“White Collar Exemption” and the danger to the LDP

Wages remain stagnant in Japan, and are even declining, even as the economy improves. TransPacificRadio’s Ken puts it well:

Certainly, Japan is in its longest period of post-war economic growth. That said, the current ‘boom,’ if it can be called that, has returned 2-3% annual gains in GDP. Further, the recovery has been fueled by capital expenditure. This means that corporations are the ones spending the money, not consumers. Consumer spending has remained flat in Japan, and it accounts for 50% of GDP.

abe looking serious t2007011229abe.jpgThere are those who have argued for interest rate increases by claiming that a rate hike would provide a better return on savings accounts. This, of course, is disingenuous. Current returns are next to nil; even doubling the prime rate from 0.25% to 0.50% would mean little in the way of returns on savings accounts. It would, however, mean substantial increases in terms of mortgages, business loans and automobile loans.

Plenty of experts have wondered why consumer spending has yet to increase in Japan. Yet, the reason seems obvious: wages declined by about $4,000 on average per worker from 1995-2005 and then increased by about $400 per worker over 2006. Given that two recent effective tax hikes have taken place, in January 2006 and January 2007, the average worker in Japan simply has less money.

The bigger questions would be: Why haven’t companies been able to increase wages during this period of supposed economy recovery?

PESEK has your answer, Ken:

Abe’s predecessor, Junichiro Koizumi, changed the tone in Tokyo, forcing the need to upgrade an antiquated economic model on change-resistant politicians. Yet Koizumi, who stepped down in September, was a transitional figure. It was always up to his successor to accelerate and broaden efforts to modernize the economy. So far, Abe is failing in this regard.

That can be seen partly in how households aren’t increasing consumption as you would expect by this stage in an expansion. If households had more confidence in the outlook, they might spend more. If consumers trusted politicians to increase GDP or shore up the national pension system, people might save less.

The thing is, foreigners are far more excited about Japan’s recovery than the average Japanese citizen. That’s a problem, considering that the only way for this revival to gain momentum is by increased household spending. Exports can only get Japan so far; domestic demand is a more important dynamic at the moment.

Without faster growth and fatter paychecks, Japan will be hard-pressed to restore fiscal sobriety. Abe is right to want to reduce Japan’s reliance on debt for growth, yet the government’s plans to increase consumption taxes may backfire. The same goes for central-bank policy makers anxious to raise rates. Doing so might damage Japan’s recovery.

Abe’s task is a tall one. A key reason Japan isn’t booming as hoped is that it, like other rich economies, is increasingly facing the dark side of globalization. High-cost nations are being pressured as rarely before by fast-growing developing ones. That competition is reducing the willingness of Japanese executives to boost wages.

Combating that dynamic is a long-term process. It includes increasing productivity among current workers and encouraging more start-up companies to create new jobs. The effort would have a greater chance of success — and its benefits would kick in sooner — if Abe were focused on it. What’s more, Abe needs to improve his public-support rating if he’s going to have clout to build on Japan’s successes of recent years.

PESEK’s somewhat grim recommendations to avoid “economic booms that the average citizen doesn’t benefit from” (my convoluted and liberal translation of “jikkan dekinai keiki”) — a long-term process of productivity boosting and job creation — will assuage the concerns of neither workers nor powerful, large corporations, who both want security, in the forms of stable career paths and guaranteed profits, respectively.

These competing interests are coming to blows in recent days, as the government’s plans to submit a bill that would create a “white collar exemption” — meaning office workers who earn 4 million yen or more (or 9 million depending on what the final bill looks like) annually could no longer be eligible for overtime — have come under intense criticism.

The measures are backed mainly by the Keidanren, Japan’s powerful business lobby. Keidanren chairman Fujio Mitarai (CEO of Canon), recently frankly admitted that international competition is behind his group’s desires to keep wages down in Japan:

”Japan is faced with structural shifts in the global economy and that makes enhancing Japanese companies’ competitive edge a top priority,” Fujio Mitarai, chairman of the Japan Business Federation, known as Nippon Keidanren, said in a speech at a two-day labor-management meeting that began in Tokyo.

”We are in no condition therefore to raise workers’ salaries across the board,” he said.

So what would the new law implement? Essentially, any worker making 4 million yen per year or more would be eligible for overtime-exempt status. This is an affront to your average white-collar worker, who expects overtime pay as a matter of course, especially since Japanese workers are traditionally expected to stay later than the nominal work hours. Some more detail:

The business community welcomed a recommendation late last year by a government panel to exclude certain white-collar employees from working hour limits. Many companies plan to exercise the exemption following the revision of the related labor laws.

