Japanese-Style-Management. Has It Survived? Will It Survive?

Date September 8, 2004
Speaker Ronald DORE(Visiting Fellow, RIETI)
Moderator TANABE Yasuo(Vice-President, RIETI)



As today's title is "Japanese management system. Has it survived? Will it survive?" let me start by explaining what I understand as the particular characteristics of the Japanese management system.

First of all, the nature of the firm is in Japan much more like a community than in other countries. The Financial Times introduced a distinction between "property" firms and "entity" firms. Property firms are treated as the property of the shareholders, but in entity firms, there is some sense of being like a school, university, or public institution which continues through time and has a reputation of its own, irrespective of the people who are, at any one time, working in it. This is very clearly a Japanese characteristic. In practice, this has meant the three great pillars of the Japanese industrial relations system: lifetime employment; the seniority wage and promotion system; and enterprise-based unions.

Lifetime employment meant that the people running the firms were nearly always people who had spent their whole working lives within the firm. This meant that the seniority wage system, now spoken of as a bad kind of egalitarianism, was actually a system of promotion according to both seniority and performance merit. This system kept wage differences between peers of the same age limited to a span of about 20% around the average wage. Nevertheless, it did differentiate according to performance, and who got on the board or became president was a matter of intense rivalry. But it was a rivalry which was played out by showing how well you could cooperate with others. This was one characteristic of Japanese top management system. It had the consequence of orienting management decisions to the long term. People were conscious of the fact that they were trustees of a firm that had a long history, and would have a glorious future. In highly fluid labor market situations, unions have as their main objective keeping wages up, but that kind of union has hardly ever existed since the Taisho era. Instead, what the unions do is to unite all the people who have the same employer, and are committed to that employer.

The second characteristic is called relational trading, which includes having long-term suppliers with whom you have a long-standing relationship, and whom you do not change except under extreme provocation. In a truly market system, a firm shops around each year for a supplier with the best quality and the cheapest price, and it will switch suppliers depending on the market. The long-term stability of supplier relations and also long-term stability in the relationship between industrial firms and their bankers, or relational banking - although more of a German characteristic - also fits into this general pattern of relational trading.

The third characteristic is that the balance between competition and cooperation is shifted more toward cooperation than in most industrial societies. There are quite strong industrial associations and tacit or explicit agreements among market competitors to limit the kinds of competition in which they indulge. So, while in the UK Rupert Murdoch cut the price of his newspapers to increase circulation, in Japan there is a hierarchy of prices, and there is a tacit agreement that, although newspapers companies compete in advertising and sales, they do not compete on price. That sort of limitation of competition in favor of cooperation is a form of cartelization which American antitrust would come down on.

The fourth characteristic is that the role of the bureaucrat has traditionally been very important, not only as a promoter of the growth through indicative planning, but also as a promoter of a particular pattern of egalitarian growth. That is to say, to make sure that the small and medium enterprises also had the ability to grow and to protect themselves from the large corporations. Thus, the bureaucracy played the role of promoter of egalitarian growth and also arbitrator between industrial and consumer interests. For example, the oil refining industry was regulated for 10 years by an unwritten agreement brokered by the Ministry of International Trade and Industry (MITI), whereby the prices of gasoline and heating oil were kept at a ratio not normally produced by market forces. This was done in the interest of poor people's home heating, as opposed to the car-owners' desire for cheap gasoline. The fact that most of the poor people were voting for the Liberal Democratic Party (LDP) and that there were more of them than those who were interested in gasoline may also have had something to do it, but it was seen to be a decision in the public interest. This tacit agreement was then broken and replaced by a law. One can call this "relational regulation" because it was a way in which long-standing relationships between industry associations and bureaucrats were used to promote the public interest.

Why the urge to change? In the 1990s, the main features were economic stagnation after the bursting of the bubble and the need for many firms to reduce output. Firms had a lot of spare capacity including workers who they did not need, but who, under the lifetime employment system, they were unable to sack There were many people urging the restructuring of companies and rethinking the lifetime employment system.

Second was the push for deregulation, which was partly ideologically driven: the growth of neoliberal thinking stressing the importance of unleashing market forces and price competition. The deregulation drive has been an important factor in changing the system.

The banking crisis since 1997 has accelerated the tendency to break up the mutual crossholdings of shares, which was one of the main reasons why Japanese firms were employee-sovereignty companies that looked after their employees rather than shareholders. This was possible not just because of the mutual crossholdings between industrial companies and between banks and industrial companies. The banks were in severe trouble because of the bad loan crisis, and were forced to cash in a lot of their holdings, which reduced the incidence of crossholdings.

