Japan Inc 2.0 – Adapting to Survive

Corporate Japan is undergoing change, of that there is no doubt. Hierarchies are slowly getting less rigid, working hours are down and wages are up (at least at most big companies). Work-life balance is gradually becoming more than just an empty slogan and the number of people leaving the public sector to join startups is surging. There is though more to be done that would unlock further growth across the economy. Productivity remains stubbornly low, female leaders are rare and decision making is often still not nimble enough. But pressures brought by labour shortages, corporate governance reforms and global competition are driving transformation.

One phenomenon that illustrates the changes happening is workers leaving the stability of public employment to join inherently more risky new ventures. And yet the fact that only a tiny percentage of new graduates are prepared to take the more adventurous path suggests this is still a work in progress. Nevertheless, the number of people taking the examination for the elite track of bureaucrats at central government ministries and agencies hit an all-time low this year, according to the National Personnel Authority. Not all of that drop in applicants is explained by demographics: an ultra-secure but extremely demanding career in Kasumigaseki does not hold the appeal it once did.

Terms and conditions

By some estimates, there are now only three new graduates for every four positions available, pushing firms to offer better conditions and working environments. Companies are being forced into more flexibility in terms of mid-career hiring, older workers, non-graduates and non-Japanese. Those that aren’t able to change will struggle to survive. A record 313 companies went bankrupt last year due to labour shortages, according to Teikoku Databank.

The tight labour market is helping to push salaries up, but predominantly at bigger corporations, many of which gave decade-high raises this spring. For most of the 70% of workers employed at SMEs, average real wages have fallen due to hikes not keeping pace with inflation. Increased pay across the board would give a further boost to the economy.

Partly in response to higher personnel costs, large Japanese companies are seeking more voluntary redundancies than in recent years. Though the numbers are still small by Western standards, corporations have announced plans to cut around 4,500 employees since the beginning of the year, about three times the number in the same period in 2023, according to Tokyo Shoko Research. With compulsory layoffs difficult under Japanese employment laws, offers of severance packages are one of the few options open to employers looking to reduce headcount. A potential pitfall for firms aiming for efficiency and higher productivity is that capable employees who will have little trouble finding employment elsewhere may be more likely to accept such offers than those who would struggle in the job market.

Producing more with less

Even though productivity in Japan rose for the last two years, it has fallen behind that of other countries, with workers producing an average of $52.30 per hour in 2022, around a third of that in the most efficient nations. That ranks Japan 30th out of the OECD countries, just behind Portugal. Few would argue that low ranking is the fault of Japan’s overwhelmingly hard-working, educated and conscientious labour force. The blame lies more with out-of-date systems, slow digitalisation, low investment in human resources and inefficient work practices.

The Work Style Reform Act passed in 2018 (more restrictions on overtime came into effect this April) with stated goals of improving work-life balance, raising the pay of non-regular workers and boosting productivity. But it takes time to convert these intentions into reality. This writer was one of a team of 17 who visited a central government agency to pitch for a campaign promoting the work-style reforms. Only three of us spoke. The irony of 14 people pointlessly attending a meeting related to promoting productivity and reducing overtime – when they could have been working productively – was apparently lost on everyone.

Progress is happening, many of the changes that still need to happen are very doable and the momentum to do better continues to build. Employees are on average working 10 fewer hours a month than they were a decade ago. Meaningless meetings and pointless procedures (password-protected files sent in the same email as the password, anyone?) can be easily abandoned once the decision to do so is taken. Listed companies are under pressure from investors, the government and the Tokyo Stock Exchange to be more efficient, productive and diverse. Record corporate profits and share prices speak to the improvements already made.

As companies seek to raise returns and adapt to the new realities of Japan Inc 2.0, skilled personnel will be more in demand than ever and in a better position than ever to secure better conditions and compensation.

By: Gavin Blair

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