Japan: economic growth and HRM HR Management

In the 1970s and 1980s the Japanese economy and its managerial and working practices came under intense investigation, mainly because of the phenomenal growth in its economy led by a number of Japanes multinationals in the vehicle and electronic industries. Incursions were made into previously dominated European and US markets, and by the 1980s, according to Vogel (1980), Japan had become ‘number one nation’ by outstripping US growth.

The Japanese phenomenon generated an entire literature devoted to understanding and explaining this miracle, ranging from prescriptive eulogistic texts such as Ouchi’s (1981) Theory Z to more critical analyses rooted in careful research (Dore, 1973; Gerlach, 1992). Much of this literature concentrated on the role of human resource management in creating higher Japanese employee productivity, product quality and company expansion.

This has usually been encapsulated in the pattern of employee relations in the form of the three pillars: lifetime employment, the seniority system (nenko) and enterprise unionism. However, this simplistic view of the Japanese system of employee relations has been criticised by numerous observers from various positions, including historical, cultural, economic and labour market perspectives (Berggren and Nomura, 1997; Sako and Sato, 1997).

  • The classical Japanese model: the three pillars

The basis for the three-pillar approach has been described by Abegglen and Stalk (1987) thus: the Asia-Pacific model is far from homogeneous [and that there is] a vast range of geographical and demographic variation. The economic systems range from emerging from a communist planned economy to fully fledged liberalised market-based ones. The political systems also differ greatly, as do the social arrangements.

There is probably less cultural variation but more variety than acknowledged by many writers in the field. There is in this sense a fair degree of residual cultural diversity in the Asia-Pacific region that is likely to continue into the new millennium. On the other hand, if there is a common direction in which the HR systems are moving, it is most likely to be towards business restructuring, deregulation and liberalisation vis-à-vis the challenges of globalisation.

First, the employee is hired directly from school, rather than from an open job market. Second, he [sic] is hired for his general characteristics and abilities, rather than for a particular skill or a particular job. Third, he is expected to remain with the company for a lifelong career and in turn expects not to be laid off or discharged.

  • The establishment of enterprise unionism

The company is also the basic unit for employee representation through company unionism, which forms the third pillar of the Japanese employee relations system, together with lifetime employment and the seniority wage system. While industrial unions exist in Japan, most large corporations allow only one union based around the enterprise itself. The origins of enterprise unionism date back to the 1920s (Gordon, 1985), although the system as we recognise it today stems from the period after the Second World War.

The American occupation enacted a trade union law allowing trade unions the right to exist with full legal rights, and by 1949 trade union density had risen to 56 per cent, but by the late 1980s had fallen to 27 per cent (Tsuru and Rebitzer, 1995). There are two major controversial reasons for this growth and decline in trade unions. Growth took place after the Second World War.

First, workers wanted to safeguard their rights amid the collapse of the industrial structure and wholesale inflation. Second, for the first time blue-collar and white-collar workers cooperated in controlling production for the sake of their own living standards. It therefore made sense to combine into one enterprise union. Third, the unions demanded a number of conditions:

  • removal of the old grades and status;
  • job security;
  • reform of management organisation;
  • the setting up of participation systems;
  • recognition of the unions;
  • the right to negotiate and conduct labour agreements;
  • the democratisation of management;
  • expansion of workers’ rights.

The best way for the two groups of workers (white and blue collar) to cooperate to gain and maintain these initiatives was at the enterprise level. Employers also encouraged enterprise unions, primarily because in the 1950s there was high employment and high demand for labour in a rapidly expanding economy. However, employers also saw the advantages of promoting enterprise unionism, and they ensured that labour relations were conducted vertically, thus weakening the horizontal solidarity of the workers.

It also emphasised cooperation in the workplace: supporting the desire for consensus made it easier to remove workers who propagated radical ideas and were aggressive towards management. This also had the effect of creating a unitarist style of organisation. However, the path of industrial relations was not always smooth, and up to the 1960s there were often disputes, sometimes of a violent nature.

The cooperative industrial relations that have been identified with Japanese management style only began in, and developed after, the 1960s. Thus the so-called ‘traditional model’ is really quite a recent phenomenon. The decline in union density began after 1975, and a number of reasons for this have been put forward by Tsuru and Rebitzer (1995). First, and most important, has been the inability of unions to organise in new firms.