The penetration of U.S. business culture has been quite considerable over the last 10 years. One of the main reasons is the flow of people who have had an MBA training or graduate school economics in the United States. This cohort has grown larger and they are beginning to be important middle-management influences on firms' behavior. Many of the people who have had this kind of training have accepted the assumption that the Anglo-Saxon way of running companies and markets is the normal way, and that the Japanese form is somehow a deviation from normality. That ideological influence from the United States was amplified by what happened in the second half of the 1990s when the Japanese economy was stagnating, the American economy was bouncing along with tremendous vigor and confidence, and Japan was losing market share in some technological fields.

That loss of national confidence was important and the idea that 'America has it better' was focused on two things: one was transparency - Japanese firms were secretive; the other was the success of venture businesses. Silicon Valley was the symbol of entrepreneurial vitality, but the venture capital industry was just not taking off in Japan. Of course both of these salient characteristics of America have suffered a blow with the fall in the NASDAQ and the dispersal of Silicon Valley, while Enron and WorldCom have destroyed the myth of the total transparency of the American company. So there has been a change in atmosphere, especially with the nascent economic recovery of Japan. But the notion that America is better is slowly changing.

There is another reason why people thought there ought to be change, which was a collection of scandals known as Fushoji. Hugh Patrick, the economist at Columbia University, said that in America, employees steal from the firm, but in Japan employees steal for the firm. That sums up all the scandals about payoffs to gangsters, which were done in the interest of the firm. However, the number of instances of people actually stealing from the firm has not been large. Nevertheless, it was a powerful argument for those who said Japan must change.

What sort of changes have taken place? The lifetime employment system has survived to a remarkable degree. It is certainly true that there is much more mobility of young people. But if you look at the general wage survey, which gives a breakdown of workforces by the number of years of service, the proportion of people between the ages of 30 and 34 who have been working for that company for less than one year was 4% in 1985, rose to 5% in 1990, but was back to 3% in 2002. The labor mobility among people in their early 30s is still very restricted. If you take only university graduates, each of these figures is 1% lower. If you look at the wages of those people who have been working for less than one year as compared with the average wages for people in that age group, the only industry in which they are slightly higher is financial services, where the movement is only 1% But they are people who are moving up by changing firms, which is still quite rare.

In the deliberations in the changes of the labor standards laws, a lot of people wanted to change by statute what had been established by legal precedent as obstacles to the unrestricted dismissal of workers. A lot of legal precedents really protect jobs, so it is not simply a convention to maintain the lifetime employment system - it is also the legal system. A lot of people on the Labor Standards Committee argued that these protections should be abolished because everybody else is going for labor market flexibility and so on. But they were prevented, not so much by the trade union representatives who are very weak, but by paternalistic managers, the older generation of managers and bureaucrats. It was a touch-and-go system and I expect that the next time around it will really change. But it was an indication of the strength of the lifetime employment tradition.

Two things, however, have changed. One is the introduction in the majority of the firms of some kind of performance pay, replacing the seniority-constrained merit promotion. However, it is not clear how this will end up. Many firms that introduced the system in the mid-1990s have backtracked because the administration costs and effects on morale of objectively measuring differences in performance were counterproductive in terms of productivity. So there has been this change not only in the management philosophy, but also among the people being managed.

Changes in corporate governance include the possibility of shareholders bringing suits against directors. There has been an enormous change in the options for the financial restructuring of companies: making holding companies, permitting companies to buy back their own shares, allowing the use of shares for takeovers and mergers, et cetera. These liberalizations have in fact increased managerial power rather than shareholder power. But, in order to increase shareholder power, there have also been changes in the introduction of outside directors, slimming of boards of directors and the creation of a second level of executive directors in an attempt to separate the executive and monitoring functions. However these efforts have been quite limited, and have made little dent, either on managerial autonomy, or on the tendency for firms to promote from inside. In one survey of 32 firms, we found that the average age at which the president was appointed was 52.4 in 1993 and 52.7 in 2003. There has been almost no change in the pattern of promotion to top posts within Japanese firms over the last decade.

One important change in industrial relations is the weakening of trade unions, which has come from all the changes that have led to the collapse of the Socialist Party. Another very important factor is the process of education selection. Many who led trade unions in the 1950s and 1960s were men of high intelligence with considerable charisma, who were exceedingly bright but who were too poor to go to university. The enormous increase in educational opportunity has meant that people of that caliber no longer get onto the shop floor and are no longer available to the trade unions. The other influence is the deflation of the last eight years, which has practically wiped out the process of collective bargaining, and the major starting point and justification, the compensation for inflation. With deflation, real wages were rising although nominal wages were stagnant, and there was no justification for the process of collective bargaining to continue. So these are the changes in the firm.

