Historic and cultural heritage
Japan is a complex, dynamic society that has undergone enormous change in the past 125 years, converting itself from a feudal state into a modern industrialized nation and an economic superpower. In doing so, the Japanese have absorbed Western technology, science, education and politics, while still keeping their unique cultural identity. The Japanese have always been distinctly aware of the difference between foreign and native things, and very early they recognized the value of borrowing from others, while maintaining their Japaneseness (Gannon, 1994). For the most part, the only language spoken in Japan is Japanese. The country is an island culture of almost total ethnic homogeneity (Engholm, 1991). Asian common cultural traits such as group centredness, authoritarianism and protocol are salient ingredients of the Japanese society.
Contrary to other Asian countries, the collectiveness of Japanese culture has been carried over to the companies (Kashima and Callan, 1994). A job means identification with a larger entity through which one gains pride and feeling of being part of something significant, tying an individual's prestige directly to the prestige of his or her employer. Typically, the company is seen as a provider of security and welfare. Actually, loyalty to the company even surpasses the family bond. The Japanese believe in a natural order in society and in Japanese organizations different rank and statuses are considered perfectly normal, to the extent that people's ranks are usually more important than their names. The Japanese are great believers in establishing a person's status as quickly as possible so that the proper interaction and communication can take place. The language is also used to reinforce the natural order of ranks and statuses. Various endings are added to words to subtly indicate the status of a person, and at work honorifics are used to address higher status managers. The Japanese are great believers in doing things the proper way, following a specific protocol. Kata is the way of doing things, especially regarding the form and order of the process.
There are katas for eating properly, using the telephone, treating foreigners, and so on. Japanese tend to believe that conducting something in the proper way will eventually result in doing it in the most successful manner. Katas were developed within this hierarchical society, because it was assumed that everyone has defined life roles (bun) in which obligations are spelled out in detail. Obeyance of the rules reflects one's inner character.
Japan has a population of 126 million, of which the labor force constitutes 68 million (54 percent). The female share of the workforce is 41 percent. The education level is high with 43 percent of the age group in 1996 being tertiary students, of which almost half (44 percent) are female. The average growth rate of the population 1980-1997 is only 0.5 percent, the total fertility rate (births per woman) is merely 1.4 percent and the life expectancy is 80 years. This has contributed to a rapidly aging population pyramid. Japan has a total GDP of almost US$42 billion but its average annual growth during 1990-1997 was only 1.5 percent, making this period a prolonged recession. It has a highly advanced economy where agriculture only amounts to 2 percent of GDP but services account for 60 percent and industry 38 percent. Its major industries are motor vehicles, electronic machinery and consumer electronic equipment. Electric machinery and non-electronic machinery are major exports (Far Eastern Economic Review, 1999).
Japan's economy finally began to show signs of a recovery in 1999. Promoted by giant government stimulus packages, the economy surged ahead at an annualized 7.9 percent in the first three months of the year. However, other signs were more negative, as the unemployment rate increased in June to an all-time high level of 4.9 percent. Land prices continued to fall, and capital expenditure and demand for loans remained low, as firms trimmed excess capacity instead of investing in new plants and equipment. Restructuring of Japan's financial sector started in late 1998 and continued in 1999 with massive mergers. These reorganizations were expected to increase efficiency. However, the most dramatic changes came in the form of foreign companies buying the control of Japanese companies, massive restructuring resulting in lay-offs of tens of thousands of workers and ``big bang'' deregulation opening up the protected financial sector to foreign firms (Far Eastern Economic Review, 1999). Traditional practices Hiring of workers and managers into entry-level positions directly out of college is common. Pay rises and promotions are automatic. In the wage system
based on seniority (nenko-joretsu), status and seniority are tied to length of service, rather than to job duties or merit. Shushin koyo is the lifetime employment system. Participation by coworkers in after-hours gatherings to foster harmony and cooperation is generally expected. Workers take responsibility and then accept blame, to protect their superiors from loss of face. Although subordinates know that they can influence decisions, the ultimate decision comes from the top. Japanese managers make an active commitment to preserve harmony, through intricate social rituals like gift giving, bowing to superiors, and using honorific language to show deference. They keep their opinions to themselves, rarely expressing true feelings (honne), instead voicing tatamae feelings, revised to harmonize with those of the group. Japanese managers humbly decline to take credit for personal achievements, even when credit is due. They cooperate with their coworkers in every way they can to complete their tasks without involving their boss in any mistakes and problems along the way. Every group member is responsible for lending a hand in achieving the objectives of the group (Engholm, 1991). Operationally, workers belong to production teams with fluid job assignments. They often gain a broad perspective on production by being rotated through different departments. Such investments in breadth of skill and overall understanding of the production process are justified by the strong lifetime employment guarantees bonding workers to their companies and allowing the skilled and experienced production workers to contribute to management decisions (Doeringer et al., 1998).