Second, unions have had a limited effect on wage levels. This perceived lack of influence limits the attractiveness of union membership. The non-effectiveness of unions, particularly in times of crisis, as in the recessions of the 1970s and the 1990s, has shown the unions to be ‘overly accommodating’ to the employer’s position rather than rigorously protecting their members.

  • Community consciousness

Enterprise unionism has thus been seen to be synonymous with unitarist HRM practices, reinforcing company objectives and allowing for only limited independent action on behalf of the workforce. This paternalist nature of large Japanese corporations creates an understanding between employer and employed. Sako (1997) describes this relationship as existing within a community – that is, the corporation: Sako (1997) believes that this mutual interest between employer and employee cannot be expressed in terms of the psychological contract, which has elements of instrumental bargaining rather than shared values, or even common interest .

A more apposite description, he believes, is the term community consciousness, in that employees identify closely with the organisation, and the ‘community’ extends beyond the firm into shaping individual identity, and influences life beyond the workplace itself. In return for this employment security the company expects worker commitment and flexibility. This community consciousness is reinforced by internal labour markets that encourage the development of employees through training and development, mentoring, and teamworking, leading to progression through the organisation, until 55 or 60 years of age when the intensity of work is reduced in preparation for retirement. Promotion is based heavily on seniority, as are wages and salaries and other forms of remuneration.

However, nenko is not just about seniority; it is also increasingly about merit. Within the first 10 or 15 years of employment each employee cohort will move together, but after that promotion is based on merit. This gives management a long period to screen people for selection to senior positions. This community consciousness is also reinforced by employee participation at workplace levels. This form of participation (ringi) is less about workplace democracy in the Western sense and more about reaching consensus (nemawashi) and harmony (wa) in the decision-making processes.

  • Perspectives on Japanese HRM

This view of the classical Japanese model of HRM is, of course, simplistic, and critics of the system have challenged the outward appearances of harmony and cooperation, particularly in the light of the economic crisis that began in the 1990s and is continuing into the new millennium. In 1999 unemployment had risen from a consistently low level to 5 per cent and probably double that for young workers, and the percentage of temporary and part-time workers rose to 7 per cent (Japan Labour Bulletin, 1999). Before examining some of these criticisms it is appropriate to explain how the Japanese classical model originated and developed.

  • Analytical approaches to understanding the Japanese system of HRM In general, four approaches have been taken in analysing the origins, influences and development of Japanese HRM: history and tradition, the influence of culture on work attitudes, industrialisation as bound up with the ‘late developer’ thesis, and politico-economic arguments (Stam, 1982). Others might describe these influences as cultural, institutional and politico-economic influences, or attribute developments to the unique business system of Japan which incorporates most of these factors (Whitley, 1992).

The historical view

This view emphasises the unique historical context within which Japanese HRM has emerged, and highlights the pre-industrial influences of the Samurai as an elite group in a feudal society, with its emphasis on fealty (duty and loyalty) and a strict code of conduct, the Bushido – the way of the warrior. In a sense the continuity through history lies in the development of large family-owned companies, the zaibatsu, which acted as small fiefdoms that emphasised these historical values.

This feudal form of managerial ‘familyism’ (the organisation perceived as one big family) was a means of integrating employees into the quickly expanding enterprises. After the First World War this was extended to include welfare corporatism, in which the enterprise provided protection through welfare measures as befits family duty.

The cultural view

The cultural view incorporates some of the concepts of the historical perspective, and in reality they cannot be separated. Geographical and commercial isolation until the late nineteenth century, and racial and linguistic homogeneity, have resulted in a unique culture in which the Japanese strongly value the social nexus or social structure in which they function. This can be in either the family, a circle of school friends or the company where one works. Such bonding groups provide certainty and security.

Second, there is a strong emphasis on anti-individualism. In other words, the group has a strong priority over the individual. This can be associated with Hofstede’s and Trompenaars’ forms of collectivism as the opposite characteristic to individualism. These relations are structured through hierarchy in the enterprise. However, while different grades of status exist, all members of the organisational community are valued.

