Japan at Work in the 21st Century: An Analysis of Developing Labor Practices in Japan and Institutional Barriers to Reform

A complex hierarchy of relationships and mixed personal-cast-institutional dependencies in Japanese society has been established over the course of many centuries. The economic path towards establishment of large, highly integrated corporations with life-long employment contracts was a natural “culturally-driven” process for Japan, which brought significant economic benefits and competitive advantages during the period of rapid post-World War II industrialization. As has been examined in many publications [1], Williamson’s transaction cost theory behind the formation of large firms is directly applicable to Japan.[2] During the 20th century, mutual dependence of corporations and employees resulted in a rise of complex contractual obligation in the form of lifelong employment. However, in the last several decades and especially since the information technology revolution of the 21st century, the role of a human worker possessing only basic skills has greatly diminished in economic activity that requires quick adaptation to changes in a globalized world. On one hand, workers become forced to be more flexible in their employment opportunities, as they can no longer be guaranteed that a company will stay committed to them. On the other hand, the removal of lifelong contracts voids the fundamental prerequisite for the creation of corporate hierarchies. This makes an adherence to lifelong employment suicidal to both the workers and corporation, imposing a significant stress on Japan’s socio-economic system.

The necessary adaptation to new economic reality is difficult for Japan due to fundamental norms of Japanese culture emphasizing social stability and long-term security. If Abe continues to pursue standard Western strategies of jump-starting the economy through monetary and fiscal policies, he will likely fail. He needs to exploit a new regional free trade agreement to expand the Japanese export markets and to invoke bold societal changes challenging the Japanese social norms by stimulating entrepreneurship, economic independence of younger workers and making economic growth the people's’ priority. But to fully succeed in rebuilding the Japanese economy, Abe must not only engage in tactical near-term fixes, such as participating in free trade, but most importantly focus on long-term cultural transformation projects.

In this work, I attempt to examine and substantiate the above thesis by analyzing Japan’s cultural roots underpinning its socio-economic development over several centuries in the context of evolution of Japanese government structure and external influences from the Western world. I show how the hierarchy of institutions and practices, which have been imposed from the top over many centuries as “Japanese way of life,” has led to an inflexible social contract between the working population and the country’s governing elite. This social contract presents an overwhelming barrier to transforming a rigid and slowly degrading industrial machine of today’s Japan into a flexible and adaptive economic system. Ultimately, I pose a challenge to Japan’s leadership to find a balance between the aggressive monetary and fiscal policies and the long-term social transformation of Japanese society to support sustainable economic gains without sacrificing societal harmony and cultural tradition. The long time required for sustained social transformations and the complexity of “social engineering” approaches when applied to a country with strong cultural traditions make the bold social change agenda more pressing than economic policies.[3] It must start immediately and target the youth, with broad understanding and support from older generations and significant financial commitment from the government. This will give Japan the best chance to succeed in the rapidly developing world for centuries to come.

Pre-War Japan

Japan’s rapid economic growth due to its strong and unique labor system following a long period of isolation is unique among advanced industrialized nations. The roots of growth started with the Edo period under Tokugawa rule (1603-1867). Japan’s feudal system rose to nationwide prominence in the 1100s. The persistent presence of moral obligation as a means of class distinction allowed the system to last longer, until the Meiji Restoration. The generalization that Japan’s feudal system was universal until the Meiji restoration of 1868 and immediately fell apart following the restoration is false.[4] Japan’s economic sector today is still heavily influenced by principles of social hierarchy. The system of respect between samurai and peasants proved stronger than the European system, under which knights expected profit. While increased growth of a middle class and currency interactions were important to the demise of European feudalism, the European enlightenment movement in the 18th century was the biggest stifling factor of the feudal system.

Revolutions, rebellions and the idea of individual rights gave the working class a motivating factor to protest. Individualism motivated entrepreneurship, which quickly blended rigid European class distinctions. Sakoku1, the Shogunate’s2 policy of isolation, did not completely hinder the spread of European ideas.[5] This lead to the Edo state loosening its isolation policies to learn more about the west. A specific example was the Dutch trading port in Dejima3 where scholars kept in tune with Yogaku4 and western studies.[5] The century-long isolation of Japan created a social atmosphere in which fast changes in people's mentality and adaptation to new workplace reality became fundamentally impossible. Japanese isolation from western revolutions and ideologies helped the Japanese transform into a modern economic society much smoother while maintaining many feudal beliefs.[5] However, reliance on the government and guaranteed employment at large corporations has greatly hindered Japanese innovation and entrepreneurship.

