“For the first time, economics is coming to Japan.

What is economics? Economics is the allocation of scarce resources. In Japan until 1990, there
were never any real scarcities. Labor force was growing, land prices were going up, economy was
growing at 5 to 7 percent on a nominal basis. That has come to an end, and as a result Japan is
forced to restructure and deregulate its entire economic system. (Koll. J, 2005).

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1.0 Introduction:

To sum-up the Japanese success stories. Following the oil crises of 1973 and 1979 the Japanese
industries came out of nowhere to take the world market by storm. At the time, much of Japan's
success in penetrating the world markets was credited to the actions of the Japanese government's.
(Porter, Takeuchi, Hirotaka, Sakakibara and Markio, 2002).

The Japanese economy formally pursued an agenda of broad economic deregulation, a specific
package which measures for financial markets, and administrative reforms which has profound
implication on their traditional model to a new economic realities, from result base old economy
model to rules based de-personalized market led economy such as transformation of MITI,
liberalization of postal saving, lifetime employment and the seniority system are no longer general
rules, keiretsu are dissolving themselves, especially in the automobile and electronics industries
and deregulation of banking system because of the internationalization of financial markets. Yet
management gurus argued that moving towards “Anglo American” model is debatable in highly
value oriented (Ware Ware Nippon-jin) and every one else gaijin social order society. However
Japanese are also realistic and well aware of industrial trends from rest of the world.

This assignment will lead us the current debates and issues of Japan cultural economy lagging
behind and in general and until what extent Japan will accept “Anglo American” capitalism model,
or is it rationalization of Japanese capitalism, an uneven transition or more of hybrid system.

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2.0 Reorientation of Japanese Business system.

2.1 Rationale.

In democracies, reforms do not happen over night, however they cannot be ordered from the top.
Opposition needs to be won over by means of persuasion and vested interests are also taken into
account. In Japan, this is particularly so within the ruling party itself. The Koizumi reforms can
hardly be judged on the basis of one year. Just two comparisons: the "Reagan revolution" of US
budget policy was shifted by Congress on the reverse track of a Superkeynesian deficit before
balance was attained a decade later by the Clinton administration. The privatization of the German
Post took 15 years. (Drucker, 1993).

2.2 Keiretsu System.

It is hard to deny that unique economic institutions and policies such as the keiretsu, industrial
policy, and cooperative employer-employee relations contributed to Japanese economic
development during the era of catching up with the West. Keiretsu as manifestations of a Japanese
cultural economy “in which choices are constrained, behavior is rooted, and institutions are
grounded”, causing a bubble economy and later burst, given them an every reason to be trapped
and later the termed coined as “iron triangle” emerged, because of keisetsu vested interests.
However, facing international pressure and globalization, the mood has been changed. By 2005,
more than sixty major companies including Sony, Toyota, Toshiba, Hitachi and Nomura Holdings
had adopted the American-type system. Even among companies that opted for the second
alternative, there seems to be some tendency toward hiring a greater number of gaijin outsiders.
For example Renault, French company buying 37% of Japan troubled Nissan, at that time
company’s president was Yoshikazu Hanawa but it soon became obvious that Carlos Ghosn,
become chief operating officer runs the show. However Schmiegelow argued that, although the
definition of independency of outside directors and transparency is not as rigorous as in Sarbanes-
Oxley Act of 2002 in the U.S. (Schmiegelow, 2003).

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2.3 Deregulation of Japanese Economy.

Cellular telephones boomed in Japan after substantial deregulation occurred in 1998, with the
number of cellular telephone subscribers rising explosively from 2.1 million to 60 million in the
seven years from 1993 to 2000. (Lincoln, 2001). Those dramatic changes in the context of a
largely stagnant economy certainly suggest that economic vitality was not entirely lost. Further,
with regard to bilateral relations, Japan is strengthening the efforts to create innovative frameworks
that complement the multilateral trade system, such as Japan’s recently announced Free Trade
agreement with Singapore. Moreover, the triangular cooperation of the government, industry and
the bureaucracy which symbolized Japan’s economic power has already become a thing of the
past. Against this background, efforts are now being made to revamp the system of Japanese
capitalism.