The final report of a subcommittee of the Labor Policy Council, an advisory panel to the minister of health, labor and welfare, also calls for increasing overtime pay rates. Based on these recommendations, released on Dec. 27, the Welfare Ministry will submit revisions to the labor standards law as well as other measures to the Diet this year. With upper house elections slated for the summer, however, some members of the ruling coalition are expressing concerns over the potential impact.

Under current laws, working hours are limited to eight hours per day and 40 per week. The provision was designed to protect the health of factory workers. But working conditions have changed drastically amid globalization and the growth of knowledge-intensive industries. The original rules are no longer seen as appropriate in light of the increased proportion of white-collar workers.

The proposed exemption applies to those with annual remuneration exceeding a certain threshold, who would have discretion in adjusting their hours to accommodate work schedules, but would not be eligible for overtime pay. Businesses contend that such flexibility would bolster their competitiveness.

Another proponent of “white collar exemption” measures is the US business lobby, whose policy recommendations are reflected in formal bilateral economic negotiations between the US and Japanese governments. According to the Japanese 2006 Regulatory Reform Initiative Report (PDF):

The US government requested that the Japanese government, from the perspective of the skill development of laborers, introduce the white-collar exemption system in place of the present hourly labor system under the Labor Standards Law.

However, from what I can see, the proposed system gives companies too much leverage to make their employees exempt from overtime, at least compared to the US system. According to this site, you have to pass a certain number of legal hurdles to show that you’re either a manager, high-paid, or a professional such as a CPA or attorney. According to this report, the minimum threshold to make an employee exempt is around $23,000, but the system remains unresolved and controversial there as well.

Predictably, the opposition parties (who are backed by labor unions), and even some LDP and Komeito members, came out strongly against the new rules, forcing LDP Secretary General Hidenao Nakagawa to try and put the brakes on the laws with some comforting statements on popular talk shows. In the past few days, there’s been some confusion as to just what the LDP will do with this bill: yesterday, news reports indicated that Chief Cabinet Secretary Yasuhisa Shiozaki confirmed at a press conference that the kantei wants to submit the proposal in the upcoming Diet session, though at a higher salary threshold (9 million yen) than the original proposal, meaning that only about 20,000 200,000 people would be affected. It’s unclear how many people would have been affected under the original plan. But today, it looks like both the government and the LDP have agreed to postpone the decision as to whether to submit the bills in this session until after the budget for FY2007 is passed this spring. MLHW Hakuo Yanagisawa apparently exerted his influence after having a change of heart on the matter as supposed misunderstandings about the bill could pose a serious threat come election time. However, the government is likely to submit the bills late in the hopes of securing passing in an extraordinary Diet session in the fall.

As PESEK points out, there’s a need for balance so that the business community doesn’t unduly screw its employees while the Japanese public can see more opportunities on the horizon beyond stable employment and fat pension plans. In a more ideal situation, the government wouldn’t hurry to slash wages and could maybe even place wage reform in a larger context of localizing authority, deregulation for entrepeneurism, and “second chances” for people who switch jobs mid-career or lose their business. But no, the LDP blundered and instead tried to push through legislation that made it the target of criticism, and ended up wasting a lot of energy that could have gone to more constructive initiatives. Why would it do such a thing? ZAKZAK has an idea:

Why [submit white collar exemption legislation] now? There are those who cite the system as part of Abe’s “Second Challenge” initiative, but one Nagata-cho insider sees it this way:

“The current revision to the Labor Standards Law, including this system, comes as a result of a decision by the Koizumi cabinet and deliberation in the Ministry of Health, Labor, and Welfare’s Deliberative Council. Behind the momentum driving the implementation of this system under the Abe administration may be the securing of support in the [July] Upper House Election from big business, who is calling for this system to be implemented.

The Nippon Keidanren released a statement calling for the introduction of this system in June 2005, on the reasoning that it would lead to lower wages. Our source contends: “Since [the LDP] is always relying on the business interests, this time there was some bartering for support of the LDP in which [the party] accepted the lobby’s demands.”

