Bloomberg News

Abe’s Arrows of Growth Dulled by Japan’s Three Principles

June 20, 2013

Japan's Prime Minister Shinzo Abe

Japan's Prime Minister Shinzo Abe disappointed investors on June 5 when he outlined his growth strategy. Photographer: Kiyoshi Ota/Bloomberg

As Japan’s economy fell into recession last year, Yoichi Uehara wanted to save money at his family firm. Firing workers wasn’t an option: Under Japan’s labor laws, that would have increased costs, not cut them.

“It’s almost impossible to fire people,” said the head of Uehara Nameplate Co., whose 500 employees make more than a million emblems and hub caps a month for the likes of Honda Motor Co. (7267) “It would be good if we were able to lay people off like they do in America.”

Prime Minister Shinzo Abe has relied on stimulus measures to weaken the yen, boosting the value of sales in the local currency of companies such as Honda and electronics maker Panasonic Corp. (6752) that manufacture or export abroad. The challenge in the wake of elections next month will be to follow through on pledges to reduce business regulations and free companies from five-decade-old labor rules based on lifetime employment.

“Japan needs a lifestyle overhaul with different hiring and firing rules accompanied by changes in the social safety net to better utilize a declining working-age population,” said Jun Okumura, a senior adviser to the Eurasia Group in Tokyo and a former official at the Trade Ministry.

Panasonic and Fujitsu Ltd. (6702) are among companies pushing Abe for a major labor overhaul as they brace for billion-dollar job cuts to try to restore competitiveness. Japan’s industrial expansion in the 1960s and ’70s was underpinned by the so-called three major labor practices of lifetime employment, the seniority system and corporate labor unions.

Too Rigid

“It was the management culture that first promoted Japan’s strength, but the system is a little too rigid when companies try to improve competitiveness,” Fumio Ohtsubo, Panasonic’s chairman, said in an interview in April. “It’s no longer feasible to sustain the three major practices.”

The third-largest employer among Japan’s publicly traded companies is pushing for change as part of the third of Abe’s “three-arrows” growth strategy, which also include monetary stimulus and fiscal spending.

Panasonic has lost more than 1.5 trillion yen ($15.8 billion) in the past two financial years, and plans to spend 250 billion yen on restructuring during the next two to end losses from TVs, electronic parts and mobile phones.

The company may need to lose 10,000 jobs in Japan, which under current rules would cost the company around 100 billion yen in voluntary retirement packages, said Kota Ezawa, a Tokyo-based analyst at Citigroup Inc.

Costly Separations

Fujitsu, Japan’s biggest software-services provider for companies, said in May nearly 500 managers and 2,000 workers applied for early retirement as part of a 5,000 job-cut plan announced in March. The company took a charge of 54.2 billion yen in the fiscal year ended in March for staff reductions.

In Japan, companies can only make major cuts to the workforce if they meet certain conditions, including having successive years of losses. To fire an individual, the worker must be caught doing something egregious after repeated warnings, said Lance Miller, Asia regional managing partner at law firm DLA Piper LLP in Tokyo. Uehara Nameplate’s solution was to reduce the number of contract workers.

“It’s virtually impossible to fire a Japanese employee unless there’s been a violation of the law, they’ve been embezzling money, or something else very dramatic,” Miller said. “Terminations are cumbersome, very expensive, and increase the cost of doing business.”

Near Bottom

Japan ranks 134th out of 144 nations in terms of ease of hiring and firing, according to the World Economic Forum’s Global Competitiveness Report in 2012.

Japan isn’t alone in having to change labor restrictions. In Italy, where unemployment is close to a 36-year high, former Prime Minister Mario Monti last year pushed through a bill that expands jobless benefits and makes it easier for distressed companies to fire workers. Germany (GRUEPR), benefiting from a labor-market overhaul carried out a decade ago by then-Chancellor Gerhard Schroeder, has seen unemployment fall to 6.9 percent in May, from more than 12 percent in March 2005.

Even with the current firing restrictions, Japan has lost 1.2 million manufacturing jobs since the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The nation sank last year into a third recession in five years.

Discouraged from large-scale lay-offs, companies instead have reduced workers’ pay to cuts costs, contributing to the nation’s 15 years of falling prices. Monthly cash earnings were flat in April from a year earlier after falling in six of the previous seven months.

Cutting Wages

“Deflation in Japan persists because of declining wages,” said Hisashi Yamada, chief senior economist at the Japan Research Institute in Tokyo. “It’s hard for companies to restructure by firing people, so they look to cut costs by cutting wages.”

As a result, Japan has the lowest unemployment rate in the Group of Seven advanced nations, at 4.1 percent, compared with 7.6 percent in the U.S. and 12 percent in Italy. The low figure in Japan masks a trend to hire more temporary or part-time workers, who aren’t subject to the same protections as regular employees.

“At the start of the ’90s, the share of nonregular workers was around 20 percent, but now it’s about one-third,” Yamada said. That’s eroding the traditional model where men typically took full-time work with one company for life, while women worked for a few years until marriage.

“Japanese society is built around men becoming regular workers and household heads,” he said. Now, “cases of double-income families are increasing.”

School Graduates

With fewer regular jobs available, many of those graduating from school or college are forced to take part-time or temporary employment. “If young people cannot find stable work, they won’t build skills, and this will have a negative impact on future economic growth,” said Yamada.

The jobless rate among 15-to-24 year olds was 8.1 percent in April, compared with 3.8 percent for the 35-to-54 bracket.

Twenty-three-year-old Masaru Shimoyama had never held a full-time regular job and lost even his temporary position after the Tokyo drug store where he worked shut down in April.

“I’m looking for a job that I can keep for a long time so that I can gain skills,” Shimoyama said outside a Hello Work government labor exchange in the capital’s Shinjuku district. “I don’t have high expectations for what Abe will do.”

Stocks Performance

Stocks tumbled when Abe said in a June 5 speech outlining his growth strategy that specific legislation to implement his vision won’t come until Japan’s autumn at the earliest. The Topix index posted a 6.1 percent decline over the three days through June 7. The benchmark is still up 49 percent since mid-November, when Abe -- then in opposition and leading in polls to become the next prime minister -- called for unlimited monetary stimulus.

Abe in a June 19 speech in London reiterated his determination to restructure Japan’s economy, invoking the acronym TINA that was applied to the late U.K. Prime Minister Margaret Thatcher.

“There is no alternative,” Abe said in translated prepared remarks. “I have positioned the next three years as a period for intense reform. I will be afire, burning with all the political strength I can muster,” once next month’s elections to the upper house of parliament are behind, he said.

Labor laws aren’t the only area companies want changes to help increase competitiveness, said Martin Schulz, an economist at Fujitsu Research Institute in Tokyo.

Implementation Tough

“If the government focuses on reforms in energy, health, services and agriculture that allow for new demand trends, companies will soon compete for workers in the shrinking workforce,” said Schulz, who has done research for the Bank of Japan. “Unfortunately, the latter reforms are even more difficult to implement, which will keep companies hoping for lower labor costs and easier redundancies.”

Japan’s working-age population of 15-to-64 will decline 46 percent to 44 million in the period 2010-2060, according to a March 27 report by the Japanese National Institute of Population and Social Security Research.

Unemployed Shimoyama has yet to see Abe’s strategy turn into new jobs. For him, Japan’s labor market reflects a divide between his uncertain future and the older workers with their guaranteed jobs.

“The bars are filled with old corporate-employee types,” said Shimoyama, who attended technical college for two years after leaving school. “The older generation appears to be enjoying themselves.”

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net; Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net


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