MITI once rigid institution and plays pivtol role in Japanese economy for 3 decades in general.
MITI is undergoing some radical changes, for example the world market for software is large, and
growing fast. It is estimated that it will reach $1000B by the turn of this century. MITI, has
attempted, through a series of centrally funded programmes, to establish Japan as an information
society. Although their reason for doing so is undoubtedly economic, their objectives are often
expressed in terms of long-term social aims, a technique used by most global organizations to
provide a framework for their corporate strategies. Software engineering is an important part of
MITI’s strategy.

Japan has about 4000 software development companies in Tokyo alone, the sign of entrepreneurial
ship. Further, the industry is growing rapidly, it is expected that the turnover of the Japanese
software industry in 2002 was estimated to be ¥2.3 trillion (Ito, 2003). However, the domestic
market was the reason for software development growth, the major obstacle that MITI will face is
penetrating international markets, because of language barrier of Japanese people are generally not
multi lingual compare to India. Nevertheless, MITI forecasts that, although it will cost 1.6 million

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jobs but IT will create 2.5 million new jobs in modern Japan in the next ten years. (Whitehill,
2001)
However, such examples do not offset the harsh reality of a stagnant economy and the need for
broader reform. The fact is, Japan does not have enough examples of such successes to drive the
economy back to health and needs further systemic changes to provide more receptive
environment for them.
2.4 Japan Bank’s and Postal Saving.

Ministry of Finance strictly controlled the banking industry through a web of regulations and
through formal, or informal, directives control over the financial system, by directing Japanese
banks to provide artificially low interest rates to selected firms falls in vertical keiretsu and
frequently bailout the loans to overextended enterprises well beyond the company’s capacity to
repay and often beyond their net worth. This vicious cycle was going on until economic recession
hit into the heart of Japanese economy. But now, staying afloat in global era the Japanese financial
industry has been undergoing a large-scale consolidation. Therefore, through management
integration directives are diligently moving to take advantage of economies of scale and scope,
through improve cost competitiveness, price leadership, and strengthen capital to withstand
diverse risks and the latter to expand revenue opportunities by cross-selling and achieve stable
management through business diversification. (Nishikawa, 2001).

The banking system are undertaking a paradigm shift from the conventional banking business of
taking deposits and making loans to becoming a financial service industry. Further, the banks are
also applying it self to further innovate and shifting to bold, unique business models based on
customers' need. Moreover, there are indications, that banks will stop flooding pumping excessive
liquidity with low interest rates to the companies where the loan is not performing well, a policy
known as "quantitative formulization", introduced in 2000, clearly stated that non performing
loans and bad debts to company must be re-evaluated, (fig-1) and forcing them to change their
conventional model. (Economist, 2005).
Fig-1 NPL status of Japanese Banks (Percentage of Lending)

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Source: Bank of Japan, (2003), ‘NPL status of Japanese banks’. Taken from, Posen A, S, (2004), ‘What Went Right in
Japan: Global Economic Prospents’, Institute for International Economics, Washington DC.

Merger between Dai-Ichi-Kangyo Bank (DKB) Fuji Bank and Industrial Bank of Japan. The new
bank has 30% of the loan in the market, with ¥9.6 trillion worth of cross held share. Furthermore,
the new bank also becomes the biggest investor in Japan’s stock market, with a stake of 10% in
103 listed companies (Dugger, 2003). The sign of dispersed ownership. In addition, this new
meger is an indication of the potential for change. The bank is starting to treat these shareholdings
transparently from their investment, the old keiretsu protection will fall away from its borrowers.
However, According to Kathy matsui of Goldman Sachs, the new bank also have to face ongoing
political pressure for the rollover of loans to politically favored but bankrupt enterprises, in hopes
of preserving jobs, which stood 5.3% comparable to 5.6% at post war scenario, and the near total
erosion of bank capital between loan and equity losses, created incentives for the problem to keep
growing, this is perhaps not too surprising. Moreover, author argues that, unemployment is not just
an indicator of immediate economic problems, it is a byproduct of the transition to a market led
economy. (Hiroshi, 2002).

