Throughout the 1980s, Western observers of Japan were nothing but dazzled by the country’s rapid yet unfaltering economic growth. In fact, the rise of Japanese industry was perceived as a threat to both the United States and Western Europe. The angry reactions that followed the Japanese acquisition of the Rockefeller Centre in 1989 are now difficult to comprehend. As the Japanese bubble burst the same year, Western fears for Japanese economic dominance were to be proven unfounded. As the stock market in Japan tumbled, Japanese companies were forced to withdraw capital from abroad, a process that soon brought the Rockefeller Centre back in American hands. Notwithstanding, until the burst of the bubble, the Japanese economy was second to none in terms of its performance, of which much credit has been attributed to Japan’s unique human resource management system. The latter, believed to be more efficient than its Western counterparts, was studied and copied throughout the 1980s. Interest in Japan quickly evaporated, however, as the recession experienced during the 1990s showed that even Japan’s human resource management system is not without flaws. More than ten years have passed since the burst of the bubble, yet Japan is still caught in a severe recession. Lack of financial deregulation and incompetent LDP politicians receive much of the blame for the poor economic performance, yet the previously revered Japanese HR system has also become the subject of severe scrutiny.

This paper will attempt to answer if the once admired Japanese HR-system still is applicable in the current economic environment, this through a review of aspects of the system that have traditionally been considered its major strengths. In particular, the lifetime employment system will be studied in great detail. It will be shown that several of the key features of the Japanese HR-System are not, as previously believed, uniquely Japanese in the sense that they are interconnected with the country’s culture and traditions. Additionally, this paper will argue that Japan currently is not doing enough to adjust to a new economic reality and the process of globalisation.

A 1993 business review from Keio University, one of Japan’s leading educational institutions, poked fun at Westerners for their apparent incapability of comprehending the reasons for the high efficiency of Japanese management. An accepted notion in the West has been that Japan’s success was founded on the country’s peculiarity, but the Keio report jokingly dispels the notion that the Japanese consumption of miso soup can, in any way, explain the concept of Japanese efficiency. The study does correctly emphasise that only a part of the Japanese HR system relies on social-cultural factors that may be difficult to transfer to a foreign environment (Keio 1993). Currently, the economic picture is similar to a mirror image of the situation ten years ago, when American business leaders made frequent visits to Japan to explore the secrets of Japanese business. While it is now generally accepted that Japan has a lot to learn from the American success stories of the 90s, there is disagreement on which parts of the American system are transferable to Japan.

The system of permanent employment, better known as The Lifetime Employment System, is one of the best known features of the Japanese HR-system. The Japanese Ministry of Labour defines lifetime employment as the "practice of companies to hire their core employees primarily from among new graduates and other young persons, to plan their continual training and development, to continue their employment within the company group over a long period of time, and not to discharge or lay off such employees except in very unusual circumstances" (Ornatowski:2). It is important to emphasise that this definition only refers to core workers, thereby excluding temporary workers, subcontractors, part-timers, seasonal workers and dispatched employees. Additionally, only larger companies have been able to offer lifetime employment arrangements. Of the workers that are offered lifetime employment, 66.2 percent of university graduate white-collar workers stay with the company until the age of 50, while 33.6 percent stay for another ten years. Lifetime employment, therefore, usually lasts until age 55 or 60, when workers often end up being transferred to a subsidiary (Ornatowski 1998).

Due to various misconceptions, it was long believed that the system was an extension of feudal principles that dominated pre-industrial Japan. It is now clear that the system was not conceived before the end of World War I. Therefore, the system of lifetime employment does not have a basis in Japanese history (Richardson 1981). As a consequence, nor is it a social-cultural factor unique to Japan. As the Japanese economy began slowing in the early 90s, Japanese companies started finding it increasingly difficult to provide the job security and the various other benefits that traditionally have characterised the lifetime employment system. At the time when the economy was booming, the system was considered to be of great benefit to Japanese companies. The outcomes of the system, as for instance a high labour retention rate, proved valuable in a high growth economy. Currently, the system of lifetime employment is deemed to be one of the forces hindering Japan in pulling itself out of the recession. Estimates show that about two million jobs have to be cut to make Japanese companies profitable. A restructuring of this scope would cause the unemployment rate to rise to 8 percent, from a current modern history record of around 5 percent (Hirakubo 2000). Still, the importance of the lifetime employment system has often been exaggerated, and reforms might actually free resources that can create an economic revival.

