Economics - Introduction to Japan - Lecture Notes, Study notes of History

Download Economics - Introduction to Japan - Lecture Notes and more Study notes History in PDF only on Docsity! PART V: ECONOMICS INTRODUCTION The Japanese economy is the second largest economy in the world. In terms of value of outputs, Japan’s economy is second only to the United States and several times larger than that of China. In 1998 it recorded a gross domestic product (GDP) of 481 trillion yen (US $3.67 trillion). Per capita national income in 1997 was US $28,361, ranking Japan fourth in the world. Japan is also the third most important trading nation in the world and the largest creditor in the world. Japan’s rapid and immense economic development has influenced the development of all other developed countries and many developing countries have modeled themselves after Japan. In Hong Kong we can see the evidence of Japan’s economic creativity in the cars on the roads, the electronic goods in our homes, stores where we shop, the food we eat, the video games we play and the comics, television and movies that entertain us. But the Japanese economy is more important to Hong Kong than simply a source of goods and services. Japan-Hong Kong Trade is vitally important to the health of our economy and Japan is our third largest trading partner after Mainland China and the U.S. Hong Kong is Japan's sixth largest trading partner. Bilateral trade in 1997 totaled 3.57 trillion yen, of which Japan's exports accounted for 3.298 trillion yen and its imports for 272 billion yen. The overall cumulative total of Japan's direct investment in Hong Kong reached US$11.2 billion by the end of 1995 and that is the third largest place of Japanese investment after China and the U.K. Japanese Companies in Hong Kong number about 2,300 and employ more than 50,000 local employees. More than 60 Japanese banks have branches/offices in Hong Kong and that is more than in New York or London. In 1997 Japanese people living and spending their money in Hong Kong numbered 26,600. In 1997 about 1,369,000 Japanese visitors (although these numbers have gone done since) traveled to Hong Kong in 1997 and they were the highest spenders. On the other hand about 457,000 Hong Kong people traveled to Japan. The strength of the Japanese-Hong Kong relation is suggested by the fact that over 15,000 people in Hong Kong are currently learning Japanese and the number of Hong Kong students studying at Japanese universities is also rising. Our economic relations with Japan are also highly influenced by China-Japan relations. China ranks as Japan's second largest trading partner, and Japan is China's largest trading partner. The value of trade between Japan and China reached about US $80 billion in 2000, or about 70 times more than its value in 1972. Although this figure has been trending downward in recent years China remains the principal recipient of Japanese investment in Asia. We also feel the impact of Japan’s economy indirectly through its impact on the countries of Southeast Asia. When Japan withdraws its money from them, as it did in the 1997 financial crisis, we in Hong Kong suffer as well. Japan's share of trade for the entire ASEAN region in 1995 reached 18.6% (15.2% of exports and 21.4% of imports). Japan is thus the top trading partner for ASEAN nations. Japan is also the top foreign investor and donator of official development assistance in the ASEAN region. Japan’s total FDI in ASEAN reached US$5.13 billion in 1994 and Japan has been the most important foreign influence on ASEAN’s export led growth. Understanding Japan’s economy is, thus, important to us not only because of its global impact but also simply because of direct self-interest. Over the last ten Docsity.com years, however, Japan’s economic miracle has not seemed so miraculous. Its economy has not grown very much, unemployment has increased and the value of its stock market has shrunk to one third its 1990 size. Has the economy which ten years ago looked like it might become the most powerful in the world really fallen into stagnation? If so, how long will it remain there? Is Japan no longer a good model of development for other countries? Can we continue to expect Japanese companies to play such an important role in Hong Kong, China and Southeast Asia? The questions above are difficult and probably impossible to answer. In this section, we will however, make a brief attempt at understanding the fundamental strengths and weaknesses of the Japanese economy. There are two main objectives. The first is to understand how the Japanese economy evolved. Understanding Japan’s economic evolution will also allow you to consider how the Japanese economy differs from Hong Kong’s, China’s or any other economy you are interested in. That perspective will also allow you to consider Japan’s present situation more clearly and to reflect not only on its present strengths and weaknesses, but also on its capacity for change and to build on the past. Which brings us to the second objective. The second objective is to look more closely at the Japanese management system and how Japanese business is organized. In the recent past, both Japanese management and business organization were praised as models of efficiency and competitiveness. These systems were identified as the main causes for Japanese economic success. Within the past few years, however, many outside of Japan and some within Japan have criticized these same systems as holding Japan back. Japan is responding to these criticisms. Companies are trying to increase their competitiveness by moving away from employment practices such as lifetime employment and the seniority wage system. In the area of business (industrial) organization, the Japanese government currently is reducing its role by deregulating various sectors of the economy and keiretsu (interfirm groups) companies are trying to reduce their financial and trading dependence with each other. A closer look at these systems also once again reveals the tensions between group orientation, individual expression and universal principles. Group orientation is displayed in Japanese management systems and interfirm organization. Individual expression challenges group orientation with demands for more merit based career evaluation and opportunities for entrepreneurialism. Market discipline and globalization are the universal