Japan's postal savings system, a big financier of poorly allocated public spending where the money
was often spent on politically motivated ventures. In addition, much of the money has gone into
socially targeted investment projects the government deemed desirable. It is also had been claimed,
that the money has gone to build roads to nowhere and retirement communities out in the hills
where no elderly people want to live and much of this investment is not transparent. Nobody really
knows in the light of day where the money is and whether it went to the right place. However,
recent incremental structural change is already underway such as Japan’s massive postal savings
system is going into private hands, which holds savings and insurance assets valued at $3 trillion
for 85% of Japan's population, by freeing money up for more private-sector investment, savers

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could reap better returns and businesses are likely to find more available capital for expansion and
other financing needs. Moreover, some 350,000 or 35% employees are working in postal saving
agency, liberalization of postal saving is significant move in transition process. (Mitchell, 2006).
Privatization will bring historic change to the system, which for more than 100 years collected
savings door-to-door in Japan's crowded cities and rural villages.

3.0 Life time employment.

To give careful assessment of the social and economic implications of Japanese lifetime
employment and seniority system is beyond the scope of this assignment. However, this
assignment underscores the importance and understanding the dynamic changes system which
have both merits and de-merits.

Lifetime employment traced its origins to corporate welfarism that emerged during the Interwar
period (Moriguchi 2000). In addition lifetime employment is a product of dynamic interactions
among labor, management, and government in response to changing environment, which was
further reinforced by the formation of labor laws, state welfare system, and social norms contrast
to American business practices (Appendix-1). As a result, today’s Japanese lifetime employment
is deeply embedded into complementary practices and institutions, ensuing its resilience and
stability. According to author analysis, the shift from spot labor markets to long-term employment
was initially driven by efficiency considerations, whereby achieving greater productivity through
higher human capital, it produced benefits to management in the form of profits and greater
employment security. (Hiroshi, 2002). Moreover, following the most violent labor disputes in
Japanese history took place between 1949 and 1954, involving major companies, such as Toshiba,
Hitachi, Toyota, and Nissan, where employers learned that it could provoke costly labor disputes,
therefore, employers with collective agreement bring in employment of the life time. (Kazuo,
1992). Moreover, from employee view point (fig-2) show the top five reasons not to switch jobs.

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 Fig-2: Top five reasons why workers don’t change jobs.

Source: Recruit Works Institute, (2001), ‘Working Person Survey 2000’ The Greater Tokyo Area.

Beck and Beck (1994) predicted that the economic slowdown in the 1990s, tied by the
globalization of financial markets would change managerial practice. Mixture of foreign capital
and necessity of rationalization, arguably, would promote American-style personnel practices, such
as layoffs, performance pay, in addition life time employment system undermines the precarious
equilibrium between employers to employees and also this system has inclined companies
operating fixed costs and has now become the source of great difficulty in the business
community. To respond this current ailing issue, Japanese management and with their innovation
in HRM policies, they are adjusting their employment system in all major companies, such as
Toyota, Sony, Toshiba. (fig-3), show the general method adopted by company’s adjustment
policies.
Fig-3 Employment Adjustment

Source: Ministry of Health, Labour and Welfare (2000), ‘Survey on Labour Economy Trend’.
0
1
Some major companies like Sony, Toyota have gone through large-scale restructuring by reducing
the number of their permanent employees without necessarily breaking the long-term employment
commitment by using of transfers of their employees to their subsidiaries and related firms, hiring
freeze/cut, as well as early retirement, in addition between 1995 and 2005, the number of regular
employees decreased by 4.1 million, while temporary employees in various categories increased
by 6.5 million. It seems fair to say that many Japanese firms still commit to the permanent
employment system, but the core has shrunk (Aoki, 2006). However, in these firms the sustenance
of the permanent employment system is still regarded as important, even kaizen (work

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improvement) movement has been reformed with more emphasis on the active role of the local
leadership. Although it has been modified in terms of promotion schemes and reward systems with
a certain degree of competitive elements. However, Drucker argues that the employee's lifetime
commitment to one employer and one place of employment often misleadingly, called "lifetime
employment", this may equally turn into a serious threat to social harmony, addressing this,
companies to preventing social desolation by using economic measures and to adopt the system to
shield the social order of the “old Japan" while building a radically different "new Japan.",
(Drucker, 1993). Japan’s corporate sector is in the process of an earnest search for a model of its
own, adaptable to the evolving environment.

4.0 Seniority System.

The system of seniority wages was originally based on a great value placed on experience and
skills and on the assumption that living expenses would be greater for more senior employees, and
it became firmly established and widespread in the period of sharp inflation. However, this
structure is being challenged by younger managers, including, Japanese transnational firms and
increasing numbers of shinjinrui, the new breed of young people, reject their traditional system of
seniority wage and promotion system. Furthermore, to establish this, a survey conducted by Nihon
Keizai Shimbun (Nikkei), Japan's business newspaper, found that 80% of top managers at 450
major Japanese corporations wanted the seniority promotion system abolished.