Most of the labor force during the Edo period engaged in agricultural production. Almost 90% of Edo society were peasants, who were not the lowest tier in the social hierarchy.[6] This was crucial to the system’s long-term survival because it put a larger economic focus on peasants rather than merchants. Since the peasants were the tax base, law dictated that peasants cannot move, but peasants ignored the regulations both for entertainment and better economic opportunity.[6] The local system of tax collection was important to the success of the shogunate. The system is a very early form of lifelong employment which has been a major backbone for economic success in Japan. The Daimyos practiced salutary neglect as long as farmers paid their taxes. Sengoku Jidai5 allowed for a large expansion in farmland, giving even more weight to farmers. During this period the farmers bribed field inspectors to understate crop output.[6] This early form of bribery marks the emergence of corruption among Japanese bureaucrats, which put a heavy economic burden on the country in the 20th century. Rapid expansion of farmland began spiraling out of control, eventually contributing to the demise of the Tokugawa Shogunate6. The large farmer class was forced to compete over a small amount of land. The government was responsible for over-regulating the system, thus giving birth to the belief that economic opportunity is achieved through the government policies. Uprisings by the farmer class marked the end of feudal society as the government failed to adapt its policies.

Commodore Perry’s7 arrival in 1853 signaled the end of feudal isolationism to the Tokugawa shogunate. The Bakufu8 realized that Japan had been completely eclipsed economically and technologically. Perry’s demands to the Tokugawa were mutually beneficial in terms of trade.[5] A combination of economic allure and fear of the unknown forced the Tokugawa to agree on the terms set forth by the Americans. The Convention of Kanagawa, which opened ports in Shimoda and Hakodate, was the defining point in the end of Japanese isolationism and the beginning of not only an unstable economic climate but isolationism of imperial rule. Japan’s economy started to rapidly decline following the opening of the country. Tokugawa Yoshinobu9 was ousted, and political power violently transferred to Emperor Meiji. The Charter Oath outlined the goals of the new imperial government, which wanted to rapidly advance the country technologically through urbanizing the workforce.[7]

Under Emperor Meiji, The Land Tax Reform of 1873 truly marked the beginning of a labor revolution. It reformed the tax system in a way that farmers had to assume the financial penalty of agricultural market fluctuation. The farmer had to pay taxes based on the value of land not the annual crop yield. While the new system helped establish independent commerce and private land ownership, it indirectly exacerbated the issue of wealth inequality. An attempt to reform already cemented practices had fallen through due to economic damage to lower classes. In 1872, the ban on selling and trading farmland was lifted, and in 1873 Japanese citizens were given the power to use real estate as collateral to secure agricultural loans.[8] Landowners without prosperous land became impoverished, while more successful landowners gained more social and economic power. The Land Tax Reform of 1873 industrialized the country by pushing a large population of workers to urban centers. “It is a well-recognized fact that the outflow of the labor force from agriculture provides a big source of labor for the rapidly expanding non-agricultural industries.”[9] Although the urbanization push created new jobs, these jobs were still tied to the government and had not led to a fundamental change in people's mentality. Paired with rapid population growth in the 19th century, Japanese industrialization outpaced many European countries. One of the most distinctive features of the Japanese economy is that growth in the agricultural sector never increased during economic growth.[9] During the Meiji Restoration, in an attempt to build military and industrial might the government consolidated and became more centralized. This transformation played a critical role in how the government acted throughout the 20th century, both during the period of imperial expansion and economic modernization.

A pattern of reliance on the government has yielded short boosts of growth, but created long-term instability. During the Imperial expansion period and World War II, the government twisted the social contract by inhibiting natural rights in return for national expansion. The government invested heavily in factories and shipyards, which were sold to companies to help guide a powerful private sector.[10] The private sector was successful but not agile and independent, because it was comprised of large companies with demands to their products and services largely coming from government. The development of a national rail system and modernized communications were spearheaded with the help of western technology.[11] The successful economic climate led to a rise of large corporations, which became the main provider of labor security in the late 20th century. The rise of zaibatsu10, large business conglomerates, such as Hitachi and Mitsubishi gave the Japanese government an efficient supplier of technology and consistent labor opportunities. The Zaibatsu quickly grew too big to fail, creating departments for almost everything the government needed: whether it was military supplies, nuclear energy, vehicles and chemicals. As time progressed, the Zaibatsu system expanded to other Asian countries. In 1996-97 sales from top 20 Zaibatsu, expressed as percentage of GDP, accounted for 87% in South Korea, 36% in Thailand and 30% in Indonesia.[12] The government saw large corporate companies as its fastest road to achieving global success in a modernizing world. With power centralized imperially, the government adopted a policy of expansion. The invasion of Taiwan in 1874 demonstrated the immense power that the military possessed in government affairs, as this was the first time the military ignored civilian government orders.[13] With increased trade with western nations, Japan managed to quickly grow a large and modern standing army which provided for sizable employment in the public sector. National conscription not only provided a new guaranteed labor force, but also gave Zaibatsu a secure buyer.