principles compelling the Japanese to reconsider the balance between the group orientation and individual expression. Premodern Foundations Of Industrial Development Japan’s industrial miracle was actually based on solid foundations built through several centuries but developed particularly in the Tokugawa times. These foundations include the following factors. ν Skills and technologies: Japanese craftsmen had adopted, adapted and invented many technologies over the centuries. These included: architecture and building, steel and copper forging; pottery and ceramics; textiles, paper –making and printing and so on. They were also very adept at mechanical devices and had no problem adapting these skills to the manufacture of guns, clocks etc. when they were introduced. It was the skills with which these products were made that created a strong base for industrialization. The products were complex and made Docsity.com recovered the same level of production it had before the war and was about to embark on its miraculous transformation from developing to developed country status. Rebuilding (1945-1952) ν American reforms, reverse track and fiscal restraint: Shortly after the Americans occupied Japan they started to reform many of the economic factors they believed had led the Japanese into war. These included: breaking up the zaibatsu, giving tenant farmers the right to buy their land at very low cost, allowing labor unions and giving women their vote. Initially these reforms destabilized the economy by making investment risky. The Japanese government also allowed inflation to run very high. To stabilize Japan as an American ally against communism the Americans reversed some of the reforms, most importantly some of the powers they had given to the unions. They also forced government and business to restrain spending in order to tame inflation. ν Capitalist-labor compromise: Labor unions tried to gain greater control of the government and of the companies at which they worked. There were several long and occasionally violent strikes at major companies like Toyota and Nissan. These strikes were put down with the backing of the Americans, but Japanese management learned that they had to work with their workers to a greater degree. A pattern of seeking compromise between the two sides was established and built on thereafter. ν Korean war rescue: In 1950 war broke out between North and South Korea, and then between the United States led United Nations and China. The Americans used Japan as a base of operations and provider of materials. This war demand (without war damages) was a great boost to the Japanese economy and provided the initial funding they needed to get their economy going. ν Catch up to the west Economically: In the Meiji period the national slogan was rich country and strong army. After the war the Japanese national slogan shifted to almost a purely economic focus. “Catch up and overtake the West” in economic production became a preoccupation of not only governments and companies, but ordinary Japanese felt that they could recover national and personal pride in the devotion to increased economic production. High Growth (1953-1973) At the end of Korean War in 1952 Japan was a "less-developed country," with per capita production only one fifth that of the United States. In the 2 decades to 1973 Japan averaged an annual growth rate of 8%, and was the first country to change from "less-developed" to "developed" after the Second World War.  Income doubling plan: In December 1960, Prime Minister Ikeda Hayato announced an income-doubling plan that set a goal of 7.8% annual growth during the decade 1961-1970. Government economic planning aimed at expansion of the industrial base proved exceedingly successful, and, by 1968, national income had doubled, achieving an average annual growth rate of 10%. Docsity.com ν Government targeting of basic industries: The government targeted industries like petrochemicals, coal, iron and steel, electric power, and fertilizers. This targeting was done by MITI (Ministry of International Trade and Industry) and companies that followed MITI’s directions received loans from banks made possible by the government’s support. Textiles were the first main foreign capital earner. They were quickly followed by shipbuilding. Japan became the world’s largest producer of ships by the late 1950’s. Throughout the 1960’s Japan began to develop strengths in automobiles, motorcycles, electronics and capital equipment. Japan at this time was a manufacturing lead economy. ν Preferential trade and protectionism: Japan benefited from the stable postwar world free trade regime established under the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT). Japan was allowed to participate in this trade because of American sponsorship. The Americans also support Japan with access to their technologies and their markets in return for continued military and diplomatic support. ν Investments in education, equipment and R&D: Government backing of bank loans and high savings by the Japanese people allowed companies to constantly invest in new equipment, facilities and to develop R&D capabilities. Roughly one third of the profits of Japan’s production were reinvested. In this respect, the destruction of Japan’s prewar and wartime industrial facilities forced it to construct equipment that was more efficient and of greater scale than most of their global competitors. Furthermore the Japanese government strengthened its investments in education especially at the primary and secondary level. Private capital founded many universities. ν Dependence on cheap oil and raw materials: Japan became an expert at not only using oil and raw materials to fuel its manufacturing economy, but also it became an expert at sourcing these materials cheaply around the world. However, its dependence on cheap oil proved to be a large problem when the oil producing countries formed a cartel and tripled the price of oil within in 1973. ν The environmental cost of rapid growth: By the end of the 1960’s the air in Tokyo, Nagoya and Osaka was becoming unbreathable and large numbers of the people were suffering asthma problems. In the Kyushu city of Minimata, mercury poisoning of fish was causing deaths and deformity in the people who ate them. In Toyama cadmium poisoning killed people. Between 1950 and 1970, the percentage of Japanese living