Changing HR practices
Sources of change
The breakdown of the keiretsu (interfirm network) system of crossshareholding and preferential trading among member corporations of a business group (Gerlach, 1992) has badly hurt the safety net of supporting the long-term growth strategy of Japanese firms and their ability to protect employees from downside market risks (Lincoln et al., 1996). Deregulation is another force for change. It has made Japanese markets more accessible to competitors, foreign as well as domestic. In heretofore protected industries ± like financial services, distribution and agriculture ± few firms are prepared for the onslaught of competition and uncertainty (Lincoln and Nakata, 1997). The aging population also has clear implications for corporate human resource practice. With an aging workforce, the permanent employment and seniority system burdens firms with rising numbers of higher-paid and less productive workers. Previously, these systems were more suitable to employers, since the steep seniority escalator resulted in less payment for the relatively young workforce and the permanent employment norm reduced the uncertainties and costs of high staff turnover. Finally, the transition to a service economy combined with socio-cultural and socio-economic changes has had a profound effect on Japan's employment institutions. Although leading-edge manufacturers are still competitive, their
contribution to Japanese domestic employment and income is shrinking, in favor of the emerging service sector as the next great engine of jobs and wealth. Employment practices of sales and service firms are different from those of manufacturing. Their younger workforce is more mobile, less committed to work and the firm. Furthermore, since the organization of work in service firms is less team based, individual performance is more easily evaluated. Accordingly, occupational skills are valued over firm-specific skills, so that broad job experience becomes the main driver of wages and performance rather than loyalty to one employer (Debroux, 1997; Lincoln and Nakata, 1997; Ornatowski, 1998). Gender issues are rapidly surfacing in the Japanese traditionally male dominated corporate world. Japanese women, long locked in the crouch of teaserving office ladies or contract workers performing low-skilled work on the assembly line, are standing up (Kenney et al., 1998). Professional young women are flocking to new high-tech ventures, where gender does not seem to matter much. Such opportunities have been increasing steadily over the past few years and the Equal Opportunity Law, passed in 1985, which ``requested'' employers to ``make efforts'' not to discriminate, was recently revised to make discrimination illegal. Seku-hara, Japanese slang for sexual harassment, has become a buzzword feared in many a corporate and government office. Needless to say, there are no female directors on Japanese boards of major corporations. This is not likely to change in the near future due to entrenched cultural values and institutional practices (Bostock and Stoney, 1997).
Traditionally, this type of employment refers to core employees, leaving out temporary workers, subcontractors, seasonal workers, part-timers and dispatched employees. It is mainly practiced by larger companies and it applies to the enterprise group or keiretsu, not excluding the possibility that the employee can be transferred to another company (shukko) (Ornatowsky, 1998). There is evidence of a continuing commitment to the lifetime employment principle. Results of a recent survey of directors, personnel managers, union officials in 308 major Japanese companies undertaken by the Japan Productivity Center for Socio-Economic Development reveal that almost 90 per cent of the respondents indicated that their companies planned to provide workers with continuous employment until retirement. Furthermore, 82 percent characterized lifetime employment as advantageous, while only 18 percent believed it to be disadvantageous (Lincoln and Nakata, 1997; Ornatowski, 1998).
