward the company at 33%. This would not have been possible during the heyday of lifetime employment. 

Of course, when human resource mobility was low, there was no place to go even if one wanted to quit. For that reason, many employees persevered and stayed with one employer for the rest of their lives. 

In recent years, the number of people changing jobs seems to have increased to the point that not a day goes by without seeing a commercial for a recruitment agency in the mass media. However, the ease of registering with these agencies has led many people to overestimate their value and fail to change jobs. 

The Keiretsu System

In the past, Japanese companies were organized into groups called "keiretsu," centered around a bank. Member companies across industries held each other's shares and helped each other in business. And banks gave special treatment to member companies in terms of loans and proactive assistance when problems arose. 

Moreover, Japanese companies focused on long-term profitability. Even short-term losses were not a problem as long as they could be recovered in the long run. It was precisely because of this environment that they were able to plan mega-projects. 

This concept was introduced by then Foreign Minister Taro Aso at a general meeting of the Asia Society on May 16, 2007. As an example of how Japanese firms took a long-term view, he mentioned the Industrial Bank of Japan (now Mizuho Bank) interest in the Second Panama Canal project from the 1980s.  After years of research, the bank was selected as an advisor for financing the project in 2009. 

Losing Loyalty

Through the bursting of the bubble economy, the financial crisis, and prolonged deflation, Japanese companies have implemented various reforms. Following US standards, reporting by listed companies has shifted to a short-term focus on earnings. These are now presented on a one-year, six-month, and quarterly basis. 

Japanese companies no longer have the structure in place to participate in huge projects looking 10 or 20 years into the future. Instead, they are pursuing short-term profits. Meanwhile, employees have lost their loyalty to the company. 

The failure of the Mitsui Group to save Toshiba from the brink of bankruptcy is a clear example of the weakening of keiretsu's power. This raises the question: Are the various past institutional reforms good for Japan when looking to the future? 

Learning from the Past

Novelist Lafcadio Hearn, famous for his masterpiece Kwaidan: Stories and Studies of Strange Things, spoke in Kumamoto on January 27, 1894. He talked about the dangers of Japan losing the simple, natural, and honest way of life it had developed in exchange for the extravagant ideas imported from the West. Hearn was concerned that Japan would lose its good qualities if the importation from the West went too far. 

While Japan gained much through modernization, it also lost much. After a period of economic boom, the gap between urban and rural areas widened, the environment deteriorated, and Japan's ancient wisdom and values changed. After the bubble burst, this country seemed to have lost its spiritual richness and sense of morality, which had been taken for granted, as well as its economic wealth. 

It is necessary to review what Japan has lost in the past 30 years. The ban on the dispatch of simple workers in the manufacturing industry was lifted in 2004. This was followed by the privatization of the postal service in 2007. It was furthered by the consumption tax hike that followed. Are these reforms beneficial to the nation now and ever? 

The phrase "learning from the past" means to study and reconsider what one has learned in the past. This includes the discovery of new insights and knowledge, and making them one's own. 

It is time for the government to pause and reflect on the social and economic reforms implemented in the past and assess their current impact on the nation. Furthermore, where necessary, the government must have the courage to make corrections.

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Author: Yoshifumi Fukuzawa