in cities rose from 38% to 72%, causing congestion while services such as sewage and parks were neglected. In general, the country paid a high environmental and quality of life price for its rapid growth. Restructuring (1974-1990) After the high-growth period Japan’s economy faced many challenges. It often fell into recession, but always managed to restructure itself and come out stronger. In the restructuring period, Japan not only improved her competitiveness in major export industries like cars, machine tools and electronics, but also moved into moved Docsity.com technology and information-intensive industries. Furthermore it completed a shift to a service based economy. The strength of this diversification maintained a period of growth that was still high by developed country standards. A fundamental restructuring of the economy became formal government policy in 1987 with the publication of the Maekawa report that advocated strengthening domestic demand to reduce the trade imbalance. Increasing leisure time and emphasizing quality of life issues were also promoted as a means of increasing domestic demand and thus this shifting of government policy fitted in well with the shift to a service economy that was already underway.  The oil crises: In October 1973, war in the Middle East led to an oil crisis which caused energy costs and the value of the yen to rise and a sharp recession. As a result the 10% growth Japan had enjoyed in the previous decade slowed to an average of 3.6% during 1974-1979. Japan’s companies responded by improving energy and raw material efficiency and cutting costs. Particularly car sales to the US improved because of this response. In 1979 the oil producing countries caused another oil crisis by asking for another large increase in prices. Japan’s companies dealt with this problem by making a more fundamental shift into higher value-added products and GNP growth rose to 4.4% during the decade of the 1980s.  Targeting of knowledge intensive industries and ‘sunset’ industries: The oil crises and increasing global competition prompted companies and the government to switch into more technology and information intensive industries such as computers, semiconductors, biotechnology etc. Many corporations in traditional heavy industries such as shipbuilding, iron and steel or textiles diversified into these new industries and even services such as health care, entertainment or the development of theme parks. The government didn’t try to support failing industries (sunset industries), rather created conditions to help them companies to move out of them. ν Elaboration of the dual economy: In the 1970’s and 1980’s the Japanese built the worlds most successful assembly industries. Competition on complex products such as cars, motorcycles, numerically controlled machine tools, cameras, televisions, stereos, VCRs, facsimile machines, computers and so on became dominated by Japanese companies. They accomplished this domination by improving the division of labor in the dual economy. Final goods assemblers, worked with component manufactures, who worked with parts manufacturers in a sophisticated form of cooperation and mutual learning. As they were accomplishing that increase in efficiency, they incorporated microelectronics into virtually all the products they made to further increase their performance and value. In their combination of mechanical devices with microelectronics the Japanese developed a new field called mechatronics. Mechatronics enabled the Japanese to dominate global competition in robots and machine tools, and these in turn helped improve the efficiency of the assembly industries. ν Shift to a service based economy: This period also saw Japan shift from a manufacturing driven economy to a service based economy. The service sector grew from n 46.5% in 1970 to 55.4% in 1980 and to 58.1% in 1989. The service (or tertiary) sector includes public utilities such as gas, electricity and water, the Docsity.com non-competitive sections. Competitive companies like Toyota and Sony, and all their component, parts, and service suppliers have been hurt by the slowdown in the Japanese economy because consumption has slowed. However, they and many other companies remain some of the most competitive and successful companies in the world. These companies are competitive because they have to face competition both in Japan and in world markets. Many Japanese companies in several industries, however, do not have to face this type of competition because the government has regulated how companies could compete. In the 1990’s the Japanese government has taken several steps to deregulate these sectors of the economy. The goals of Japan’s deregulation are “to create a free and fair socio-economic system that is fully opened to the international community and based on the rules of self-responsibility and market principles…” Public administration is thus shifting from requiring that regulations be in place and that companies and individuals fulfill regulatory procedures before doing something. Public administration is shifting to allowing companies and individuals to act freely and monitor their actions for possible problems. The Japanese hope deregulation will reduce the cost of living and improve choice (especially in comparison with other developed nations); stimulate the growth of new businesses; improve government services at and between national and regional governments levels; and achieve a better harmony with the international economic community. From 1995 the government has introduced several plans aimed at reducing close to three thousand regulations covering the sectors of (1) land and housing, (2) information and telecommunications, (3) distribution, (4) transport, (5) standards, certification, and imports, (6) finance, securities, and insurance, (7) energy, (8)employment and labor, (9) pollution, waste, and environmental protection, (10) dangerous materials, disaster protection, and public safety, (11) education, (12) competition policies, (13) healthcare and welfare, and (14) legal affairs. Efforts have also been made to reduce regulations affecting the interrelations of these sectors. The government reckons that from 1990-1997 deregulation increased annual consumption and investment about 8.2 trillion yen and decreased prices about 6.6 trillion yen. Measures taken in the domestic telecommunications, electric