Matsushita, a producer of electronics and electric products, is considered one of Japan’s most conservative companies. Yet, even Matsushita is being forced to offer its employees more flexibility. Like most Japanese firms, the company still offers social services such as housing, recreation and welfare, thereby making workers increasingly dependent on the company (Economist 1999). Christopher B. Meek (1999:4), professor at Brigham Young University, argues that "Dependence is cultivated not only by indulgent parental behaviour, but also through the use of socialisation techniques and disciplinary methods." The author points to surveys that consistently show that Japanese workers generally are less satisfied than their Western counterparts, and that the former appear to prefer long-term security to interesting work. The relationship between employee and employer is, in the words of Meek (1999:6); "A social contract, an emotionally powerful moral agreement, bound by filial piety and absolute loyalty in return for an unbreakable pledge for support." Consequently, if one is to comprehend the reasoning behind the lifetime employment system and the social services offered by Matsushita, an understanding of the both the Japanese economy and mindset has to be reached.

Japanese companies have traditionally been run to serve the needs of their workers, not those of the stockholders. The average net profit margin on the Tokyo Stock Exchange is a mere 2 percent, while the average in the U.S. is 8 percent. Thus, it is often argued that Japanese companies possess what is called "long term thinking". Decisions are not made in respect to short-term profit opportunities, but with regards to the future security of the company’s workers. Profit making is essential also to Japanese companies, especially to high technology companies that need capital for R&D expenditure. The ideal goal is that both workers and managers should be able identify with the company, the latter generally being referred to as "our company." To facilitate such an atmosphere, Japanese companies are generally built up in a much more egalitarian fashion than their counterparts in the West. Managers and workers eat in the same cafeteria, and the wage disparity is relatively small. The Keio Business Review simply states that "(the) Japanese prefer long term, rather than short relationships", a fact that has also had a vital impact on the training process of employees. Since Japanese companies traditionally have been in a position to expect their employees to stay with the firm for life, employees receive all relevant training within the company. At new technologies developed very rapidly, external education and training institutions were unable to provide the skill set demanded by the market, and Japanese companies were therefore forced to train their employees internally. It has been argued that this partially explains why Japanese companies are equipped with large numbers of industrial robots relative to their Western counterparts (Nakamura 1994). To encourage workers to adhere to the system of lifetime employment, Japanese companies have implemented salary structures that discourage workers from changing jobs.

As American workers, Japanese employees are compensated with regular monthly earnings, yet also receive yearly bonuses. The latter are usually equal to four to six months worth of regular earnings, and are meant to reflect general economic conditions and the company’s performance (Nakamura 1994). Workers are, furthermore, given the equivalent of two year’s worth of wages when retiring, a system that is supported by the Japanese tax system. The latter does, first of all, favour large lump-sum payments at the time of mandatory retirement. Funds set aside to cover retirement payments are, additionally, exempt from corporate income taxes. Finally, financially troubled companies that offer not to lay off workers are, more often than not, awarded subsidies by the government (Hirakubo 2000). Still, the inflexibility of the system is forcing many companies to try new ways, and Matsushita is no exception.

A few years ago, Matsushita rebuilt its company dormitories to satisfy freshmen workers. Recent graduates, being more used to individual freedom than earlier generations that often stayed four to a room, are now provided single rooms. In addition, employees can, for the first time ever, choose not to live in company accommodations. New recruits entering Matsushita after 1998 have been offered alternatives to the traditional package, which includes benefits such as free company accommodations, free social events and various subsidised services. Almost fifty percent of the recently incoming Matsushita employees have chosen new alternative compensation packages involving higher salaries in compensation for fewer benefits. Matsushita still believes in the system of lifetime employment, but is to a larger extent than before willing to admit that the system has some weaknesses (Economist 1999). However, while Matsushita appears prepared to adhere to the lifetime employment system also in the future, reforms may be necessary in order to stimulate the Japanese economy as a whole.

Job creation in Japan, between 1984 and 1992, was only half of the U.S. ratio. Since then, the situation has become even worse. This is clearly proven by 1998 data from Tokyo’s largest government-run job agency, which shows that only 5 percent of the agency’s clients had managed to secure jobs (Hirakubo 2000). On the burning hot labour markets of the 1960s and 1970s, lifetime employment was a highly requested benefit. Japanese companies are now, due to past sins, stuck with an ineffective workforce they can not fire. Instead, cuts are made on overtime and recruiting, which has made the unemployment rate for men between the ages of 15-24 reach 11 percent, equaling that of the 55-64 age group. This is more than double the national average of 4.8 percent, and clearly illustrates the need for reform (Hirakubo 2000). Since lifetime employment workers only make up around a quarter of the Japanese workforce, however, it is also necessary to look at other institutions triggering inefficiency.

