A plethora of articles in the popular business press in both Japan and the United States have reported the end of the Japanese-style human resource management system, in particular, the demise of lifetime employment and seniority-based wages and promotion in large Japanese firms.1 While many companies are making changes, it is inaccurate to proclaim the end of the current system, since the system has been evolving, rather than remaining stable in the long term. Moreover, evidence shows that while changes are occurring, they are generally limited to seniority-based pay and promotion, whereas lifetime employment remains intact in most large companies. In addition, only a minority of large firms (approximately 10 percent) have substituted performance-based pay and promotion systems (nen posei) for seniority-based wages (nenko), and even some of these firms guarantee wage levels, which is contrary to a pure performance-based system.
My evidence comes from the results of published surveys by the Japanese Ministry of Labor (JMOL), the Federation of Japan Employers or Nikkeiren (FJE), the Japan Productivity Center (JPC), and the Japan Employment Information Center (JEIC). From these surveys, I was able to obtain a broad-based picture of large Japanese companies’ employment policies, in particular, lifetime employment and seniority-based wages and promotion. I used the survey results to examine the first issue: Are Japanese employment practices undergoing fundamental changes, and, if so, how much change?
A second issue is why employment practices are changing. While popular press reports commonly point to two factors in particular — slow growth and a recessionary environment during the past six years and an excess of older white-collar employees whose productivity needs to improve2 — this categorization omits a range of other reasons, including changes in Japanese companies’ international competitive positions, the structure of the Japanese economy, and employees’ attitudes toward work.
A third issue is what strategic implications the changes have for both Japanese firms and the Western companies they compete with. Again, contrary to a popular view that Japanese firms are becoming more like Western firms in both their human resource policies and overall strategies (for example, emphasizing profits over market share), I show why large companies will continue to place strong emphasis on both growth and market share as corporate strategies, and put even greater emphasis on product, marketing, and service innovations.
1. See, for example: B. Schlender, “Japan’s White-Collar Blues,” Fortune, volume 129, 21 March 1994, pp. 97–104;
S. Mallaby, “Japan Survey,” The Economist, volume 332, 9 July 1994, pp. 1–18;
“Great Changes in the Employment System (Toyo dai henka),” Shukan Toyo Keizai, number 5373, 16 September 1995, pp. 16–34;
K. Eiji, “Has Japanese Style Management Ended? (Nihon teki keiei wa owata ka),” Voice, January 1995, pp. 70–79;
“What’s Killing Japanese Business? Japanese Style Management,” Tokyo Business Today, volume 8, July 1993, pp. 24–26; and
N. Kishi, “Use and Throw Away White-Collar Workers (Howaitokara tsukaisute),” Ekonomisto, volume 74, 23 May 1995, pp. 26–36.
2. Schlender (1994); and
S. Hori, “Fixing Japan’s White-Collar Economy: A Personal View,” Harvard Business Review, volume 71, November–December 1993, pp. 157–172.
3. Japanese Ministry of Labor (JMOL), “The Present Situation and Future Prospects of the Japanese Style Employment System (Nihon teki toyo seido no genjo to tenbo)” (Tokyo: JMOL, 1995), p. 2.
4. K. Koshiro, “The Employment System and Human Resource Management,” in K. Imai and R. Komiya, eds., Business Enterprise in Japan (Cambridge, Massachusetts: MIT Press, 1994), p. 228.
5. JMOL, p. 3.
6. JMOL, pp. 2–4.
7. JMOL, pp. 3–4.
8. Japanese Productivity Center (JPC), “The Present Situation and Future Prospects of Our Country’s Annual Salary System (Waga kuni nenposei no genjo to tenbo)” (Tokyo: JPC, 1996), p. 12.
9. JMOL, p. 4.
10. K. Imai and R. Komiya, “Characteristics of Japanese Firms,” in Imai and Komiya (1994), pp. 20–22.
11. JMOL, pp. 4–5.
12. JPC, p. 12.
13. Federation of Japanese Employers (FTE), “Design and Operation of Japanese Type Annual Salary Systems (Nihon gata nenposei no sekkei to unyo)” (Tokyo: Nikkeiren Communications Department, 1996);
Japan Employment Information Center (JEIC), “Issues and Methods in the Advancement of the Annual Salary System (Nenposei no susumekata to kadai)” (Tokyo: JEIC, 1996).
14. JPC, p. 7.
15. JPC, p. 26.
16. JPC, pp. 38, 54.
17. JPC, p. 66.
18. Imai and Komiya (1994), pp. 23–26;
H. Itami, “The ‘Human-Capitalism’ of the Japanese Firm as an Integrated System,” in Imai and Komiya (1994), pp. 80–82.
19. Y. Noguchi, The 1940 System (1940 nen taisei) (Tokyo: Toyo Keizai, 1995);
H. Hazuma, The Lineage of Japanese Style Management (Nihon teki keiei no keifu) (Tokyo: Bunshindo, 1993);
R. Dore, “Industrial Relations in Japan and Elsewhere,” in A. Craig, ed., Japan: A Comparative View (Princeton, New Jersey: Princeton University Press); and
D.H. Whittaker, “The End of Japanese Style Employment?” (Cambridge: Harvard University, Program on U.S.-Japan Relations, 1989), pp. 31–32.