Meiji reformers utilized Shintoism’s11 imperial myth to attempt a removal of Buddhism and make new national interests popular. [15] However, full removal was impossible and Buddhism combined with Shintoism to form ryōbu shitō12. With feudalism laid to rest, and people free to build their own future in the new capitalistic society, uneducated Japanese transitioned to new low paid working jobs.[15] The large influx of low-skill labor to urban centers yielded disastrous conditions for workers. As a result, groups of organized workers demanded expanded civil rights. Marxist views began to take form among not only workers but also intellectuals.[14] The government cemented a far-right stance as it formed the Tokko13 secret policy in an age of nationalism. However, the government made a decisive change in 1911 when new regulations regarding a national minimum wage and work hours took into effect.[15] Japan quickly grew into an economic juggernaut, but the working class remained neglected and labor unions began to take form. Although mistrust in government gave rise to individualism, the economic system that had been put in place was not adequate to support this change in attitude, rendering existing small businesses weak and offering no meaningful path for harnessing the economic benefits of individual entrepreneurship. Three stimulating factors which emphasize the cultural values of equality led to labor reform in pre-war Japan: gender, nationalism and social treatment.[16] Gender played an important role because the gender divide in mill jobs was greater than the class divide.[16] Nationalism had given a feeling of importance to many workers who were eager to give their power for the empire’s success, but bureaucratic regulators and business owners felt the glory was theirs.[16] Finally, Japanese workers felt that their social treatment in the labor system was more important at times than their wages.[16]

Workers mistrust in the government during this period played an important role in Japan’s rebuilding post World War. Even at the point leading up to the war not all groups of workers felt job security. Girls in Tokyo textile mills saw their employment as a temporary occupation rather than a permanent occupation.[16] Nevertheless, there was no sense of hopelessness, as a promise of new opportunities paired with Imperial expansion tempered negative sentiments. As the country gained new territories and grew stronger, more jobs were available both in the private and public sector in order to sustain the growth. A very distinct pattern emerged of entering the workforce for life in order to securely raise a family, which would be a symbol of contributing to the empire. The pattern had been repeated across generations, which allowed post-war citizens to adapt quickly to the system of lifelong employment.

The new system congealed following Japan’s reconstruction as a major power. Andrew Gordon explains that in the case of Japanese labor disputes almost none were caused by machines crowding out low-skill labor.[16] Rather, he suggests that most disputes were driven by a desire for respect and social status.[16] Japan has always had a limited internal labor force, making individual workers more powerful in their demands for job security (i.e., a seller’s market for labor). This observation highlights another pillar in the foundation for the rise of lifelong employment, that is, that a concern for job security is paramount among Japanese workers .

Japan established a large empire, and the increased inflow of resources stimulated further economic growth. Japan’s mining and manufacturing sector accounted for 30% of GDP in the 1930’s.[10] The country’s GDP was expanding at an incredible 5% per year with continued economic focus on making the military strong.[10] Although the Great Depression did not have a profound impact on the country, there was an offspring event which did. In 1927 the Showa financial crisis left most major Japanese banks without capital and gave the financial sectors of Zaibatsu most power in Japanese finances.[17]

Post War Japan

Japan’s expansionary interests eventually led to World War II. The nation overestimated its production capacity and industrial capability in a fight against the world. Japan’s leadership envisioned the Greater East Asia Co-Prosperity Sphere. In order to sustain a ballooned economy over a large and diverse range of human capital, the government required a more effective union of Pacific territory. The eventual goal rested in a self-sufficient union, where Japan would fulfill its labor requirements through colonies while also having a guaranteed consumer of Japanese exports.[18] The system would appeal to people’s desire for riskless jobs because the hegemonic nature of the Greater East Asia Co-Prosperity Sphere would require increased production to remain autarkic thus supporting endless employment for the populace. In many ways Japan used similar principles that the U.S. used during the phase of its initial growth. Three events in early American history clearly correspond to Japan’s ambitions during World War. Japan was mimicking steps which brought the U.S. to superpower status. Japan aspired to become a global superpower (ittô koku14) by eliminating impediments brought about by Western colonization.[18] However, the Greater East Asia Co-Prosperity Sphere failed due to the very same problem it sought to fix: labor inequality in colonial countries.[18] A clear conflict of interest became apparent when examining Japan’s government during this period. The bureaucracy had lost its unity by the 1940s to the military autocracy, army and emperor acting in different roles with almost unchecked responsibility. The Zaibatsu accumulated more power, as the government enforced few regulations and instead needed fast supplies. Yet, the real powerbrokers were “reform bureaucrats” and ultranationalists.[19] These events reinforced the limited economic role regular citizens could play independently in the social hierarchy dominated by government bureaucracy and military-industrial complex.

