[ Nippon Keidanren ] [ Policy ]

Summary of Position Paper 2007
on Management and Labor Policy

-- Promoting Innovation: A New Approach to Work --

December 19, 2006

Committee on Management and Labor Policy
Nippon Keidanren
(Japan Business Federation)

Part 1 Structural Changes in the Business Environment

The structure of the global economy is changing much faster than before. Linkages between domestic and international economies have grown stronger, with more economic partnerships and increasing horizontal division of labor, ever since the market economy sphere expanded rapidly around the end of the Cold War era. Against this background, the flow of goods and services through diverse channels has become increasingly complex. Moreover the growth of information and communication technology has bridged time and distance and linked knowledge clusters. With this has come the cross-border competition and the unprecedented change of exposing. On the other hand, a lot of problems, such as the environment issues and regional conflicts, that could limit economic growth have been emerging.

The global economy is basically in an expansionary phrase, although speed of growth differs depending on the region. In such circumstances, the Japanese economy has been expanding continuously since early 2002, and strong export demand during this recovery is beginning to spill over into the corporate and household sectors. However, a number of factors give cause for concern. One is the rising price of crude oil and other raw materials, and another is the disparity in the speed of economic recovery among regions, companies of different sizes, and industries. A third factor is unevenness in the employment picture among nations, and the last is uncertainty regarding the international situation, including the Middle East and North Korea.

In November 2006, Japan's economy marked the longest expansion phase in 60 years, longer even than the Izanagi "boom" of the late 1960s. But the future is by no means rosy. Many problems must be faced, from responding to structural changes in the global economy, to reducing regional, enterprise size and industry disparity in the economic recovery at home and to becoming more competitive. These are all difficult and complex issues demanding swift action as the pace of change accelerates.

Part 2 Corporate Management and Labor Issues: Focus on Competitiveness

1. Innovation is the Key to Growth

Japan faces many difficult problems as the global economy undergoes structural change. In particular, further strengthening our growth and competitiveness and addressing the declining birthrate and population aging are priority issues.

To ensure that the economy continues to grow, industries and enterprises must have clear visions and strategies, which, steadily implemented, will boost national productivity. It will be difficult to survive in international markets unless they continue concentrating on innovation and achieve competitive superiority through cutting-edge science and technology, better enterprise management and a lower cost structure. At the enterprise level, first, enterprises' senior management must clearly state the corporate philosophy and strategy and create a corporate culture avid for change, in order to boost growth and improve productivity. The second necessary element is investing more actively in R & D and taking advantage of ICT. Third, human resources must be further developed.

In addition to these steps taken by individual enterprises, productivity in the non-manufacturing sector must be improved. Because of lower productivity in that sector than manufacturing, Japan's overall productivity fares poorly compared to that of other industrial countries. Hard work is needed to raise productivity, by improving the quality of human resources in tertiary industry.

2. A New Way of Working -- Achieving Work-Life Balance

Under sharpened international competition and demographic change that will ultimately shrink the labor force, to promote innovation will be a vital issue. The driving force behind innovation is human resources and for employees to feel interested in their work and fulfilled in their private lives, they need to be able to adjust their work routines to meet their personal needs and values. Companies and workers should cooperate to promote new ways of working that can meet the needs of both sides. This is the quest for achieving work-life balance.

In accordance with this basic concept, opportunities are needed for all types of people to participate in the work force, and flexible ways of working should be promoted.

Searching for varied and flexible methods of achieving work objectives, and creating new ways of working and living can help enterprises achieve higher productivity and allow workers to work in a more balanced way appropriate to personal needs like child care or nursing care. Work-life balance is not merely concerned with shortening work hours or taking annual leave, but is an active step by management and labor toward creating a new, self-determined way of working. Measures in this direction will make it possible to include more people in the labor market.

Promoting work-life balance is also an important element in how enterprises respond to rapidly occurring demographic change, with fewer births and an aging population.

Industry and enterprises, for their part, should try to foster a workplace atmosphere promoting support for combining parenthood and work and offer varied employment types, as their circumstances permit. Measures could, for example, include alternatives for working hours or place of work such as shorter hours, the discretionary work hours scheme, working from home and so on, which would make it possible for employees to work more flexibly.

Additionally flexible employment types giving a diverse range of people a chance to work will provide wider opportunities for women, seniors, young people, persons with disabilities, non-Japanese and others who have not necessarily been able to fully participate in the work force so far.

3. Employment for Young Workers

The employment situation is generally improving, but unemployment among young people aged 18-24 continues to be high. In particular, many young people who are NEETs (Not in Education, Employment or Training) or "freeters" (underemployed young people) are getting older, which makes it even more difficult for them to move into stable employment. Effective measures are needed to help them find work.

Jobs for new graduates were very scarce for a time in the late 1990s and early 2000s due to economic stagnation, and many young people failed to find regular employment then. However, many of them have plenty of potential. Striking the right balance between staffing and management strategies, enterprises need to give these young people a chance to work, after evaluating their abilities, suitability for available jobs and motivation.