Firms have used various means to scale down labor costs. The Japanese Ministry of Labor reported recently that 34 percent of the firms surveyed had undertaken one or more of the following: overtime reduction (23 percent), cutbacks in the recruitment of core workers (13 percent), intrafirm transfers (10 percent), outplacements to affiliates and subsidiaries (8 percent), dismissal of part-time and temporary workers (4 percent), furloughs and other temporary
suspension of work (4 percent), and voluntary early retirements (2 percent) (Lincoln and Nakata, 1997). Also the government seems determined to avoid an abrupt departure from the lifetime employment system. The Japanese Ministry of labor subsidizes up to two-thirds of the wages of the employees whose firms implement temporary factory shutdowns instead of genuine layoffs. Starting in 1994, the further reinforcement of the existing employment adjustment measures has resulted in about 4 million workers (around 6.3 percent of the labor force) receiving subsidies at one time or another (Debroux, 1997).
Recruitment and careers
Cutting back new hiring is not such a simple and risk-free way of reducing labor costs as it may seem. Maintaining a stable yearly influx of new graduates reassures the labor market of the stability and trustworthiness of a Japanese firm and corporations fear that their competitiveness for new talent will be threatened by reduced hiring. However, the traditional system of hiring inexperienced graduates from eÂlite universities is being called into question and a growing number of companies claim an interest in hiring white-collar and technical workers without college degrees. The firms are administering sophisticated tests and other screening devices to select high quality recruits, whatever their deficits in academic certification. However, there are lingering doubts as to how fundamental this shift in hiring practice is. Merely a professed openness on the part of employers to recruit from non-conventional sources does not really signify a fundamental new trend (Lincoln and Nakata, 1997). Some companies, like Toyota, are considering a ``new flat'' (nuufratto) organization aiming at lower management density, shorter chains of command and, it is hoped, dampened employee expectations of upward career mobility. Although abolished by some large manufacturers, most companies still pursue a policy of rewarding what effectively is a ``dummy'' title, such as kacho (section head) to employees who have not made the actual grade. Although an employee of kacho rank in the ability or status (shokuno) hierarchy has no management role, but remains a staff member, his compensation and status ranking is equivalent to that of true section heads. Advancing in the status hierarchy does not mean becoming a manager; only those with a genuine talent for leading others become managers. Given the reduced availability of titles due to the de-layering, this practice of ``dummy'' titles is likely to survive, at least in the short run (Debroux, 1997; Lincoln and Nakata, 1997).
In the nenko system, employees who join the firm without any work experience are paid a low starting salary but can look forward to steady raises with increasing age and seniority until retirement (Lincoln and Kalleberg, 1990). Such a system depends on lifetime employment, because, without the guarantee that they will be around to collect their return on their early career investment, employees would find it unattractive. At the same time, under lifetime employment, the organization has an incentive to continually invest in training and it does not risk the loss of its investment or proprietary knowledge. The consequence is that both parties, the firm as well as the employees, have a long-term stake in the development and success of each other (Lincoln and Nakata, 1997).
Recently, growing numbers of companies are explicitly weighting ability and performance over tenure and age in salary decision. Since the early 1990s, some companies have developed a system of job ability-based wages focusing individual worker performance over one year compared with goals set at the beginning. This new system is quite close to a true performance-based pay system. It has been termed ``annual salary system'' (nen posei) and has been introduced by about 10 percent of large companies. This system is primarily used for managers and general managers, not for lower level employees. The monetary benefits to employees, if any at all, are typically small (Debroux, 1997; Lincoln and Nakata, 1997; Ornatowski, 1998).
The attempt to shift from nenko to performance pay illustrates the dilemma companies face. Managers worry that the resulting inequities will destroy morale and cohesion. Furthermore, most companies would not like to see younger people supervise older ones. Also, there are fears that individual merit pay will ruin the Japanese system of team-based production, where stronger team members assist weaker ones for the good of the performance of the team as a whole (Lincoln and Nakata, 1997).
The continuities in the Japanese employment systems are as striking as the changes, especially when one considers the depth and length of the economic recession. Based on data from 1,618 firms, Morishima (1995) identifies three different types of attitudes and actions of firms toward employment system reform. One group of companies tries to change their wage system from seniority based to performance based and these firms try at the same time to use the external labor market to recruit workers. Although they represent the highly publicized trend away from traditional Japanese employment practices, these companies only make up 10.8 percent of the sample. Most firms (56.8 percent) have retained the traditional employment system representing the majority force of continuity. A third group (32.4 percent) shows a mixed picture consisting of firms that are reforming the wage system, while maintaining long-term employment practices. These findings highlight the striking resilience of traditional practices as well as some important changes. Other surveys indicate a similar pattern (Thelen and Kume, 1999).