power, and oil product fields make major contributions. The most famous deregulation however was the “Big Bang” in the financial sector. The "Big Bang" was aimed at increasing the participation of private investors. Barriers between the banking, securities, and insurance fields have been removed, the ban on holding companies lifted, the range of activities enlarged for security houses and banks, and foreign exchange totally liberalized. Other areas deregulated include stock commissions and non-life insurance premiums, over-the- counter securities derivatives, and the sales of investment trust products in banks. Other interesting cases of deregulation include: taxi fare rate categories expanded in Tokyo and Osaka; required annual production for issue of a brewing license reduced from 2,000 kl to 60 kl; outright sale of mobile telephones introduced; establishment of self-service gasoline facilities permitted; restrictions on overtime, late-night, and weekend/holiday work by women lifted; restrictions on the use of temporary workers greatly reduced; and retail sales of electricity partially deregulated. Not all people are happy with pace of deregulation or on the other hand the idea of deregulation—winners and losers are produced in most cases. It takes time to come to a reasonable compromise. An example of this was Docsity.com the law which stopped large stores invading and disrupting local shopping areas. Before building a store, the developer would have to get the permission of local storeowners (i.e. the people he wants to put out of business). A compromise was reached by enacting a law that emphasized the preservation of the living environment, thereby allowing the introduction of a large store as longer as it didn’t disrupt the quality of life of the local neighborhood.  Graying economy: Japanese men and women enjoy the longest life expectancies in the world. Japan is also aging faster than any other nation and today almost 15% of the Japanese population is 65 and over. In the year 2000, Japan became the country with the highest percentage of elderly in the population. Before 2010, 1 in 5 Japanese will be senior citizens. In 2050 1 in 3 will be an elderly citizen. This aging population, plus the increasing amount of time that the young spend in school means that a heavier and heavier burden will fall on the middle generation. The aging population will affect the economy in other ways however. Japanese companies have been accustomed to employing a young workforce and not paying the costs of an older one. Companies have being encouraged to increase their retirement age from 55 to 60 and beyond. Japanese who retire from one company at 55 have usually worked for a few more years at another smaller one. They will probably have extend their working lives past the sixties well into the seventies, but finding these jobs may be difficult. On the other hand both those who have the savings to retire and those who continue to earn a living will be creating new demands that need to be filled in medicine, health, and leisure services. ν Internet economy: Japanese homes and businesses do not use the internet to the extent that we do in Hong Kong or the Americans do. However, they are at a higher or similar level to most other developed economies. Furthermore they lead in some areas, in particular, using the web through mobile phones. In the process the Japanese have become the only country to devise of method of making money through websites other than through advertising—websites get a share of the money that the phone company receives for the customer using its time. The company Softbank is also the world’s largest publisher of software and internet related information and is also one of the largest investors in new start-up companies. Mobile phones have benefited greatly from deregulation. In 1994, the handset rental system was switched over to outright sales and set off a boom in cellular communications. The number of subscribers jumped from 2.13 million in March 1994 to 43.94 million in June 1999. Another 5.76 million people use the Personal Handiphone System (PHS). ν Cultural economy: In the mass culture section of the course we looked at the incredible diversity of the entertainments, recreations and other services that the Japanese people can enjoy. These represent a powerful important continuation in the shift from a manufacturing based economy to a service based economy. From Manga, to computer games, to films and music, to food, these cultural activities have also become important Japanese exports. Docsity.com  Ecological economy: As discussed in the setting and politics sections, Japan has had some severe environmental problems in the past. Although most immediate pollution threats to human life have been eliminated, Japan still faces some great challenges. Fortunately, Japan has been able to turn some of these challenges into advantages. Indeed it looks upon environmental improvement as one of the most promising industries of this century. The greatest example of Japan turning environmental challenges into advantages is its response to the air pollution problems of the 1960’s and the oil crises of the 1970’s. Due to these issues the government enacted strict requirements on industry and consumers to improve energy efficiency and cut down air pollution. Industry responded by rapidly achieving some of the highest standards in the world. The energy efficiency of Japan’s industries gives them a great cost advantage and the energy efficiency of their cars was the primary reason that they were able to invade the North American market so successfully. Today Japan produces, in terms of greenhouse gases Japan produces 2.53 tons per capita compared to he US at 5.59 tons, Australia 4.51 tons, Canada 4.30 tons, Germany 2.94 tons, Russia 2.70 tons, the United Kingdom 2.56 tons, and France 1.69 tons. By 2030 Japan will secure one third of its energy from new sources and will be contributing to the lessening of CO2 emissions by having cut its own emission output by 50%. Perhaps the next greatest problem for Japan is finding a way to deal with the mountains of material waste that it produces. It must find a way to deal with this because its area for landfill is rapidly disappearing and the use of incinerators produces cancer-forming dioxins. With a 55.5% ratio of used paper collection and a 55.4% rate of reprocessing