The government has mapped out and expanded measures for supporting youth employment. Young people, for their part, should make the most of this opportunity and try their best to find suitable employment, taking advantage of job information, skill development and counseling services being provided to help them become independent members of society.

4. Development of Human Resources

Corporate activity is demanding more diverse and advanced human resources. The time for catching up with the West is over. Today, when the ability to open new markets and add value in increasingly sophisticated ways can have a major impact on corporate growth, enterprises must develop a clear picture of the human resources they need, develop and train them appropriately, and support employees' self-development.

There are signs that excellence in the field, which has been the strength of Japanese industry, is declining. It is individual employees, and their skills, who support an enterprise's strengths in the field. Keeping up and improving field skills is an issue of concern common to all departments of the corporate organization, including sales, administration, and research and development, not just the production floor. Diligent efforts to keep up and improve excellence in the field are essential for promoting innovation and providing high-quality goods and services. Unceasing effort in this direction builds safety, trust and peace of mind in the workplace.

5. Personnel Management for Increased Competitiveness

In order to make the most of a diversified work force and boost corporate competitiveness, a urgent priority is to develop personnel and wage systems based on fair and well-accepted evaluation criteria consistent with employees' duties, roles and contribution,. Multi-track personnel and wage administration systems may also be necessary, depending on the situation of individual enterprises. Corporate management should consider moving away from seniority-based wages that over-emphasize age and length of service and instead adopt personnel and wage systems better able to reflect the work performed, roles and contributions made by individual employees.

With regard to the issue of pay equity for long-term regular and fixed-term non-regular employees, non-regular employees should receive fair and equitable remuneration based on sound appraisal of their individual work performance not simply at one point in time but also taking into consideration how they may be assigned, their opportunities for contributing to the enterprise, and the training they may receive in the future.

6. Small and Medium-size Enterprises

SMEs constitute Japan's industrial base and provide a vast number of jobs. Without their vitality, industry cannot grow.

For SMEs, the most pressing issues are recruiting personnel and improving the quality of their workforce. They should try to establish sound work-life balance in order to attract workers. Their undertakings include reviewing working hours or workplace, introducing systems for taking holidays or time off from work, economic support and other measures.

Part 3 Improving the Business Environment

1. Energizing Regional Economies

Local economies are also not immune to the effects of globalization. As ICT becomes more widespread and people starting living in more diverse areas, the behavior and needs of consumers and citizens continue to change. It is up to the regions themselves to develop a vision and come up with inventive ideas for making the most of their local features, creating areas appealing to those who live and work there.

To regain vitality, regional economies need a system for attracting resources like people, goods, capital, information or technology. The basic step is to effectively redistribute existing area resources and attract new people, new capital, new technology and so on from outside the region, to create a new mix with existing management resources.

It is also time to seriously consider the issue of creating regional blocs extending beyond the boundaries of existing prefectures, in order to concentrate area strengths and boost vitality.

2. Supporting Innovation

Creating an environment where enterprises can operate more easily is important for promoting innovation. From that perspective, the government is requested to implement the measures described below.

First, make Japan a leader in science and technology. This calls for strong support for diverse and sustained basic research, from which innovation is born, establishing world-class research institutes, enhancing business-academia-government collaboration.

Second, continue regulatory reform. Equal footing competitive criteria for the public and private sectors should be promoted, and competitive bidding by public and private entities and within the private sector implemented steadily and systematically.

At the same time, a framework for competition policies incorporating appropriate procedures, transparency, and predictability to ensure fair competition, must be established.

Third, carry out tax reform. When social insurance contributions are included, enterprises are bearing an increasingly heavy burden. Comprehensive tax reforms lowering the effective corporate tax rate should be carried out to allow vibrant corporate activity, the engine of economic growth.

Fourth, strengthen relations with economic partners. Japan should push for more economic partnership agreements and free trade agreements and contribute more substantially to the WTO framework. Maintaining the free trade system is an issue of critical importance for Japan, which imports most raw materials from abroad, and now that an increasing number of Japanese corporations operate multinationally.

Fifth, encourage more foreign companies to open offices in Japan. With expanding globalization, it is necessary to think of energizing domestic economic activity by attracting management resources from Japan and abroad and promoting exchanges.

3. Reforming Labor Legislation

(1) Work hours

More white-collar workers wish to be remunerated based on results achieved, irrespective of hours worked. It is a fact that, nowadays, the quality and level of their work affect enterprise competitiveness. The Labor Standards Law currently sets work hours uniformly at eight hours per day and 40 hours per week, regardless of the type of work performed. This arrangement is not responding flexibly to the changed needs of enterprises and workers.

Adoption of an exemption from work hour legislation for white-collar workers who are, evaluated on ability, role and performance rather than length of time spent working, is being discussed. The aim of this exemption is to allow individuals to regulate their work on a discretionary basis while striking the right balance between work and private life. It is not a measure intended to cut down on paying overtime wages.

The new exemption system under consideration by the government establishes more stringent annual income criteria compared to the proposal advocated by Nippon Keidanren. In its proposed form, it is not likely to cover that many individuals. Setting the requirements for applying the new system should basically left up to management and labor to decide.