20. W.K. Tabb, The Postwar Japanese System (New York: Oxford University Press, 1995), pp. 78–82;
Whittaker (1989), p. 32;
Dore (1979); and JEIC (1996), pp. 10–11.
21. Koshiro (1994), pp. 228–230.
22. A. Gordon, The Evolution of Labor Relations in Japan: Heavy Industry 1853–1955 (Cambridge: Harvard University Press, 1985); and Koshiro (1994), p. 230.
23. Mallaby (1994).
24. Tokyo Business Today (1993); and Mallaby (1994), p. 13.
25. Mallaby (1994), p. 11; and Schlender (1994), p. 25.
26. Every increase of five years in the average age of a firms’ workforce under a traditional seniority wage system can result in wages rising by approximately 25 percent. See: Whittaker (1989), p. 5.
27. “The Lure of Leisure,” The Economist, volume 323, 2 May 1992, p. 83; and
28. The movement away from dependence on Western technology is reflected in Japanese technology trade figures during the past fifteen years. See: Japan — An International Comparison (Tokyo: Keizai Koho Center, 1981–1996).
29. In 1987, for example, 32 percent of all large companies with 5,000 employees or more had multi-track employment systems, while service-sector companies such as finance and insurance had 6 percent. See:
Whittaker (1989), p. 22.
Although, in the 1980s, many of these specialist tracks still used seniority-based pay systems, in the 1990s, they are gradually being switched over to performance-based systems.
30. Predictions are that the proportion of manufacturing done overseas will increase from 8.6 percent in 1994 to 15 percent in approximately 2001. See:
S. Kawakami, “Exporting a Surplus,” Far Eastern Economic Review, volume 159, 4 July 1996, pp. 45; and
Y. Kaneko, “Reform and Innovation Will Revitalize Japan,” Nikkei Weekly, 23 December 1996.
31. S. Isaka, “Toyota’s Drive for 40 Percent Angers Rivals,” Nikkei Weekly, 23 December 1996; A. Taylor, “Toyota’s Boss Stands Out in a Crowd,” Fortune, volume 134, 25 November 1996, pp. 116–122; and
D. Kirkpatrick, “Your Next PC May Be Japanese,” Fortune, volume 134, 28 October 1996, pp. 141–148.
32. The promotion of Hiroshi Okuda to Toyota’s presidency is a good example of this. Toyota, known for its risk-averse attitudes, promoted a decidedly outspoken person whose personal style sets the tone for what the company seems to want from its employees. The introduction of a new pay and promotion system giving more weight to performance, and the mandatory removal of general managers and managers from their posts at ages fifty-five and fifty to make way for younger people with newer thinking, are two more examples of Toyota’s moves to change its personnel practices. See:
Taylor (1996). For a similar but much more gradual approach at Hitachi, see:
H. Nagao, “Computer Makers Try to Mix Oil and Water,” Nikkei Weekly, 23 December 1996, p. 26.
33. This onslaught of new product innovations seems to have already started. See:
S. Brull, “The Wave of Gizmos Coming Soon From Japan,” Business Week, 25 November 1996, pp. 62–67; and
The move toward greater use of nontraditional partnering strategies also can be seen in more tie-ups between traditional rivals and between large firms and smaller high-tech firms. See:
Taylor (1996); and
34. See “Reengineering Gurus Take Steps to Remodel Their Stalling Vehicles,” Wall Street Journal, 26 November 1996, p. 1; and
“Restructuring Is Out, Replaced by Growth,” Wall Street Journal, 9 December 1996, p. 1.
35. A recent example is Nippon Steel. See:
“Great Changes in the Employment System (Toyo dai tenka),” Shukan Toyo Keizai, number 5373, 16 September 1995, pp. 16–34.
36. S. Choi, J. Lee, and T. Roehl, “What Makes Management Style Similar and Distinct Across Borders? An Examination of the Influence of Growth, International Experience, and National Culture in Korean and Japanese Firms” in M. Wakabayashi and A. Bird, eds., Association of Japanese Business Studies Best Paper Proceedings (San Luis Obispo, California: Association of Japanese Business Studies, 1996), p. 64; and
R.L. Janelli, Making Capitalism: The Social and Cultural Construction of a South Korean Conglomerate (Stanford, California: Stanford University Press, 1993), pp. 152–155.
37. JMOL (1996), pp. 13–14.
38. This seems to be the argument of, among others, Koichi Hori of Boston Consulting Group’s Tokyo Office. See:
Schlender (1994), p. 98.
39. Taylor (1996).