Third, and as we have already noted, harmony and consensus are significant in Japanese culture. The importance of preserving these values is reflected in the intensive informational and communication networks within and between groups in the organisation. Nothing is acted upon until consensus has been reached. Group orientation and consensus support loyalty to the enterprise and further act to underpin lifetime employment and collective responsibility.

The late developer view

This is often associated with the institutional and business systems perspective of HRM. The work of Dore (1973) proved seminal in developing this perspective in his examination of the origins of national diversity in industrial relations in a comparative analysis of Britain and Japan. In essence this view maintains that countries that start to industrialise late show a number of specific institutional and organisational characteristics caused by the fact that they can benefit from the experiences of their industrial predecessors.

The state’s role in helping to foment the conditions favourable for enterprise growth is also significant. The Meji governments of the late nineteenth century set up the core of Japanese industry, transferred it to private interests, and provided these enterprises with government contracts. These eventually developed into the zaibatsu, such as Mitsui, Mitsubishi and Sumitomo. Companies formed after the Second World War, such as Matsushita, Sony and Honda, in having to adapt quickly to expansion adopted the models of corporate structure that already existed, and became part of the mutual nurturing growth mechanism between the state and large private corporations.

These large enterprises allow no direct personal relationships to develop, instead of which an extensive administrative apparatus is required. Standardisation and formalization in the Japanese enterprises have led to precise relations, ranging from a clear-cut career structure based on nenko (seniority) to a diversity of benefits such as allowances for housing, family and study. From the 1920s this developed into a form of welfare corporatism in which the company performs many of the welfare functions that in other industrial economies are performed by the state. This has the effect of binding the workforce into the objectives, values and culture of the company. The nurturing relationship of the state and companies is thus important in the late developer’s view of how corporate HRM systems develop in Japan.

The politico-economic view

As with the historical and cultural views there is a considerable degree of overlap between the late developer view and the politico-economic view. Both emphasise, for example, the importance of the rol of the state in developing privately owned capitalist enterprises. This form of development has often been called alliance capitalism (Gerlach, 1992; Berggren and Nomura, 1997).

Another feature of alliance capitalism is the weaker control of shareholders over managerial decision and company strategy formulation compared with US and British companies. Whereas US and UK companies are conscious of the requirement to provide high dividends for their shareholders in the short term, Japanese corporations have been less subject to these immediate financial pressures, and can consequently indulge more effectively in long-term strategy-making. This in turn enables them to take a long-term view in considering HRM policy and practice, and two of the three pillars – lifetime employment and the seniority system – could only exist within such a politico-economic national context.

  • Criticisms of the Japanese system

There have been many observers who have been sceptical of the Japanese miracle and its ability to last. These views command a wide breadth of opinion in the politico-economic spectrum.
Left-wing critics tend to the view that the Japanese system has been strongly bolstered by US capital since the Second World War as a bulwark against communism, especially in the wake of the fall of China to Mao Zedong’s forces in 1949.

US wealth in essence nurtured and sustained the ‘miracle’ for essentially political reasons. Other commentators in a similar vein have criticised the three-pillar model as being only partly representative of the workforce of Japan as a whole, as it excludes peripheral workers, many blue-collar workers, women, and those who do not work for large corporations, where the model predominantly operates. Small-firm suppliers, it is claimed, bear the exploitative costs of the system, where workers lack the security of the large corporations, and are often the first to be made redundant in times of restructuring. Chalmers (1989) also found clear divisions between core and peripheral workers.

Peripheral workers tended to be segmented by age, gender, education and skill, and they were most likely to exist in small firms. Recent critics have claimed that Japanese companies cannot sustain the expensive three-pillar model in the face of recent financial and economic disasters. Benson (1996) believes that limiting the core of workers in corporations, emphasising the greater number of peripheral workers and operating lean practices with smaller supplier firms is a labour strategy to offload the high costs of lifetime employment and the seniority wage system.One extreme US critic, Kroll (1993), claims that the ‘final, frantic climax of capitalism without cost’ ended with the collapse of the ‘bubble economy’ in 1986–90.