A much bigger change is the centrality the of stock market and its effect on managerial objectives. The stock exchange used to be thought of as a place for unsavory speculators, and stock prices were thought to be moved by security companies' manipulation. So nobody took a move in their firm's share price as a genuinely, morally important comment on performance. One of the major reasons for this change is that 20% of Japanese shares are now owned by American investors, mostly by relatively stable institutional investors, but also by a lot mutual funds and hedge funds, which do a lot of the trading. In many months, 50% of the trades on the Tokyo stock market are done by foreigners, who have become the price-makers. The analyst profession has grown which means that managers are much more concerned to keep up their company's share price than they used to be. That has had a considerable effect in eroding the community-like character of Japanese firms.

To summarize, in the community view of the firm, the shareholders were just one of the groups the firm needed to keep happy in order to survive. But, in the property view of the firm, the chief relationship is between the shareholders and the managers, which is an agency relationship. Such firms have to get the best deal out of their suppliers, banks, and employees. So employees are treated so as to get the best quality out of their employees at the lowest price.

The "Toyota Way," is like the property view: there are delegations between shareholders and managers, while employees are just another group like suppliers or banks. There is enormous importance of shareholders, customer service and harmonious growth, which lead to stable long-term growth and maximize shareholder value. This is a great change from the past. The industrial relations manager believed that although the union had not seen this plan yet, they would not complain. Previously, not much thought was given to shareholders, but now, with more shareholders taking their profits and with a large number of Toyota shares on the market, there are considerable problems for departments dealing with equity capital. Also more shareholders speak up. However, this presentation was for investors, and it seems that they are saying, "Although this is what we say, we still believe in treating our employees as we used to."

However, I am not convinced that the next generation will have the same view. They are more likely to have a lesser gap between tatemae (the facade) and honne (the truth). This is because there will be further changes in corporate governance. The next reform of company law will make it possible for foreign firms to take over Japanese firms through the offer of shares. Last week the manager of Mitsui Sumitomo Bank said that if UFJ does not accept the current offer, they might look at a hostile takeover. Ten years ago that would have been a huge break with tradition, but now it is accepted as reasonable and something that may happen.

Secondly, the changes in the labor law that did not happen the last time will happen within the next 10 years. There will be a change in the protection of job security. Continuing changes in the education system, which have led to a weakening of trade union leadership and a concentration of talent in managers, has also had the consequence of a change in class structure. Many retiring managers, now in their 70s, went to village schools or public schools, and rubbed shoulders with the people on the shop floor before university. Many came from large families, with brothers and sisters in humble occupations. This gave the managerial class roots in the lower reaches of Japanese society, which contributed enormously to the sense of community within Japanese firms. However, managers, who are now in their 30s, have been on an elite track from the age of 11 and have none of the cross-class sense of rapport of earlier generations.

Then there is also the changing distribution of financial assets. More people in the managerial class have inherited wealth or savings of their own, whereas previous managers' income came almost entirely from their salaries. Income from financial assets is increasingly important for the people running the Japanese industry and state.

Questions and Answers

Q: In terms of the statistics for people employed for less than a year, I was wondering if the "freeter" (casual part-time worker) factor - people opting not to go into any particular business - might mitigate against the conclusion that things have not changed. There are a lot of people who are disillusioned in the way companies are not changing and do not wish to enter the labor market on the terms described, so what is the validity of this kind of comparison?

A: Yes, there is increasing use of casual labor. The wage survey I used only covers regular workers. Most of the freeters are in their 20s and a large proportion of them would have preferred to get a regular job, but their school records were such that they could not make it. These are people whose problems really touch the heart. How many of them are really people who have been to foreign schools and just do not like foreign companies, I am not sure. They are a minority. It was the labor shortage in the 1960s that reduced the proportion of casual workers, but there is now a reversion to the pattern of the 1950s when only the best qualified labor force could get regular jobs in firms.

Q: The postwar success is often posited to the Japanese system. Do you think that the current move to an Anglo-Saxon capitalist system is a move toward a less efficient economic system or is it likely to give greater efficiency?

A: I am not sure. The kind of society you get and the quality of relations and the quality of life depend on which system is used. If the Japanese system is inefficient and does not survive in the global economy, then it will be sacrificing the quality of life. If we assume that the crucial factor is technological development, I am not sure whether the American pattern or the Japanese pattern will be successful. In the American pattern, most of the brightest people stay on in graduate schools and work in their professors' labs and then become the Silicon Valley entrepreneurs, supported by venture capitalists. In the Japanese pattern, the brightest enter, immediately after a master's degree, firms like Hitachi or Toshiba. The venture capital is provided by the enormous R&D budgets of the firms. Which pattern - the large bureaucratic firm or individualistic graduate school - is going to win out, I am not sure. America has hitherto had the advantage of drawing from American brains, and from Chinese and Indian brains, but whether homeland security is going to be deterrent is also a factor in the long run. But Japanese firms still have the advantage of teamwork. If Japan could get rid of deflation, growth potential is still there. The demographic problem and age problem are genuinely serious.