… Votes gained, votes lost. Before they make their calculations, we’d like to see the cabinet and LDP leadership break a sweat “making efforts to gain the public’s understanding” as they keep repeating…

It’s interesting that this bill has been successfully put to rest (at least for the time being) while the government went ahead and passed legislation last year that hastily revised two venerable postwar institutions: education and the Defense Agency (now a ministry). While these two initiatives had a measure of public support, they were passed in the face of an atmosphere of criticism over faked town meetings. So why wasn’t Abe afraid of public opinion over education reform but suddenly he’s worried about the election when it comes to cutting overtime? I believe the answer lies in the fact that Komeito, the junior coalition partner backed by Soka Gakkai followers, pulled its support had a lot to do with it.

In the past, measures like these would have trouble getting passed because the longtime opposition Socialists would not let it happen, threatening to walk out and cause the LDP to lose face lest the two parties could reach a deal behind closed doors. However, current political conditions give the ruling coalition a freer hand to push through legislation: the current opposition party is taking a much different approach and is willing to work with the LDP when it agrees with what it’s doing, and the coalition partner Komeito provides massive electoral support that can insulate the LDP from voter backlash. This has led at least one observer (former LDP man Katsuhiko Shirakawa) to worry about the Diet’s ability to reflect public opinion in the policymaking process:

An observation on the LDP-Komeito coalition

Recently, it seems as if there are more people who take issue with the Komeito’s participation in the government/the LDP-Komeito coalition. That’s great, but I think the motivation for the analysis and the perspectives are a bit narrow and shallow. The significance and impact of the LDP-Komeito coalition are even more grave than that, and have progressed to the point where one cannot talk about Japan’s political problems without bringing up the LDP-Komeito issue.

I first took issue with the LDP-Komeito coalition and fought it bitterly in the 2000 Lower House election, and then in the Upper House election the following year. It’s already been about 7 years. In the first election after the implementation of single-memeber electoral districts in 1996, the Komeito’s participation in the government was a major point of contention. Kotaro Tawara‘s essay “The Shinshinto is the Party of Soka Gakkai” was something like a bible for LDP candidates. LDP leadership and experts also mentioned this issue. The public, too, honestly felt negative toward the Komeito’s participation in the government. As a result, the LDP defeated the Shinshinto despite the media’s predictions.

The Komeito first participated in the government in October 1999, when Keizo Obuchi took office. At that time, they participated in a coalition together with the Liberal Party led by Ichiro Ozawa. The LDP-Liberal-Komeito coalition became the LDP-Conservative-Liberal-Komeito coalition, and then the LDP-Komeito coalition after the collapse of the Conservative party. There were some who asserted that Shinshinto may have been the party of Soka Gakkai, but since the LDP is so large, it won’t become Soka Gakkai’s party even if it forms a coalition with it. These are people who in the past virulently accused the Shinshinto of being the party of Soka Gakkai. However, in these past 8 year the firm establishment of the LDP-Komeito coalition has in fact made the LDP the Soka Gakkai party. This it the natural result of the Komeito participating in the government and even campaigning in elections together. The LDP fundamentally changed by forming a coalition with the Komeito. This is easily understood if you analyze the attributes and mechanisms of political parties.

The LDP was the party in government for many years. In order to be the party in power, and because they were the party in power, the LDP had supporters and groups of supporters in a variety of circles and classes. It’s no understatement to say that it covered nearly every area in Japan. The labor unions did not, as a group, directly support the LDP, but there were a lot of union members who supported the LDP. I quite often heard of ironic situations where in surveys of what political parties union members support, the LDP was the party that was supported most. Therefore, the LDP was a party supported by not everyone in the country, but something close to that. It was not necessarily a mistake to call the LDP the “people’s party.” In exchange for that, the LDP was forced to adopt policies that compromised opposing interests between various classes and groups. There were intraparty factions who made contrary statements [to LDP policy] and even the LDP president had nothing like absolute power. Despite the dual titles of prime minister and LDP president, the prime minister had to manage his administration and policymaking while “walking the tightrope.”

Unlike the old Socialist Party, which had the General Council of Trade Unions, and the Komeito, which had Soka Gakkai, the LDP had no one support base within its various support bases that had overwhelming power. At best, the Special Postmasters Association and the Japan Medical Association could secure a few needed percentage points to win an election. If you compare it to a company, the LDP president was like a company president supported by a multitude of minority shareholders with less than 1% of shares. In that case, if you don’t lend your ears to the shareholders then it will produce an impediment in the company’s management. With the LDP-Komeito coalition, a major shareholder holding anywhere from 10-20% of shares came onto the scene. The president can now secure his position as long as he does not upset the mood of the major shareholder. He no longer has to walk a tightrope for the minor shareholders (the public). Both former PM Koizumi and current PM Abe enjoy this “happy president” status. As a result, the issue is whether the public has been made happy as well. It is extremely difficult for the minor shareholders to gather together and fight against the major shareholder (Soka Gakkai).