used paper into paper Japan already has one of the world’s best recycling achievements. However, it is taking greater steps. Japan has recently introduced recycling laws that compel companies and consumers to recycle their trash. The Receptacle Packaging Recycle Law obligates consumers to separate PET bottles, glass bottles, cans (steel and aluminum), paper packaging and types of plastic other than PET bottles and requires municipalities to collect this trash separately. Companies are required to recycle the collected PET bottles and glass bottles. The Specific Household Electrical Appliance Recycling Law obligates manufacturers to recycle air conditioners, televisions, refrigerators, and washing machines. Retailers are obligated to collect and transport the discarded appliances (consumers must pay the costs involved), and the manufacturer is obligated to recycle the materials. Many Japanese companies have taken action before these laws were implemented and are incorporating the same recycling capacity into other products such as copy machines, personal computers, portable telephones, and vending machines. Japanese companies have also been at the forefront in saving resources and energy, and reducing pollution in the manufacturing process. Some zero emission factories are already in operation. The development of environmentally advanced products is also a major thrust that has received support from consumers. Toyota has sold tens of thousands of its hybrid cars and Kyocera’s solar cells cover thousands of homes. In addition, Japan produces 40% of the world’s solar cells. Further Reading: Textbook chapters: Ch. 30 The Premodern Background; Ch. 31 The Prewar Economy; Ch.32 The Postwar Economy. Docsity.com ν Hierarchy: Any firm, of any size more than a few employees, functions as a bureaucracy to some extent. It must do so to coordinate activities and goals, and the larger the firm, the more levels of hierarchy there are. Most firms operate top- down, where goals and the means to achieve them are decided at the top and the levels below are giving directions to carry them out. Depending on the company, people at these lower levels have varying degrees of discretion in how to carry out their directions. In Japanese companies this level of discretion has been very high because of the preference and the efficiency of achieving consensus formation at the lower levels. Foundations of Japanese management  Lifetime employment: In the postwar years corporations developed lifetime employment to retain skilled and experienced workers and to acquire young recruits. A system of mutual commitment developed that was tacitly understood by workers and management. Companies did and still do hire new recruits out of university or high school and try to keep them until they retire. The employees would be kept on even if the company fell on hard times. The system was primarily oriented to male workers, and in larger corporations in particular, was extended to both white-collar (office) and blue-collar (manual) workers. The system never worked perfectly. A common drawback is that because a firm will try to hang on to employees during the inevitable slowdowns in business cycles, employees are often used just on make-work activities. The first big challenge to the system came in the early 1970’s as companies had to shift from one industrial sector to another. The first large company to try to reduce its workforce didn’t just give them the sack, but tried to find each employee a job in another related company. How deep the importance of lifetime employment had sunk into the Japanese mentality by then was symbolized by the fact that the media followed the story of each employee.  Seniority system (and pay structure): To compliment lifetime employment, length of service has been made the basis of career advancement and pay increases. Almost all Japanese companies use length of service as the base of pay, and almost all also differentiate pay by the type of work performed and the individual’s capabilities, aptitude and contributions. Thus there has always been room for salary differentials among employees. These differences were of course most notable among those with different education levels when they entered the firm, but even amongst workers doing similar work, there was scope for differentiation—even if it was done subtly or in a minor reward. That differentiation may come out in the twice-yearly bonuses that make up 30-60% of an employee’s total pay. ν Enterprise unions: In most developed countries unions have been established by a group of people in a particular type of job or trade to give them collective power in dealing with management. These unions draw on the collective resources of people in many different companies to help out the interests of their members when in a struggle with one or a few particular companies. In Japan, unions are organized on a company basis and not on a trade basis. That is, everybody in a Docsity.com Japanese company, except for the upper levels of management belong to the company union and no other. The union members generally identify their interests with those of the company and realize that the continued success of the company is good for the union members. There is thus greater likelihood of cooperation on issues of technology introduction and changes in jobs. The unions do however strongly argue for their share of corporate profits. Also the enterprise unions of different companies in the same industry join together to argue for more pay and benefit raises. They do this every year during a period known as ‘shunto’ (spring struggle), but even at this time the known relative strengths of the different companies results in the shunto rewarding the employees of the most successful companies with the highest increases in wages. Benefits of Japanese management ν Mutual Commitment: The greatest benefit from the Japanese employment system to both the companies and the workers is the mutual commitment that is built between them. As long is the company is willing to stick with its employees and help them develop, the employees are willing to work for the company and indeed they often sacrifice themselves for the benefit of the company. This culture is built not only by the formal aspects of the salary system or in skills training, but also by all the informal activities such as drinking and eating