By the time the war had ended most of Japan’s labor supply was involved in military-related activities. People in Japan were so committed to the 15 year long war that liberation came as a shock.[20] The American liberators came with a plan to rebuild Japan rather than leave it to domestic forces.[20] This optimistic plan paired with the Japanese people’s fervor for social and economic stability made the job of initial recovery easier than in other nations and became known as the “economic miracle.” The government created a comprehensive plan for rebuilding. Large investment and manufacturing firms now known as Keiretsu15 were to be drivers of internal development. They had nearly one third of overall employment and were going to be given more individual power for carrying the Japanese economy through the period of low-interest rates and low regulations.[21] These are the same firms that led to the collapse of the economy in the 1990s after their power was never taken back by the government. In order to maintain the gift of monopolistic privilege they were expected to provide lifelong employment and make sure the Japanese work force remained competitive.[21]

Japan’s second strategy was to increase the quality of individual labor. The social welfare system suffered eventually as the Keiretsu became centers of bureaucratic deal making.[21] Although the system made it easy for Japan to recover quickly it greatly hindered the quality of social benefits for the poorer citizens. The American occupation is often not given enough credit for causing the path Japan winds up on later. John Dower explains that there are eight critical reasons why the United States succeeded in rebuilding Japan: “Discipline, moral legitimacy, well-defined and well-articulated objectives, a clear chain of command, tolerance and flexibility in policy formulation and implementation, confidence in the ability of the state to act constructively, the ability to operate abroad free of partisan politics back home, and the existence of a stable, resilient, sophisticated civil society on the receiving end of occupation policies – these political and civic virtues helped make it possible to move decisively during the brief window of a few years when defeated Japan itself was in flux and most receptive to radical change.”[22] The most important of these (for Japanese) was “the existence of a stable, resilient, sophisticated civil society”[22] that did not dwell on the past. Japanese people invested their efforts in improving the country by working for the government instead of pursuing individual entrepreneur-driven innovation. World War destroyed close to 40% of Japan’s industrial infrastructure, but following the war the country was able to equip itself with newer and more advanced infrastructure.[10] This made Japanese workers more efficient and capable compared to labor in many other countries in the world. The government's extreme focus on channeling the new flood of labor, who were formerly in the military, into Keiretsu centralized advancement into specific business conglomerates and transferred the responsibility of keeping good working conditions to Keiretsu. The Zaibatsu were one of MacArthur’s biggest targets initially. Under the original plan for reorganization, he wanted to completely dissolve large commercial conglomerates. In his view, the Zaibatsu acted for themselves and spreading wealth out was more beneficial. By that point, laborers grew accustomed to working for large and stable businesses. When the Zaibatsu collapsed, instead of looking for more self-reliance and independent employment workers went simply to work for new corporations.

MacArthur was following a “new deal” type program that in his view would make a more efficient workforce by diversifying industries and taking advantage of the returning working population. While he successfully eliminated several Zaibatsu, many just reformed into looser cross-shareholding Keiretsu. During the occupation six Keiretsu became the most influential: Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa and Dai-Ichi.[25] These Keiretsu distinguished themselves from others by all being centered to one bank, and the bank loaned money to member companies in the Keiretsu while also holding equity positions in the Keiretsu companies.[26] Close relationship between the banks, companies and government regulators eventually became an insurmountable detriment to the lower-class workforce.

MacArthur started labor reform from the distribution of property in the land redistribution act. The reform’s purpose was to redistribute land from landlords who did not individually use the land to the low-class workers who rented the land and actually used it.[23] Although many believe this event acted as a de-industrializer of the labor force, it is important to understand the reform did not affect a majority of working Japanese. The land reform only helped solidify the path of corporate labor because by 1965, mining, construction and manufacturing accounted for 41% of the labor force, while agriculture only employed 26% of the population.[10] The land reform acted both as and industrial and political policy.[24] Although the policy had little effect on agricultural output, it dramatically increased the amount of conservative thinking in the urban population.[24]

A majority of economic reform pinned regular Japanese citizens as the backbone for success. In return, the society structured itself to guarantee a job for any hardworking and willing citizen, cementing the decade-long practice of prioritizing corporate vs individual employment. It was a special modification on the social contract, which had been in place for a while, and it helped solidify the reputation in the West that Japanese citizens love work in an uncompromising way. In order to return to a strong economic footing, the government revived traditional values of shame, sacrifice, responsibility and wise decision making.[21] The effort by the government is often described as an “iron triangle” where large corporations had easy financial breaks, yet they had to pay large prices for resources and make sure their labor force was well serviced.[9] This brings about one of the greatest contradictions to present “Western” economic strategies. In “Western” countries, the government more often over regulates the financial system and ignores the workers. An American strategy is making sure the key economic drivers are fair in hope it will eventually benefit the poor. However, the Japanese took a different rout inspired by Roosevelt’s “new deal” and motivated the general workforce to better the large corporate institutions. The new corporations understood that a motivated labor force could be well trained and given pay incentives.

Japanese people had put national GDP growth as their foremost personal priority.[30] Through the corporation's desire for capable labor, the government no longer had to worry about a social welfare net.[9] The “economic miracle” could not have been achieved without the costs the United States government incurred from reconstructing Japan. The United States made sure to sufficiently fund Japanese defense spending well until the end of the Cold War. Also, a complete rebuilding of infrastructure helped the Japanese government focus on molding its labor force. However, in the long-term, Japanese people are still suffering today from the initial labor policies.[9] If a stronger effort had been put into incentivizing self- employment, Japan would have taken a slower but more robust path to economic recovery. There is almost no social security or pension fund for retirees.[9] To the present day, a large portion of Japan’s population is elderly and the child fertility rate is low due to the young generation’s urgency for having a stable position in the unforgiving labor market.