In other words, the LDP, despite currently having a large number of seats in the Diet, essentially needs the Komeito’s permission to move forward if it wants to continue counting on very reliable electoral support. I’m not sure exactly why the Komeito was against the labor rules, but it’s likely that neither side wanted to give the opposition DPJ something so juicy to chew on, especially when Diet Affairs Chief Naoto Kan has vowed to get tough in this session to make the th Diet a “economic disparity correction Diet.” Also, the coalition will may want to pick its battles, such as when the it attempts to force through public referendum legislation to prepare for rewriting the country’s constitution, something the LDP and Komeito will likely agree on.

6 thoughts on ““White Collar Exemption” and the danger to the LDP”

  1. A lot of this talk about consumer spending in Japan (or the lack of consumer spending) rests on comparisons with other G8 nations like the USA, Canada, England, etc. All of these economies have great levels of consumer spending but they also have a big black mark – credit card debt. In New Zealand, an advanced economy for which I have seen statistics, consumers are spending about $1.50 for every dollar earned. How can Japan possibly compete with what some people are calling “insane” consumer spending in other developed economies? Why would Japanese consumers want to compete in the debt race?

    Low interest rates may be a bad thing for savings growth but they also mean that mortgages are not quite so bruising.

    Let’s also not forget that while wages in Japan dropped, there was also a general deflation – things became a lot cheaper. Chinese production has also opened up a variety of avenues for cheap good for Japanese consumers – 100 yen shops like the ones that we see now would have been a dream during the bubble.

    I think that things have gotten qualitatively better for Japanese consumers over the past decade.

  2. Adamu, I’m commenting before I finished reading, which is really, really dangerous, but I really, really have to get some work done before getting to bed, so I really, really don’t have enough time…haha.

    As far as the overtime exemption goes: If it were set at the 9 million yen level, this would put Japan in line with other OECD nations. The spirit of this law is to spare corporations the burden of having to pay overtime to top executives, who often put in 50-60 hours a week and would be hurting the bottom line if they had to paid overtime. This is especially true at startups, which the government is at least giving lip service to supporting. Of course, executives at that level often get bonused at apposite levels, which renders the overtime unnecessary.

    That said, I agree with you that if the law were to come in at the 4 million yen level that it would be an affront to the white collar workers in the 28 year old and above range, who are starting to move out of the bottom rung of ‘analyst’ position down in Toranomon. And so on…(ok, I read more, as you point out, it seems as though the law as stand would be applied in Japan in a way that would not exactly be to the benefit of workers…not much of a surprise.)

    But, what I really wanted to get at. Thanks for bringing up the Pesek article. I talked about that article a bit on the Japan Economy News blog. I do agree with you assessment of what he has to say: it’s grim, because if it’s true, it’s doubtful that factors will sway towards something that workers find beneficial.

    However, I don’t find his assessment to be an adequate blanket explanation. Certainly, it is true at some firms, but one has to wonder if it is merely tatemae, or a convenient explanation for simply holding wages back. Let’s face it: many companies, and many that are not globally known, have just finished the painful process of restructuring, and increasing pay packets is dangerous when they cite a possible downturn in the US economy as their greatest threat.

    At the same time, we will recall that corporate bonuses reached an all-time high in the last cycle, which shows that some cash is in fact flowing back to workers’ pockets. We should also note that only seishain (salaried workers) will receive these bonuses and that they make up a smaller percentage of the overall workforce versus ten years ago. Companies are going with more and more outsourcing and cheaper keiyakushain (contract or part-time workers), who are cheaper than their seishain counterparts. Of course, they feel less loyalty to the kaisha.

    The big test will be to see how the retiring group of baby boomers are replaced in the coming five years. Will companies hire seishain to take over for them, or will they continue to trim cost in HR?

  3. White-collar overtime is a pretty useless concept in Japan, because all full-timers work overtime regardless of whether they’re being paid for it. It’s partly a bandwagon effect (nobody wants to be the first to go home) and partly a result of inefficient work practices (people need the extra time to actually get things done because they do everything so slowly).

    I would say that the only employees who actually cite the overtime provisions of the Labor Standards Act are people who the company would like to fire, if it could.

  4. Everyone does overtime, sure. But a fairly high proportion actually does request reimbursement for at least some of that overtime, I saw a statistic once and it was something like one-half or one-third. I wish I remembered where that was written.

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