There is no reason to assume the system of lifetime employment will suffer a quiet death. Japanese companies are not likely to break any agreements made with current workers. With regard to restructuring, it evidently makes economic sense to lay off senior workers close to mandatory retirement, yet Stanford Professor Masahiko Aoki comments: "Actually doing so, however, may jeopardise the reputation of the firm, which puts it in a serious dilemma" (Aoki 1988). Tellingly, a 1993 JMOL survey of large companies found that only 2 percent had laid off workers or suggested voluntary retirement due to the recession. Similarly, a 1996 Japan Productivity Centre survey of personnel managers of Tokyo Stock Exchange-listed companies found that 82.4 percent supported maintaining the lifetime employment system as much as possible (Ornatowski 1999). These numbers show that Japanese companies, Matsushita being a prime example, are only half willingly moving away from the traditional system of lifetime employment. Still, nearly 80 percent of the respondents argued for a removal of the nenko system, better known in the West as the seniority system.

During the Second World War, wages based on education, sex, geographic regions and experience were institutionalised. Salary increases based primarily on age and length of service became obligatory in many industries during the same period. After the war, companies and labour unions agreed to make the seniority and lifetime employment system the cornerstones of the Japanese economy, thereby lying the ground for the now famous Japanese economic success story (Ornatowski 1999). The JMOL definition for seniority-based pay is: "A system or practice which emphasises number of years of service or age and educational background in determining pay and promotion." It is the inherit inefficiency of the seniority system that is pushing towards a transition to a performance-based pay system. Recent numbers imply that there is now less disparity between older and younger workers in terms of wages. For instance, while workers in the age group 45-49 in 1983 made 303.9 percent more than workers in the age group 20-24, the difference has now decreased to 277.00 percent. To Western eyes, though, it seems staggering that every other Japanese firm in 1994 gave their first promotion to all employees hired in the same year at exactly the same time. Still, this percentage figure appears to be smaller than it once was, proving the times are changing (Ornatowski 1999).

Nakato Hirakubo (1999:7), assistant professor of management and marketing at St. Peter’s College, argues that "As more and more middle managers are hired by small and foreign firms, the seniority-based promotion and pay increase will disappear, and internal competition among workers will intensify." Many believe, as Hirakubo, that Japan’s future is found in the new economy. While the West is concerned with the downfall of former Japanese industrial powerhouses, numerous small and medium-sized enterprises and high-tech companies have been growing relatively unnoticed, all hungry to create a new economic revolution. The Economist’s consensus poll of economic forecasters expects the Japanese economy to shrink by 0.3% this year, but predict a growth of 1.2% next year (Economist 2002). Very likely, this growth will be largely export based, but will hopefully also be driven by a new generation of Japanese companies that are not bound by rigid lifetime and seniority-based pay systems. Other economic worries, as for example the enormous government debt, certainly leaves no reason to celebrate, but at least the new economy firms leave some hope for the future.

It is often pointed out that Japan moved faster than anyone expected after both the Meiji Restoration and World War II, and that Japan is likely to do so again (Helweg 2000). Obviously, Japan’s main problem is not its peculiar HR-System, but it seems clear that the latter needs reform in order to stimulated continued economic recovery. Still, before the group-oriented Japanese reach a consensus on the need for reform, there is no reason to expect the process to be swift. A young manager at one of Japan’s largest steel companies illustrated this point during an interview with a correspondent from the Sloan Business Review. When asked if Japanese companies should try to conform to the business practices of their American counterparts, he responded: "We don’t believe we should have to abandon our commitment to our members who have devoted so many years of service and sacrifice to the company. As of yet, we have no proof that your capitalism, American capitalism, is the true capitalism." (Ornatowski 1998) Evidently, the American economy has seen a rapid decline in business confidence due to the recent Enron and World Com scandals. Still, comments such as that reported by the Sloan Business Review prove that Japan can not be expected to reform unless it is forced to do so, and if the weak economic recovery continues, Japanese business practices are unlikely to change. The system of lifetime employment is therefore not likely to in the foreseeable future, nor will there be a stop to awarding positions on the basis of seniority. Prime Minister Koizumi proved this point by including an 81-year-old finance minister in his cabinet, thereby illustrating that while the Japanese economy does not rely solely on the consumption of miso soup, it certainly relies on old age.