Dower describes the relationship that the U.S. and Japan have had since World War II as the “San Francisco system.” The conservative government had an easy decision to make because the U.S. granted military protection and independence to Japan at little cost.[27] While Dower argues that the system has imposed eight problematic legacies on Japan - “Okinawa and two Japans, unresolved territorial issues, U.S. bases, rearmament, the nuclear umbrella, containment of China and Japan’s deflection from Asia, and subordinate independence” - there have been substantial economic benefits from the close protection umbrella that the U.S. has cast on Japan. Japan’s border disputes have not resulted in destabilizing conflicts and the U.S.’s heavy military armament of Japan has alleviated pressure on defense spending. The time and capital that Japan has saved has been meticulously applied to creating a high growth economy rather than social investment. During the U.S. occupation, two more reforms were passed that established a very rigid labor structure: The Labor Standards act of 1947 and Trade Union Act of 1949. They created a basic system of ensuring workers’ rights were met and made up for not having a strong safety net for the unemployed. The Labor Standards Act has 13 chapters which outline necessary work conditions for human beings.[28] An important inclusion of the act are wage and labor contract provisions. The Trade Union Act made sure workers had the ability to organize and assemble.[29]

Following the U.S. withdrawal, a functioning, well-educated urban professional class, strong bureaucracy and effective agriculture put the country on track for a 5% economic growth rate compared to the U.S.’s 3.8% by the 1980’s.[10] While United States reform was necessary to rebuild the manufacturing sector to pre-war conditions, the motivated and highly educated labor force did a majority of the work. Japan also had a fast modernization of technology due to substantiated corporate investment.[10] The overall system worked on “arbitrary motivation,” where companies were able to attract capable employees with new technology and promise of promotion. The corporations were growing so fast they could guarantee senior positions to almost all employees. Although there was no long-term capacity for management positions, the lifetime employment system made sure that only employees approaching retirement received positions. Also, the companies were so well endowed with resources, they could meaninglessly fill high paying positions with no regard of valuable yield. Recent studies have shown that the Japanese population's propensity to spend helped drive the economic recovery.[30] These claims fall perfectly into the other established characteristics of the Japanese economy for two main reasons.

First, the well trained and motivated workers had very good wages. In the 1960s, a combination of low population growth and increased industrialization resulted in increased wages.[10] Second, low interest rates that were used for rapid growth benefited individual spending habits. At the same time the workers who participated in the lifelong employment system had a friendly relationship with higher management, which allowed for very few labor disputes.[30] This also can be seen as a perpetuator of the Japanese spending habit. The promise of greater financial gains during the later years of a citizen’s career was too tempting, and it led to a demise of the riskier possibility of entrepreneurship. In fact, as supported by statistical data on the number of internal migrants in Japan from 1954 to 2004 (Table 2-37-a in reference [37]), the total number of internal migrants began to decline from 8,026,029 in 1974, and this downward trend continued through 2004 with almost 30% reduction reaching 5,771,921 migrants. This demographic indicator of population mobility, as a proxy for economic opportunism, provides indirect evidence of sustained transition to a less entrepreneurial workforce in Japan, which underpins the beginning of lifelong employment dominance in the 80s as one of the important precursors for the “lost decade.” Companies essentially guaranteed workers higher pay alongside job security as time went on making people more inclined to spend. The political system from the 1950s to 2000 can’t be ignored as Japan has been in control by one party (LDP), which advocated for conservative policies favoring business growth.[30] The LDP’s long standing and consistent platform further benefited workers’ security because the party kept close economic ties with the United States. Despite the Cold War sucking funds away from nations, the keiretsu were safe since the United States was still a reliable consumer of new technologies. The labor system which was so focused on education and motivation also painted its own destiny and security. Other global nations recognized the quality and reliability of Japanese exports, giving an international brand to companies such as Sony and Nintendo.[30]

The system which closely relied on uniform loyal participation from the labor force could not last forever. In the 1970s extreme environmental pollution accompanied by an environment of overworking and stress became a political issue.[10] The social contract in Japan had rapidly changed for centuries and at this point work was intolerable. The success of both the industrialized and agricultural economies heavily relied on the success of the labor market, with labor efficiency being undoubtedly the largest factor when considering the nation's propensity to export. In most well developed nations there are two limiting factors when considering successful international trade: an available buyer and an ability to efficiently manufacture. Japan’s guaranteed buyer was the U.S., but Japan pinned its entire industrial capability on its labor force, which for a long time ultra-efficiently manufactured goods. However, Japanese people no longer agreed that economic success should be the national policy.[30] Both Japanese workers and corporations understood the value of the lifelong employment system. Even though economic stressors such as the oil shock tested the reliability of the economy, quick recoveries from large production covered up the issues that would become apparent later. It continued to satisfy the workers' desire for job security and helped businesses by making training easy and loyalty a standard.