'Japanese management philosophy cannot just continue as it has for the past 40 years,' says Shotaro
Watanabe, vice-president of Kao Corp, Japan's leading maker of detergents, toiletries and personal
care products. Takuma Yamamoto, chairman of computer maker Fujitsu, suggests that the
seniority promotion system has actually been losing ground for several years. As in the past,
technological innovation today is changing the Japanese style of management. The focus of
education and training within the company is shifting from the newly recruited to the middle and
higher level layer of employees to ensure their adaptation to new technology. The seniority wage
system has been combined with a system of wages based on job function, which itself is
undergoing revisions amid rapidly progressing technological innovations. On other hand , life time
employment and seniority system are interrelated to each other, where to eliminate this whole

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system need time to change, there would be some adjustment in Japanese management system but
it cannot change the whole system with in 5 to 10 years because of deeply embedded structure .

5.0 Japan in transition.

One of the most important problems with Japan is that the risk return mechanism, which is the core
of a good market, is not functioning. Furthermore, in Japan there is a social stigma against starting
new businesses, because it is quite unintelligent to start a new business if it is a high risk/low
return venture, while keiertsu system are deeply involved in non-transparent relations between
government officials and the private sector, provided ample room for bad decisions and incestuous
relationships to go largely undetected until they had resulted in major damage to the economy.

Recent years the Japanese management practice is reorienting it self, for example in Toyota, one of
major Keiretsu group, (Appendix-1), life time employment is doubtful, Toyota call centers and
customer service center, hiring the employees with contractual agreement and selections. In
addition, Aflac US base insurance company controlled 85% of supplemental insurance market in
Japan, forming an alliance with Dai-ichi Mutual Life. Japan’s second largest life insurance
company in terms of assets, clearly shows the further pursuit of sweeping reforms with the
ultimate goal being that markets should be free, fair and global. (Beauchamp & Bowie, 2001).

U.S. player such as E*Trade Group Inc. and Charles Schwab Corp are setting up online trading
services, Mazda Motor Corp engine plant in Hiroshima, where women are finally allowed to work
the higher-paying night shifts, Tokyo's Shibuya district, hotspot for Internet startups companies.
Foreign investment is running at an annualized rate of $125 billion. In addition, the huge influx of
overseas portfolio investment put 15% market capitalization in Tokyo Stock Exchange and $3.7
trillion in foreign hands compares to 5% a decade ago and now surpasses the holdings even of
Japanese banks. (Bermner, et. al, 2001). Including, more competition in the non tradable sectors,
such as telecommunications, airlines, and distribution, will enhance productivity gains and lead to
lower prices. Thus, both industries and consumers will benefit from structural reform.
Manufacturing sectors may slow down if the costs of production are reduced. However, the
transition to a deregulated environment will no doubt be difficult for many sectors. Structural
reforms are needed not only in industrial organization but also in employment practices. Careful
implementation of the necessary changes should provide new engines for growth without causing
too much friction in Japan’s economy.

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6.0 Conclusion

Let us assume that Japan succeeds in these reforms and Japanese capitalism is in fact transformed,
but various aspects of the economic system which are influenced by Japan’s particular culture and
social framework will still remain. This will hold true on both macro-economic and micro-
economic levels. That is to say that Japan’s capitalistic system may change into hybrid system, but
not same as ‘Anglo America’ model, the reason being that differences in history, culture, and
social framework will not disappear.

Japanese are pragmatic people, producing a dramatic and successful transformation of their nation
into one of the leading industrial powers of the world. Furthermore, even economy is going
through pain staking transition process, deregulation and aligning their system to achieve the
economies of scale in a globalization. Japan can afford to do so, because it is still fundamentally
very strong economy by any means of western standard. It is still the second largest economy after
the US with a per capita income, the largest creditor country of the world, for example,
contributing $80 billion to aid the Asian economies. (Nishikawa, 2001). The country with the
greatest and highest pool of household savings of the world ($3 trillion), a country boasting the
Schumpeterian quality leading firms that set global benchmarks in their respective sectors, a
technology location where, wise American and European firms consider it necessary to be present
to preserve their own competitiveness.

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