(2) Labor contract law and other laws

Nippon Keidanren reiterates its position on the issue of labor contract law: if new legislation is being considered, it should fully respect autonomous decision-making by labor and management, and the system and procedures should be simple, so that most enterprises, including SMEs, can adhere to the law without difficulty.

Regarding the labor contract law proposed by the government, a number of its provisions impose unilateral obligations on employers. The draft law should be amended to maintain proper balance between the rights and obligations of both management and labor.

The government is thinking of amending the Part-time Work Law as well. Wages for non-regular employees should be determined individually in accordance with each worker's contribution, such as skills or the future role expected of that person, according to circumstances in individual enterprises, and should not be set uniformly by law.

4. Sustainability for Social Security

With demographic change occurring so quickly, sustainability of the social security system must be ensured. Citizens should provide for themselves basically through self-help and learn not to depend so much on public systems.

The first issue to resolve is restoring the system's fiscal health. As part of overall fiscal reforms, changes to put in place a comprehensive pension, health and nursing care social security system appropriate to our circumstances and consistent with our economy and national finances must be implemented soon.

The second is reform that concentrates on keeping the contribution burden under control. The older generation are not necessarily poorly off. To ensure the system's sustainability, emphasis must be placed on reducing the burden on the currently active population.

5. The Gap between Haves and Have-nots

In these days, disparities in various aspects of society are being widely discussed: the income disparity between regular and non-regular employees; wage differences among corporate employees as a result of the shift to performance-based remuneration; widely differing income levels for households headed by seniors; differences in the pace of economic recovery between urban and rural areas, and so forth.

Some believe that regulatory reform has widened disparities. But regulatory reform has been implemented to make competition fairer and more equitable and allow motivated people to enter the market. It is, in other words, a policy being carried out to offer equal opportunities and expand the choices available, and it encourages those who are willing to try.

The point at issue here is whether the factors causing disparity can be explained, and whether those factors can be avoided. Economic disparity emerging as a result of fair competition is a natural outcome. Income disparities are often due to differences in individuals' skills, the work or role they perform and the contribution they make. However, what should be considered a problem are income disparities that become entrenched, unequal access to education, or the lack of opportunities to start over for those who are not successful the first time around. To avoid creating entrenched disparities, it is important to encourage fair competition and equal opportunity and give people more chances when necessary.

Part 4 Employers' Position

1. Upcoming Negotiations and Consultations with Labor

Today, it is important for management and labor to talk about the corporate business environment, employment and other matters from various perspectives and develop a thorough understanding of the issues. In wage determination, across-the-board base wage increases that raise wage levels even at companies that have not improved productivity are no longer an option. Base wage increases not supported by productivity increases not only sap corporate competitiveness, they also perpetuate the high cost structure. Enterprises must become more competitive to hold their own in international markets. They have no leeway for a uniform wage level increase.

Wages should be determined in accordance with companies' ability to pay, by management and labor based on that company's circumstances. Labor and management talks in individual companies have led to changes in their wage systems to reflect performance in different ways. Uniform base wage increases for all employees are unthinkable now; workers should basically be rewarded for strong short-term results in the form of bonuses.

In terms of labor's share, enterprises will need to decide, from the medium- to long-term perspective, whether their own company's apportionment is at a level compatible with better competitiveness in international markets. Labor's share differs among industries and companies, and there is no uniform benchmark for discussing whether it is high or low. Labor's share tends to rise when an economy is sluggish and drop when it recovers. This is because there is downward rigidity of wages that cannot easily be adjusted in coordination with changes in the economy. Adjusting labor's share in accordance with short-term economic fluctuations will end up destabilizing wages and employment and have a major impact on corporate management. This round of negotiations and consultations with labor will focus on the following issues: such control of total labor costs, the need to revise wage systems and structures, review of personnel remuneration systems other than wages like promoting work-life balance, human resources development and reexamination of retirement benefits such as lump-sum retirement pay, corporate annuities and so on.

2. A New Perspective on Japanese-style Management

Under the globalization, transformation of the management techniques is discussed worldwide. In a radically changed economic environment, some have said that the ideas of Japanese-style management have collapsed.

However, the basic philosophy of Japanese-style management, which emphasizes people-centered management and management from a long-term perspective, should be retained even as economic activity becomes increasingly globalized, because it is necessary for drawing out the best from employees and for maintaining and improving corporate competitiveness. That is how Japanese enterprises will gain the trust and support of their various constituents, shareholders, customers and other stakeholders.

3. Passing on Lofty Ideals

Enterprises are economic entities pursuing profit through fair competition. At the same time, they must be socially useful.

In Japan, the enterprise has long been considered "a public institution of society," which infers that enterprises should not only pursue profits but also contribute to society and its members. That is the underlying philosophy of corporate social responsibility.

The way in which a society functions is determined in large part by how its members work and their way of life. Employers also have a strong impact on society through their activities. It should be remembered that developing a vision for society and acting on that vision is the duty and responsibility of enterprises and employers.

Society recognizes the true worth of enterprises when the aspirations of employers working for the good of society yield concrete results as they aim to create value through business activities, win society's trust and further invigorate society.

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