In response to growing displeasure of outdated policy by the labor force, the Liberal Democratic Party passed more social reforms to help create a larger safety net.[30] People quickly benefited from the high growth era in the 1980s with a growing stock market and strong real estate market.[30] The Keiretsu grew quickly out of the banking success stemming from Japanese people’s spending. Japanese society saw the growth as having a negative effect on the people, associating excessive spending with a loss of traditional values.[30] Japanese citizens of all ages preferred a humble lifestyle with no excesses that often come with personal success, and this provided a social background for negative perception of people striving for independent success. In an exaggerated way, it was as if people had tirelessly worked for 20 years then excessively reaped the benefits. A society that had been so focused on maintaining a neutral social structure as a mechanism for post-war national recovery evolved to establish a more distinct class structure than ever before. This is corroborated by statistical data on Japanese households’ income from side work, i.e., outside of primary employment, which can be used as a proxy for the diversity of economic activity among the population (Table 2-22 in reference [37]). The data shows that the number of households with “side business activity” peaked at 123,772 in 1970. By 1980, ten years later, the number of households dropped to 85,243. This suggests a trend of reduced entrepreneurial activity in population, which is typically stimulated by having sufficient number of workers seeking new income opportunities, in addition or instead of favoring stable employment at large corporations.

Nonetheless, as Japanese people bought more homes, banks saw the sky as the limit, issuing incredible amounts of loans, not all of which that were secure. Nobel Prize winning economist Paul Krugman states "Japan's banks lent more, with less regard for quality of the borrower, than anyone else's. In so doing they helped inflate the bubble economy to “grotesque proportions".[32] Banks were forced to issue more loans because large corporations grew too big and had to search for other places to finance their capital from bigger foreign banks.[30] Banks felt that due to the lifelong employment system they were relatively safe in issuing mass loans due to the strong job security most people had possessed. When the bubble eventually burst, the labor system was undoubtedly one of the biggest perpetrators in the collapse. Despite the loan bonanza enjoyed by large corporation, the banks did not invest as much into new businesses that could provide engine for economic growth and new opportunities. Statistical data (Table 14-8 in reference [37]) shows that during the 90s and early 2000s Shoko Chukin Bank, Credit Cooperation and Shinkumi Federation Bank actually decreased loans and deposits for small businesses. By 2003, these three banks, in addition to Shinkin Central Bank, Labour Credit Association and the National Federation of Labor Credit Associations all together issued fewer than 100,000 loans a year to new business ventures. In essence, the large banks had lost confidence in the potential for small businesses to succeed. This decrease in loans took place despite a major decrease in a number of reported bankruptcies in late 80’s, with a staggering ~75% drop in just 5 years between 1985 and 1990 (Table 6-17 in reference [37]). One can suggest that this decrease indicates a healthier economic climate which helps new businesses survive; however, since its onset occurred in 1985 when the economy of big enterprises started to collapse, the “positive” trend most likely is another indicator of a dramatic slowdown in entrepreneurial activity in Japan, simply because small businesses are much more susceptible to bankruptcy. In turn, this led to a reduced diversity and increased bureaucratization of the economy with more workers favoring employment at large corporations.

The decrease in private ventures from bankruptcies in the 1980s is also displayed in data showing the number of private institutions. Beginning 1981, the number of privately owned enterprises and individual proprietorships stagnated and slowly decreased by the thousands, especially in Aomori, Iwate, Akita, Tokyo, Ishikawa, Kyoto and Osaka (Table 6-8 in reference [37]. At the same time, the number of corporations and joint stock companies saw a dramatic increase. This further supports a conclusion that entrepreneurialism was no longer viewed as a viable path to achieve economic success and societal preference towards the risk averse economic development relying on larger corporations and stable labor employment policies.

When examining the reason for the unchecked growth many economists agree that inept public policy, corruption, greed, and sentiment that Japan was "different" were root causes.[30] As previously mentioned, the central bank kept interest rates low forcing banks to give out more speculative loans in order to maintain growth levels. However, pressure from the United States to maintain a competitive domestic industry through politics of weakening the U.S. dollar forced the Japanese government to rapidly increase its interest rates, which made risky borrowers unable to pay back loans. Japanese regulators were too close to the banks since bureaucrats weren't paid well and often decided that working for a large bank would be more profitable.[30] This issue stemmed out of the rigid labor practices because most of the salary increases were in private corporations while government jobs offered a low retirement age. Thus, government regulators were able to retire early and profit at Keiretsu. This fostered an environment where bureaucrats would focus their time to establishing good relationships with banks in order to guarantee a well-paid position after retirement.[30] Not only did such relationships promote a conflict of interest for regulators before retirement, it also meant they had very good connections and abusive strategies when working for banks after retirement. When the bubble eventually burst, growth became so dismal that huge corporations people called "too big to fail" were forced to scrap their system of obtaining domestic human capital.