He also claims that the low-cost capital that accounted for Japan’s unique HRM systems could not be sustained after this period, and that Japanese companies will have to compete on Western terms – another slant on the convergence view. Other commentators believe that this view is a gross exaggeration. Kawakita (1997) claims that while Japanese companies have been adapting their strategies to changes in the economy, with for example increases in peripheral workers, this must be seen in context.

The high cost of the three-pillar system has been recognised by employers for a long time, but there is still a strong belief that companies do not lay off redundant workers as this would destroy the whole psychological basis of the high-trust work system that has been so painstakingly built up. Companies thus proceed with caution even in times of crisis, and resort to large-scale redundancies and restructuring only when no other course can be taken. Berggren and Nomura (1997) also believe that the system with adaptations is still resilient.

Free-market critics emphasise the obstructive forces posed by Japanese governments to free trade: the imposition of barriers on foreign imports, while Western economies accept Japanese goods, and also welcome Japanese investment. This lack of free trade reciprocation came under fire by US critics in the 1980s when Japan overtook the US lead in terms of growth.

  • Recent trends in Japanese HRM

There has been an awareness for some time of the negative influence of demographic trends and increased globalisation on the Japanese economy and labour market. The population is ageing, and this is having and will continue to have enormous implications for human resource policy and practice in Japanese companies. As Table 17.1 indicates, there is an older labour force and fewer young people entering the labour market.

This is putting, and will continue to put, a strain on the pensions system and the nenko system as remuneration rises with age. There is a shortage of senior positions. There has also been a significant increase in female labour participation, and new technology has replaced a considerable number of jobs. The rise of the service sector and relative decline of the older industries have also had an impact on the economy (Sano, 1993). Highly educated younger workers are less likely to stay with one company for long periods, thus creating greater fluidity in the labour markets.

The Japanese population and labour force

The Japanese population and labour force

There is also a significant and growing number of female workers who are seeking senior positions and a career structure. There has been a considerable increase of women in the expanding service sector such as banking, retailing, insurance, especially in the 25–29 age group. Women’s rising level of education, the drive for equal opportunities, and female take-up in employment have increased pressures for equal opportunities policies.

This was backed by equal opportunities legislation in 1985, and companies are now required to provide equal opportunities in recruitment, employment, work assignments and promotion. The law also forbids sexual discrimination with regard to training and education, employee welfare benefits, retirement age, resignations and dismissals. This is further supported by the provision of childcare leave.

The traditional internal labour markets of large Japanese corporations are at a turning point, and some characteristics that were considered unique to Japanese companies may be disappearing. The hierarchical structure of companies has been considerably flattened, and formerly bureaucratic organisations have become more flexible units, with project teams working with subsidiary and subcontracting companies.

The compensation system is also changing to cope with these influences. Shibata (2000) states that ‘generally it appears that employees’ age and seniority have become less important while their performance has become more influential in Japanese wage determination’. As Table indicates, Sano (1993) has systematised these changes. A solution to the problem of the ageing work force has been raising the pensionable age.

In 1985 the retirement age was raised to 60 years, with the possibility of its being raised to 65 years in the future. As we have already noted, there have been modifications to the seniority wage system. Many companies have now set an age where wages start decreasing, or at least increasing at a rate less than average. There have also been revisions to the retirement benefits policy – for example, reducing the proportion of salary that makes up the lump sum received on retirement.

Because there are not enough senior positions for the ‘baby boomer’ generation (those born after the Second World War and now aged 40 and over), many companies are beginning to emphasise ability and other factors besides age and service for promotion.

Changes in HRM patterns in large Japanese firms

Changes in HRM patterns in large Japanese firms

Many companies are requiring resignation from a senior position at a certain age to make room for younger managers. Some observers believe that, as a result of these changes, it will spell the end of the classic Japanese model based on the three pillars. Many authoritative writers (Berggren and Nomura, 1997; Sako and Sato, 1997; Kuwahara, 1998), however, while accepting that change is inevitable, stil believe that the ingredients and uniqueness of the Japanese system remain largely intact. As Sako (1997) states:

‘The principle of lifetime employment continues to be upheld by management because without it, the motivational basis of workers’ and unions’ cooperation would falter . . . but in order to maintain the lifetime employment principle, pressures are placed elsewhere in the system’.

While the employee relations system will evolve and change slowly, there is no sign that it is converging towards the US model.


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