Technological changes have revealed some of the limits of traditional practices based on seniority-based wages and on-the-job training. The basic assumption of the traditional system was that workers would become ever more valuable to the company, as they acquired more experience on the job, justifying their steadily increasing wages. However, recent rapid technological developments have surpassed the skills of many experienced workers. The need to fill this gap has increased the competition among firms for promising young workers, not so much because of their relatively lower wages, but because of their adaptability to new technology. Furthermore, increasing competition in product markets requires breakthrough innovations more than incremental adjustments in product development, the latter associated with onthe- job training. Breakthrough innovations may require more flexible staff policies based on external labor markets rather than internal experienced-based systems of skill formation. These observations suggest that the changes in Japanese traditional managerial practices are but partial adjustments to adapt to a new market context rather than a genuine transformation of the entire employment and wage system (Thelen and Kume, 1999).
The Japanese enterprise based unions (kigyo-nai kumiai) have had a conciliatory attitude in salary negotiations in favor of a strong stance on job security for their members. Unions would guarantee cooperative behavior by their members, in exchange for appropriate behavior by companies and the
integration into the firms' training, wage setting, and redundancy systems. Furthermore, firms could rely on the role of organized business as a last resort defender, if the union did not fulfil its side of the agreement. This balance has now changed with the concurrent weakening of the traditional trade unions, business associations and keiretsu networks. Currently, both sides are less able than before to guarantee that the other side will be well behaved, even worrying that the other side would have an incentive to leave the relationship. Middle managers are the targets of the nuufratto delayering process and they feel a growing need to defend their interests. However, the Trade Union Law only recognizes unions as representing the interests of the employers. Short of official recognition, more groups may form inside the companies to defend the interest of the core white-collar employees and their implicit non-lay-off contract. The system of company-based unions may be severely undermined if such groups extend outside companies to become horizontal regional or national white-collar unions. Also non-union employee representation may pose a threat to the traditional enterprise-based unions. Japanese firms have devoted great effort to develop participation in management by using non-union representation practices innovatively and effectively to structure and expand employee representation in decision making. There are two types of employee associations. Approximately onethird are voice-oriented organizations, while the remaining two-thirds focus on recreational activities. Voice-oriented employee associations frequently discuss industrial planning and working conditions with management, and managers typically appreciate their functions of aggregating and communicating views of employees (Sato, 1997). These aspects of non-union employee representation have been largely ignored in the literature but are vital to understand contemporary labor relations in Japan.
There are broad and striking changes sweeping the Japanese employment system. How fundamental or reversible they are is more difficult to evaluate.
No matter whether it regards performance pay, the elimination of management titles, or reductions of the workforce, the change of HR practices in Japanese companies seems to be slow and incremental, carefully avoiding abrupt or traumatic breaks with the past. Japanese managers have a strong sense of corporate obligation to provide jobs, income and security. The rather cautious reforms of Japanese corporations undertaken so far could be targeted at influencing the expectations of the workforce and the community, preparing people for the steady stream of fine adjustment that will eventually end the traditional Japanese employment system. However, that is far from a safe conclusion. The uncertainty of Japanese managers of what is the best long-term course of action is genuine. Assuming that the economic recovery takes hold, a considerable stabilization of Japanese HR practices can be expected, although at a higher level of market-oriented flexibility (Lincoln and Nakata, 1997). More future changes can be expected in the nenko, seniority-based salary system than in the shushin koyo, the lifetime employment regime. In a recovering economy, also Japanese labor relations may be affected by many changing environmental forces such as the internationalization of the economy, the rapidly aging population, the acceleration of technological innovations, changes in the values of the younger generation, etc. However, it is also dangerous to over-emphasize the pace of current developments. A safe conclusion is that the main characteristics of Japan's industrial relations will most probably be maintained in the coming decade (Ishida, 1999).