together after work, company sponsored group vacations, group exercises, gift-giving and so on. ν Job rotation and training: Japanese employees are shifted from one type of job to another quite frequently in their career. Most often this will occur within a particular area such as manufacturing or accounting, but at the upper levels of a company people will get to know how several departments work. In so doing, employees get to know not only the aspects of each job they are assigned to, but also the interrelationships of different jobs with each other and how their company works. This organizational knowledge pays off in efficiency gains. Japanese companies are in essence strong learning organizations. On-the-job training is highly developed in both large firms and small, usually through the mentoring process. In small companies, new employees often learn directly from the owner or president. Off-the-job training in seminars or other formal methods are also used to a great extent. ν Openness to change and participation: The Japanese management system is often characterized as excessively bureaucratic. Certainly some companies may be rigid and have many levels, however Japanese companies are also generally quite small in employee numbers in relation to productive output. More importantly they have important capabilities for responding to change and benefiting from employee participation. Companies can respond to change easier because the lifetime employment system allows them not to be afraid of change. New technologies and practices can be brought in without people fearing for their jobs. Two examples of participation systems within the business hierarchy are the ‘ringi system’ and quality control circles. Some companies use the ‘ringi’ system to develop consensus among people throughout a department or division for any major initiative being introduced from below or above. In this form of nemawashi all the people affected by a decision, through several management levels, are notified of an initiative, supposed to Docsity.com consider it, and their stamp of approval is required before it can be introduced. Quality Control (QC) circles are largely a Japanese development. In QC circles employees are given time to identify problems they see in the business process and develop solutions. Besides these two examples, another important one is the suggestion systems used to obtain the input of workers on how to improve production. However, the most effective communication of problems and means of finding solutions probably occur after work when managers and employees eat and drink together, and release their honne. Costs of Japanese management ν Long working hours and karoshi (death by overworking): A major criticism of Japanese employment practices has been the excessive hours that people spend at work. The pressure of corporate culture has been such that salarymen, in particular, would arrive at work before official starting time and leave several hours after official quitting time. If one considers the time spent eating and drinking with colleagues and business contacts several nights a week as part of work, then working time gets further extended. These people also often fail to take their holidays. This overwork has been responsible for the degradation of Japanese home life and off the job individual expression. The fact that this is a social problem has been recognized by the government in its attempts to reduce the working week. The media has dubbed the fatal results of this overworking ‘karoshi’ and a few court cases have forced companies to grant compensation to the relatives of those who worked themselves to death for their company. ν Tanshin funin (assignment away from home): Job rotation for an employee will often, sometime in their career, involve being assigned to a branch of the company in a different part of Japan or in a foreign country. Very often a male will leave his family behind and take up the position for one, two or more years. Tanshin funin is not only a problem of the employment system, but also a problem with children transferring among schools and with the rigidity of the house renting laws and conditions. ν Assignment to subsidiary firms (shukko): One of the ways Japanese companies have reduced their employee numbers as conditions changed is to place them with subsidiary or dependent suppliers and distributors. Although a person may retain a similar position and salary or even go up in position, generally the move is not looked upon as a good one for the employee other than to keep him or her from becoming unemployed. ν Frustration and inefficiency due to less weight put on merit based advance: From a individual expression perspective, the greatest drawback to the lifetime employment system is that one is not rewarded directly for their contributions to the company, nor can they move up in the company as fast as they may feel they deserve to. Of course this frustration may impact on the company adversely, by denying a talented individual to make innovations that could benefit the company. This frustration may result in even greater inefficiencies if the lifetime employment system doesn’t allow for participation in decision-making the way it is supposed to. Docsity.com participation in the workforce have dramatically increased, until by 1995 almost 27 million women worked, comprising 41% of all workers, and 38% of all employees. The number in the lifetime workforce have not increased significantly as the increase in participation has been primarily in the service sector where there are less offerings of lifetime employment. In 2002 female workers accounted for 45.7% of temporary workers, and this was up from 34.0% in 1995. About 70% of all women in the work force work in the service industry. Indeed among the developed nations Japan is second only to the U.K. in making part-time work such a high percentage of all employment opportunities for women. Part-time work is in both secondary and tertiary industry and many people believe that women continue to serve as a buffer workforce against structural changes in Japanese industry. Against that perception, however, is the continued demand by Japanese women for the freedom to set their own schedules for childcare and leisure pursuits. There are also corporations that integrate part-time workers as their most important employees and some raise part-timers to managing and senior executive level positions. In the fulltime workforce as well, there is less female concern with lifetime employment, not only because of their expectation of later male support and the ability to pursue leisure with present income, but also simply because of the demand for greater freedom in choice of occupation and creativity in how work is done. The part-time workforce is also disproportionately made up of young workers. Many young workers prefer the part time work whether they are in school or graduated. The graduated and voluntary temporary workers are often called ‘freeters.’ Like the women workers, however, a large proportion of temporary youth workers would prefer to be employed fulltime. There is genuine concern that the long recession has diminished the hiring of young workers by companies and has made them more protective of their older permanent workers. One effect of this trend is that unemployment among youth is about 10 percent and much higher than the overall rate of 5 percent. ν Potential and risks in the original family model of a business: The percentage of self-employed workers has dropped gradually from 24% in the mid-1970s to less than 10% in recent years, but this still remains high by developed country standards. At 13% women make up a disproportionate share and this share has increased relatively over the years (even though it has fallen absolutely). Japan thus remains a country where self-employment is still very important and the vast majority of these self-employed are running small family businesses. Many of these will be handed down from one generation to the next and include everything from farming to surgery. Now, the passing-down process, however, even in farming, usually requires formal education in addition to that which can be learned from one’s parents. More businesses are fresh start-ups. Again these can cover all the range of industries. An interesting variation in between these two types of firms are a third type started up by someone who apprenticed (or simply learned on the job) in another company in preparation for starting up his or her own, often with the help of their previous employer. All these types of firms offer a person the freedom to run their own business and to develop their own skills and talents. The risks, however, are great in an economy where even small businesses can demand a lot of capital and constant upgrading of skills, not to mention pay for health and pension benefits. One of the benefits of lifetime employment is that large companies have the capacity to provide employees with the type of monetary Docsity.com or time cushions needed by small firms.  Summary of Employment System: The changes in the Japanese employment system reflect both changes in the economy and changes in the attitude of workers. The shift to the service economy has not only decreased the relative share of the manufacturing industries where lifetime employment was so strong, but the need for flexibility to meet to meet the rapidly evolving nature of technologies and services means that human resources cannot necessarily be found internally or be financially maintained internally. Japanese workers also demand to be able to develop lives outside of work and to do work that they find creative and rewarding. The reforms to the lifetime employment system are a part of this shift to a more direct relationship between performance and outcome and to changing attitudes. However, that trend can be considered simply a greater importance being placed on individual abilities and performance and not a rejection of the relationship of mutual commitment between firm and employee. This remains particularly strong amongst firms trying to maintain their core work forces. The maintained belief in mutual commitment (or at least developing a shared understanding) and group orientation within firms, however, is still strong among the majority of workers who don’t desire to and don’t believe the economy will allow them to work in one company for the rest of their lives. Younger Japanese employees, for example, still recognize the usefulness of going out with bosses and colleagues for dinner and to talk things out. They just don’t want to do it every night and want a chance to decide where to go. Further Reading: Textbook chapter: Ch. 33 The Employment System. Assessing the state of the Japanese company, Iwai Katsuhito, Kobayashi Yotaro. Japan Echo. Tokyo: Oct 2003. Vol. 30, Iss. 5; pg. 9 (Website, click on Economy_1.Company.pdf) Who come first, shareholders or employees?, Yonekura Seiichiro, Mogi Kenzaburo. Japan Echo. Tokyo: Dec 2000. Vol. 27, Iss. 6; pg. 41, 5 pgs (Website, click on Economy_10.Incentives.pdf) Constancy and change in Japanese management, Ushio Jiro, Ronald Dore. Japan Echo. Tokyo: Apr 1999. Vol. 26, Iss. 2; pg. 26, 8 pgs (Website, click on Economy_12.Dore.pdf) Doing something for the unemployed young, Kawamoto Yuko. Japan Echo. Tokyo: Aug 2003. Vol. 30, Iss. 4; pg. 54 (Website, click on Economy_3.Young_emp.pdf) Assessing the growth in nonregular employment, Nishitani Satoshi. Japan Echo. Tokyo: Apr 2003. Vol. 30, Iss. 2; pg. 63 (Website, click on Economy_4.Labour.pdf) BUSINESS ORGANIZATION REFORM In a conventional capitalist business system, the owners of a firm (whether they be owner-operators or stockholders) have complete control over how a firm is governed (run). In Japan, this is not quite the case. Stockholder control is still very Docsity.com important, but a system developed in which the government and managers of companies have a greater say in how business is run. This has allowed Japanese business to free itself from the impact of market discipline, the idea being that stockholders want the business to respond to the market and make the greatest profits. Some claim that this freedom from the immediate demands of the market has allowed Japanese companies to develop technology and human resource practices that give them advantages over the long term. Others believe that this freedom from market discipline actually makes the companies disregard long-term survivability. At any rate it has allowed the Japanese to develop not only their own internal type of firm organization, but also a unique type of organization between government and business and among business. Especially the interfirm organization of related businesses repeats the group with group