Q: While population decline in Japan may be seen as a disaster, it may be a savior. The population has been excessive for the economic activity, as two or three people were assigned to one job after the war to keep them fed. What do you think of Japan turning from an inefficient country to a super-efficient one, destroying some of the community atmosphere, but also providing high growth in labor productivity?

A: I have trouble with this problem. There is no problem with the rise in productivity of material goods with the decline of the labor force. But material goods manufacturing is now less 20% of the labor force. The population is expected to decline in the medium term, while the proportion of old people whom they have to support will increase from 25 million now to 35 million by 2045, and that is a considerable problem. The Health and Welfare Ministry estimates between 0.8% and 1.8% for overall annual growth in productivity over the next 30 years. Productivity in services - in which more and more of the population will be employed - is extremely difficult to measure. Provided that Japan does not entirely write off the pay-as-you-go pension system, I feel that the welfare part of the problem can be taken care of. The real problem is that the real increase in jobs is going to be in the care of the aged, and there will be a gap between social need and effective demand. That is to say, people whose needs can create employment simply do not have the money to pay for it. That is why the pension system becomes very important as a means of creating jobs for people pushed out of jobs in manufacturing.

Q: There were reforms to the links between universities and firms to mimic the U.S. model based on the assumption that Japanese firms were doing poorly. In Japan, university researchers could be added as stakeholders in the community model with donations for invention disclosures and gift exchanges. How do you see the shift toward the American patent, license, venture model as fitting into the move away from a community to an Anglo-Saxon university-industry-government linkage model? Does that address the issue of can we grow our way out of the welfare problem?

A: There is a very interesting study by Dr. Masayo Fujimoto, former faculty fellow at RIETI, from interviewing around 500 scientists. She comes up with the conclusion that the reference groups of company researchers depend very much on how good they are. In other words, people who have come out of a good national university with a great reputation and go into the likes of Hitachi know that at around the age of 30 that they have the possibility of becoming a university professor. That affects their pattern of social relationship and degree of commitment to the firm. In an Anglo-Saxon system, lawyers and accountants have a dual loyalty both to the firm and to the profession, and this loyalty exists in electronic engineers in Japan.

An interesting case was the Tokyo District Court judgment this year, giving Shuji Nakamura - the inventor of blue diodes - a sum equal to the profits of six years of the firm he worked for. His firm had bought him an expensive machine and sent him to Florida University, but he was not producing any great results. The chairman of the firm suggested using the machine for something else. When he got results, it made the firm considerable profits. Afterwards, he began to think that he had been cheated and brought the case. That case has caused people to rethink the question of securing the loyalty of company personnel. A new law changes the definition of the inventor's right and most companies are rewriting their regulations. In a previous case, the judge had said that even though the researcher had accepted a set of regulations, this does not override his right to compensation. Other employees, of course, think such researchers are being selfish and damages for such claims come out of employees' pay. The growth of individualism is eroding the sense of community. There is still an ethic among major competitors of not stealing each others' leading researchers, but that may start to break down, just as the taboo on takeovers is.

Q: I am interested in your view on future changes in the labor law. In my understanding, labor laws are still very conservative and need to be deregulated to keep liquidity in the labor market. In which direction do you think changes in the labor law should go?

A: I think the proposals before the committee deliberating on changes in labor laws were to define the right of employers to dismiss workers for redundancy reasons with less circumspection than current precedents. In order to satisfy a labor tribunal that somebody was discharged for reasons of redundancy, you have to prove that you have tried to find another position within the company, or tried to place the worker in another company. The point of the new proposals is to remove such legal precedents.

Q: One of the big changes in the Japanese management system is the encouragement of internal whistle-blowing. How do you feel about such the recent changes in whistle-blowing, strict corporate governance, and avoiding fraud?

A: We did a survey of bucho (department chiefs) and kacho (section chiefs) in 313 firms, and asked them to suppose their firm had done something illegal or contrary to social norms, and someone from within the firm had informed the media. Which of the following best described what would happen in their firm? First, however much the motive was citizen conscience and public spirit, he would have a hard time in the firm thereafter, this has been the case and there is no change; second, if the motive was citizen conscience and public spirit, he would find rather more people in the firm who would approve and back him up than used to be the case; third, many more people than before would support the whistleblower. 30% said no change, 17% thought that there was a big change and 52% said that there had been some change. But there has been some kind of change, and people are becoming more careful because whistle-blowing is a much more present danger.

*This summary was compiled by RIETI Editorial staff.