The Economist has its latest update on the economic situation in Japan. After outlining the dire situation of plunging exports and domestic consumer sentiment, the writer drops this bombshell:
There is cause to temper the pessimism. Households still have their savings. And bank lending to companies is on the rise, though a good chunk of this is taking over from credit once supplied by capital markets, which have dried up.
Crucially, adjustments are happening swiftly in areas that beleaguered companies tackled only slowly during the last slump, such as bloated workforces and excessive capacity. Bankruptcies of “zombie” companies long kept alive on cheap credit and an undervalued currency have soared now that credit is harder to get and the yen has risen to a fairer valuation on a trade-weighted basis. And at the end of a decade in which much more use was made of contract and temporary workers, companies are now laying these off fast. In order to reduce inventories, production is also being slashed. This marks a new flexibility in Japan’s economy.
Unemployment, now 3.9%, may head back towards the post-bubble high of 5.5%. At the same time, the structure of the labour force may lessen the pain. As the economy recovered, many companies asked workers from Japan’s huge generation of baby-boomers to stay on past retirement age. Plenty of these will now simply retire with their pensions. Swift adjustments to workforces and inventories mean that Japan may recover sooner than other rich economies.
Really? Is keeping a third of the population in employment limbo really that much of a boost? Surely, I don’t deny that unpleasant realities can prove positive for economic growth and stability, but I just have never senn anyone actually defend the dual employment system.
Among many including myself, it is almost taken for granted that Japan’s dual employment system is unfair and exploitative. And even among those who disagree, I have seen near universal dissatisfaction with the status quo.
In the postwar era, one of the defining aspects of Japan’s economy was lifetime employment, in which most employees at the core companies were given job security in exchange for loyalty and limited input into their career destinies. This system was instrumental in Japan’s development as it provided a highly motivated, highly skilled workforce and contributed to developing Japan’s broad middle class. While never the sole driver of Japanese development, it did form a core component of the “full mobilization” of Japanese society to achieve growth and development.
But the devastation of Japan’s “lost decade” in the 1990s meant that companies could no longer afford to fund generous seniority-based pay scales. In response, the Japanese government began instituting a series of reforms that expanded employers’ options to employ workers under different schemes, including fixed-term contracts (keiyaku shain) and temporary employment (haken shain). Today, today non-regular employees make up around a third of Japan’s workforce.
With 2/3 of workers given vastly better treatment for often the same work and experience, many have long called for reforms that would equalize the situation. The dual system persists, however, due to resistance from the big labor unions who instead claim that the temp and contract workers should be brought into the regular employee system.
As I mentioned, many such as the OECD and writer Masafumi Tsujihiro see this system as highly problematic in terms of basic fairness. But unlike the labor unions, they call for the elimination of the excessive protection of regular employees, which is backed up by court decisions that make the hurdles for firing employees quite high.
Just off the top of my head, I would think that the US, with its reputation for having an enormous capacity to make “swift adjustments to workforces and inventories,” would beat Japan out of recession, all things equal. So readers, help me out here — are haken really a blessing in disguise?