The Journal The Authority on Global Business in Japan

The jury is hung on whether the third arrow of labor policies under Prime Minister Shinzo Abe’s economic recovery plan can deliver answers acceptable to companies, workers, and society. Japan urgently needs to secure a steady supply of skilled labor in the face of an aging population and low birth rate, with lifetime employment becoming increasingly unsustainable.

Labor skill is the most important—if not, perhaps, the only—resource Japan can boast in the absence of natural resources. It is no exaggeration to say that how Japan treats its labor force will determine the nature of the Japanese state in the 21st century.

“Labor policies contain the most important elements of Abenomics’s third arrow,” said Kentaro Koyama, an economist in the Global Markets Research Group at Deutsche Securities Inc. in Tokyo. “They will have the most significant impact on the Japanese economy.”

It doesn’t help that the Japanese labor curve is skewed between excess at the top end of the age group, and shortages at the lower end.

A 2010 report from the Keizai Doyukai, the Japan Association of Corporate Executives, estimates that Japanese companies were employing more than three million excess workers.

Based on an official unemployment rate of around 5 percent at the time, that meant there were nine million unemployed workers in Japan. In effect, Japan’s real unemployment rate was 13 percent, well above the Organization for Economic Cooperation and Development average of 8.3 percent.

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Source: Adapted from Japan Statistics Office information

The Doyukai report ventures that excess workers were being maintained partially as a labor reserve in preparation for a recovery in consumer demand, but also noted that a large number of such workers should be considered “chronic excess personnel.”

Professor Noriyuki Yanagawa, of the Faculty of Economics at The University of Tokyo, specializes in economic policy including labor issues. He is broadly positive on moves by the Abe government to introduce liquidity into the Japanese labor market by, for example, allowing companies to pay some high performers based on results and not seniority.

Yanagawa believes, however, that Abenomics has not gone far enough.

“Given that we must produce a labor market that allows for the right people to move into the right positions, it is clear that Abenomics is inadequate,” he noted.

Jesper Koll, managing director and head of research at JPMorgan Securities Japan Co., Ltd., focuses on labor shortages at the younger end of the Japanese market, and the need to attract skilled non-Japanese labor.

“The issue in Japan is a labor shortage and not excess labor. To be specific, if you are 25 to 35 years old, that age cohort will decline by 231,000 per year between now and the Tokyo Olympics,” he said. “Labor is getting scarce. The single most important issue is whether Japan has the ability to attract talent, and to retain it.”

Allowing in more skilled labor—dubbed the “A-team” proposal—is an obvious solution, but many non-Japanese may no longer find Tokyo a good place to build a career.

“The A-team wants career advancement, opportunity, and responsibility,” Koll said. “The A-team is not about money, but about empowering who’s best, not who’s got seniority.”

But, Japan might lose out on attracting the cream of the labor crop.

Despite the need for measures to attract younger people and non-Japanese into the workforce, the vestiges of seniority-based pay and promotions mean that, before being able to make a meaningful contribution, many new hires will linger for years in low-paid positions that are not highly evaluated. “That’s why young engineers from MIT and Stanford don’t want to come to Tokyo,” Koll explained.

Deutsche Securities’s Koyama believes shaking up the Japanese tax system to allow women to earn more, while still allowing their husbands to receive the spousal deduction, could bring more women into the labor force.

“The system must change to encourage more female participation,” he said.



Radical Proposal
Perhaps the most radical proposal for the Japanese labor market originates with Professor Yanagawa.

At present, Japan sets no legal limitation on the length of employment for fulltime employees, but those same laws restrict termination before mandatory retirement age. In his book Nihon seicho senryaku, 40sai teinensei (A Japanese growth strategy: a system of retirement at 40), Yanagawa proposes introducing three set contract periods, for those between the ages of 20 and 40, 40 and 60, and 60 and 70.

The number 40 in the title indicates the age at which the average employee looking to gain a full pension—which staff qualify for after having worked 40 years in Japan—reaches a halfway point in their professional lives.

As they enter the second half, Yanagawa urges workers to use this critical juncture as an opportunity for education and skills training, to be able to respond better to a changing labor environment. He takes his cue from the labor policies of Scandinavian nations.

In what is referred to as flexicurity, a welfare state model based on flexibility and security, countries such as Sweden and Denmark make it relatively easy to dismiss workers. However, the government offers terminated workers generous handouts that are meant to be used for vocational training purposes, to hasten redundant staff᾿s return to the labor market.

“If you want to work until you are 70 or 75, you need to acquire skills that respond to changes in the employment environment,” he said. “If you don’t do this, you will not be able to work.”

While inertia suggests many workers in Japan may well be employed by a single company throughout their working lives, Yanagawa’s proposal would present 40-year-old workers with the chance to review their job performance and consider what the future holds.

Workers with updated skills and inherent talents not immediately rewarded by mainstream Japanese companies could play a major role in adding liquidity to the Japanese labor market, by moving to smaller and, possibly, venture-like companies, as they opt to follow their career dreams.

Such a system would not only allow businesses saddled with costly excess labor to remove it from the books, but would also keep workers gainfully employed against the backdrop of longer life expectancy and likely pension constraints.

“Retiring at 40 should not be taken to mean workers stop work and do nothing,” Yanagawa said. “This mechanism is designed to allow people to work until they are 70 or 75 amidst the rapid graying of Japan.”

The three-arrow approach of Abenomics has been likened to the historical story of Motonari Mori, who taught his children the need for unity, by showing them that, while a single arrow easily can be broken, it is difficult to break a tightly gripped fistful of three arrows.

This concept has several phrases of similar meaning in English, one of which is, “United we stand, divided we fall.”

Against the backdrop of an increasingly unsustainable system of lifetime employment, it is a motto that the government, employers, and workers would be well advised to remember, particularly given the need for collaboration in seeking innovative ways to maintain a viable employment environment.

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Martin Foster is a bilingual writer who has lived in Tokyo since 1977. Martin spent much of his career in financial journalism, and now focuses on various aspects of business and the economy.

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If you want to work until you are 70 or 75, you need to acquire skills that respond to changes in the employment environment.