principles. Ownership and governance  Who owns Japan’s large corporations and for what purpose?: The easy answer to that question is that the large corporations own each other, because the shares they own in each other greatly outweigh the amount of shares owned by private investors. Indirectly, however, the corporations are in a sense owned by the government and thus the Japanese people. This unusual situation arose because of the way that Japanese corporations were financed after the war. When Japan began its postwar recovery it was capital poor, yet by 1955, industrial output recovered to its prewar level and from 1955 to 1973 the economy grew by 8 times in real terms to become the world's second largest. Throughout this period the Japanese government guaranteed credit to the banks so they could lend to large businesses. Large business, however, had to commit themselves to help the government achieve its growth goals. Thus major large capital-intensive corporations financed by government capital led Japan's economic growth. By 1970 the 1,185 corporations at the top of Japan’s 780,000 companies (or .015%) earned over 35% of Japan's total corporate income, made 45% of corporate profits and held 47% of corporate assets and 60% of corporate capital. Much of the profits that corporations made from this growth they reinvested in themselves. This reinvestment fueled Japan’s great productivity gains and it also eventually reduced the dependency on banks and the governments for financial support. By the 1980’s, the large debt to equity ratios that had characterized Japanese companies had been reduced greatly and furthermore companies were looking toward the stock market for financing rather than towards banks and the government. They were becoming independent of government control and most sectors of the private economy maintain this independence. The 1990’s have seen a return to government support of both the banks and the stock market. Unfortunately, this has been to simply guarantee the banks won’t go bankrupt because of all their bad loans and to make sure the stock market doesn’t fall so far that it makes the bank and financing problems worse. The government’s objective is to maintain the health of the Japanese economy (the Liberal Democratic Party’s [LDP] objective of course is to stay in power). The government has gone into great debt to help finance the banking and other sectors of the economy, and it can once again be said that the Japanese government and the Japanese people own a large share of so-called private industry. Docsity.com the group relationships. In the 1970s, banks and industrial firms started cross- holding shares to promote a stable business environment. In the bubble period of the late 1980s, booming stock prices encouraged the spread of the practice and companies began to purchase shares in remotely related firms. Transactions amongst keiretsu firms are the most obvious reason for them to work together. These include lending, purchasing of finished goods, parts and raw materials, services such as importing and exporting and also those such as design. The companies are tied together on a personnel level by temporary, long term and permanent exchange of people (occasionally a dominant firm ridding itself of surplus people). The companies also exchange company directors. Many people in the different companies of the keiretsu will have come from the same university and they may make a point of hiring out of preferred schools. Perhaps the most interesting feature of the keiretsu are their strong group identification which often leads not only to companies favoring the products and services of fellow group members, but also employees practicing the same form of selection in their private purchases. ν Benefits of the ties: structured competition, stable development: The benefits of the ties are most obvious in manufacturing. Japanese interfirm cooperation on design, cost reduction, manufacturing improvements and delivery have proved so valuable that they have been emulated around the world. It should be noted, however, that this cooperation is not a simple preference for old friends. It also integrates competition amongst 2 or 3 different suppliers. Cross share-holding allows companies some freedom from market pressure and the ability to focus more on market expansion and technology development rather than just pursuing profits. Manufacturing companies especially bought the shares of their major suppliers to guarantee their long-term stability. Personnel exchange allows a free flow of information between companies and the ability to reduce fixed costs when needed. ν Costs of the ties: The costs which accompany ties are the support of weak companies which should be given greater incentive to become more competitive or be allowed to go out of the business. These companies are a financial drain on their supporting firms, whether that drain comes from the constant need for funding, inefficient purchasing or even director or personnel costs. This drain also represents an opportunity cost to companies and the economy because these resources could be used more efficiently.  Reduction of cross-share holding, diversification of relations: Despite the benefits of the ties among companies, companies are starting to reduce their commitment to them. The most important reduction is in the area of cross-share holding. The investment in related and distantly related firms was in many ways a bubble inflated trend that went well beyond what it should have. Companies began selling-off their cross-holding stock to make up for losses when the stock market plunged. Now it has become necessary to look for transaction partners that will help competitiveness. The sell-off is being propelled by new accounting rules that will reveal the true value of cross-holding shares and the necessity that merging banks sell-off stocks from firms in which they hold more than 5 percent. A sell- off of cross-holding shares will likely push share prices down in the short term, improved market governance should improve management, be more profitable for Docsity.com investors, and bring back life to the stock market. Ironically, just as cross-share holding is weakening there is greater consolidation in many sectors as banks, and insurance companies merge and as some manufacturing firms buy controlling shares in their suppliers. Docsity.com