Japanese corporations had to cut costs, let go of useless workers and move expensive manufacturing to other countries.[30] Loyalty from workers became unimportant when a company is struggled to stay afloat, and senior management positions which provided no value could no longer be tolerated. To maximize labor efficiency part time employment proliferated, which meant the end of low unemployment rates and financial security to workers. By 2009, non-permanent employees constituted more than 30% of the work force.[31] A massive stagnation in wages meant that workers could not spend money to stimulate the economy, and the rapid transition from low to high then back to low interest rates hurt the labor market structure. Savers and retirees were ruined due to their dependence on accumulating funds, which stopped following the collapse.[30] In a country with a large elderly population and low fertility rate, the low interest rates make a well paying and reliable job even more important. However, the leading corporations now outsource a large fraction of labor and are always looking for cheap labor rather than investing in domestic human capital. This pattern will likely persist as Japan enters the next Asian free trade agreement, making cheap transactions easier within the region. The crisis disabled long-term political solutions throughout the 1990s as the country constantly elected different leaders with no long-term vision.[30]

One of the crisis's overlooked impact is the social change it caused. People have not only given up looking for stable employment, but also given up on life all together. Stories are widespread of young people who don't see education as a useful tool and are pressured by the unstable job market lock themselves in their parents’ room and withdraw from society. Although the private sector's inability to stimulate better conditions for development of domestic human capital do not always lead to extreme cases such as that, Japanese standard of living and happiness levels have significantly plummeted.

“Abenomics” and Beyond

After a half century of unstable economic climate, the Japanese people have found a resurgence in nationalistic and self-sufficient thinking. Japanese leaders have seen close economic and defense relationships with the U.S. as the best means of achieving high growth. Prime Minister Shinzo Abe has taken a very different approach to returning Japan onto the mainstage of global economic superpowers. Abe's plan, commonly named "Abenomics", aims to use three "arrows" -- monetary policy, fiscal policy and economic growth strategy -- to increase private investment.[33] Abe's plan relies heavily on changing how the labor force traditionally thinks in Japan by transforming the social priority given to saving into spending, much like in the 1980s. Although many economists have agreed that Japan's macroeconomic situation is nearly unmanageable due to interest rates already at zero, Abenomics specifically sets negative interest rates to help push Japanese workers into entrepreneurship. This policy is one of Abe's hardest to be successful due to historical instability of monetary policy and cultural norms in Japan. Fluctuations of the capital market go against the cultural desire for stability over everything else. The government's inability to be consistent on maintaining interest rates and excessive focus on large corporations to remain stable puts pressure on regular middle class Japanese. It will be incredibly difficult for the government to find a way to dispel its past troubles especially since large businesses still dominate the financial sector.

For trust between people and government to emerge, Abe will have to either provide further tax incentives for small businesses or establish stronger regulations on large corporations. However, for either to work, he needs to create something similar to China's five year plan, which Japan used to rely on, where a commitment to the policy is laid out because otherwise people will fear that the tax breaks or low interest rates won't last long enough to develop their business idea. Nonetheless, even if Abe can do both of these things, the cultural barrier will present a steep obstacle. In Japan, those who do too much to stand out are looked down upon in a society that tries its hardest to be “the most normal.” Not surprisingly, the allure of the lifetime employment system still has young workers hoping they can catch the tailwind of this dying trend. To succeed, Abe must show that individual employment opportunities will be more stable long-term than the corporate ones, and a culture of economic individualism does not negate the possibility of a fair social contract that broadly benefit everyone and the society as a whole.

Instead of discouraging people who have potential to make Japan more prosperous, the country has to buy into the idea of a national goal similar to the post-war dogma. Abe's best plan to tackle the pressure that large corporations project on government would be to limit the government's bending to corporate "screw-ups". This would cement a free market approach with basic government planning, show entrepreneurs the government is committed to a leveled economic field with equal opportunities and encourage large corporations to be more scrupulous. For the "monetary policy" arrow to hit its mark in promoting growth through low interest rate investments, Abe has to develop a more aggressive foreign policy. By decreasing interest rates further, Japan will see a rise in inflation. This will serve to lower the cost of domestic goods, which can be used to create a larger international trade surplus. I would like to emphasize that this is a short term policy to stimulate growth, which will have to be corrected if growth becomes excessive. That being said in the short term this should help not only promote growth via export, but should also eventually increase wages, thus promoting demand in Japanese markets

Japan's lifetime employment system must also change. The system works only during a period of high growth, due to more tolerance to inefficiencies during the growth periods, and it can only be managed with an excess of wealth. The Ministry of Internal Affairs estimates there are currently 25 million company workers between the ages of late 40s and mid 60s, and in Japan the most productive age is 45, which endangers the company's profitability.[34] The lifetime labor system guarantees pay increases as you get older, so in a time of small or negative growth an excess of money is wasted on inefficient older workers. The excess of employees in pointless management positions has yielded a new term oidashi beya16 which means “expulsion room.”[35] The system targets workers in their 30s and 40s, people who were lucky to find lifetime employment during the “lost decade.”[35] Companies have no easy way to shed excess labor due to the lifetime employment system and are forced to find ways to make employees quit. Transferring workers to useless departments and social disconnection emerged as passive methods of encouraging workers to leave. While this is an obvious example that could be used by Abe’s government to demonstrate the fundamental deficiencies of the existing corporate culture in Japan, it has the potential to create the unintended effect of being a social stressor. If Abe chooses to emphasize this as the largest consequence of Japanese corporate labor, it could paralyze people instead of forcing them to change their views on employment,

Historically, statistical data shows that the Japanese government has been slow to address the social climate from a young age. Data (Table 26-24 in reference [37]) shows that although the overall number of educational classes, training courses and events increased until 2005, the youth leaders’ training category experienced a massive decline. After peaking in 1984 at 1,518 leadership classes and courses, the total number declined by more than 50% down to mere 797 in 1999. The total facilities and number of trainees focusing on developing the leadership skills also dramatically declined after experiencing peaks in the 1980s. Leaders’ training is an important aspect of teaching entrepreneurial qualities, so for entrepreneurship to be boosted the social environment that provides the widespread educational and leadership training opportunities must be urgently revamped and invigorated.

Looking ahead into the future, free trade agreements will have a significant impact on Japan’s domestic workforce. Whether the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) survives the United States’ withdrawal, or China’s Regional Comprehensive Economic Partnership becomes the premier Asian free trade agreement, Japan will benefit. The largest challenge to Japan will be selling the deal to voters.[36] The deal will put heavy pressure on small scale labor, such as farming or low-skill workers, because of the intense competition from other countries with lower labor costs (China). The next free trade agreement will be the final strike onto the weak permanent employment system. Corporations will have even easier access to labor in other countries where it is not only cheaper but requires no permanent commitments. This should not be a surprise, since for the last decade large Japanese corporations have already efficiently outsourced labor. Corporate outsourcing could have a positive impact by directly forcing Japanese workers to seek new opportunities. Despite the negative effects the deal will have short term, it will accomplish what Abe set out to do-to: jumpstart the stagnant Japanese economy by giving more opportunities for Japan to increase its exports. Free trade’s primary goal is to reduce trade barriers between Pacific nations, giving Abe the perfect chance to export high quality Japanese goods, made cheaply, to more countries.

Abe’s greatest challenge will be balancing corporate power and the supply of domestic labor. Through free trade, Japanese corporations will want to reduce expensive Japanese labor and expand production to other countries. In addition to promoting domestic entrepreneurship Abe will have to find a way to make it favorable for Japanese corporations to hire from the domestic workforce and domestic manufacturing base. In this way, Abe will stimulate economic growth and give Japanese workers money to invest and consume while interest rates are low. The only way this is feasible is by making corporate taxes competitive with the other members of a free trade agreement and making improvements to the education system. But, ultimately, only bold and consistent transformation in Japan’s social fabric -- especially targeting younger population and emphasizing self-reliance and the power of an individual -- can produce success in this paradigm change of the Japanese economic culture. The only way Japan will recover its 20th century economic swagger is if the working people buy into Abe’s plan and Abe strikes a delicate balance between big business growth and individual success.

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References

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Endnotes

1.) A Japanese policy that would not allow the entry or exit of foreigners. Also, Japanese citizens could not leave the country unless they had official permission. The policy was present under the Tokugawa shogunate.

2.) Ruling military elite in control of Japan prior to the 1867-68 revolution.

3.) An island in the bay of Nagasaki created as a trading outpost.

4.) Western music learned by Japanese scholars at Dejima

5.) An unsteady period in Japan notable for its many military conflicts and societal transformations

6.) The feudal government that remained in power in Japan from 1603 to 1868.

7.) Perry was a Commodore of the U.S. Navy who substantially contributed to linking Japan to the West (April 10, 1794 – March 4, 1858).

8.) Also known as the Tokugawa Shogunate

9.) The last Tokugawa shogun of Japan.

10.) Large corporate and financial institutions during Imperial Japan

11.) The ethnic religion of the people of Japan.

12.) A religion formed from a combination of Buddhism and Shintoism

13.) A law enforcement entity founded in 1911 to control political organizations and movements.

14.) A first rate country.

15.) A type of organizational structure which is based on tight interconnection between shareholders and business interests.

16.) The banishment room or the expulsion room for pressuring employees.

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Acknowledgement

My advisor Professor Brian Woodall (the Sam Nunn School of International Affairs, Georgia Tech’s Ivan Allen College of Liberal Arts) who guided me, helped develop ideas and advised me on complicated issues.