The Selected Issues paper analyzes the health of the corporate sector, areas of vulnerability, and the effect of corporate restructuring in Japan. It reviews the deflation and associated economic problems of Japan, demonstrates the impact of fiscal policies on public debt, and estimates the expenditure and revenue adjustments needed to restrain the growth of debt. It also analyzes the issues in the Japanese labor market, structural developments, changes in the behavior of stakeholders, policy issues on employment insurance, and the social safety net.


The Selected Issues paper analyzes the health of the corporate sector, areas of vulnerability, and the effect of corporate restructuring in Japan. It reviews the deflation and associated economic problems of Japan, demonstrates the impact of fiscal policies on public debt, and estimates the expenditure and revenue adjustments needed to restrain the growth of debt. It also analyzes the issues in the Japanese labor market, structural developments, changes in the behavior of stakeholders, policy issues on employment insurance, and the social safety net.

V. Structural Changes in Japan’s Labor Market1

1. Japan’s employment situation has deteriorated, mainly due to the long economic slump during the 1990s. The unemployment rate has reached a record high, and long-term unemployment has increased. Amid the worsening employment situation, stakeholders, including firms and labor unions, have changed their responses to economic hardships.

2. This chapter deals with a broad set of issues in the Japanese labor market, paying particular attention to structural developments and changes in the behavior of stakeholders. The structure of the paper is as follows. Section A introduces recent developments in the Japanese labor market, in particular, increases in noncyclical unemployment, long-term unemployment, and youth and old age unemployment. Section B describes the changing practices of corporations in reducing their labor costs and their recent actions to decrease the number of regular workers and their wages. Section C discusses recent weaknesses in job creation and business start-ups as well as increased job losses and business closures. Section D considers possible policy measures to revitalize the labor market by making it more flexible, by decreasing mismatches between labor supply and demand, and by creating more jobs.

A. Recent Developments in the Labor Market

3. After the asset price bubble burst, the Japanese economy entered a long slump in the early 1990s. Since then, the real GDP growth rate has dropped significantly compared to its 1980s level. In addition, corporate bankruptcies increased to the highest level in history, in terms of both the numbers of bankrupt firms and the amount of debt left by bankrupt companies (Figures).


Real GDP Growth

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005


Firm Bankruptey

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

4. Reflecting this economic slack, Japan’s employment situation has deteriorated. Japan experienced remarkably low unemployment before the 1980s; the unemployment rate was still only 2.1 percent in 1990 (Figure). (The low unemployment rate once puzzled researchers and was sometimes attributed to statistical differences between, say, the U.S. and Japan. The recent rise in the unemployment rate makes this argument less persuasive (see Annex I); Japan’s low rate in the past may be better explained by Japanese corporations’ past practice of retaining workers even during a depression.) However, the rate steadily increased thereafter and reached 5 percent in 2001, more than doubling within a decade. The labor force grew at a subdued rate in the 1990s and even started to decline at the end of the 1990s (Figure). At the same time, total nominal wages peaked in 1997 and began to decrease thereafter (Table). As a consequence, employment insurance expenditures skyrocketed, putting pressure on the finances of the insurance system.2


Unemployment Rate

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005


Average Annual Change in Labour Force

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

5. Among these weak labor statistics, four characteristics should be noted in particular: increases in noncyclical unemployment; rising long-term unemployment; high unemployment among young (aged 15 to 24) workers; and increased unemployment among old (55 to 64) workers.

Paid Monthly Wages per Worker

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Source: MHLW.

6. First, data clearly show increases in noncyclical unemployment. Japan’s Beveridge curve, which shows the relation between unemployment rates and vacancy rates, has noticeably shifted to the upper right since 1995, showing a rapid and large increase in noncyclical unemployment during the late 1990s and the early 2000s.3 Similarly, the Ministry of Health, Labor and Welfare (MHLW) estimated that the noncyclical unemployment rate increased to about 4 percent by 2002 from 2 percent in the early 1990s (Figure).4


Beveridge Curve 1/

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

1/ Definition of the unemployment rate here excludes the self-employed from the workflow

7. High noncyclical unemployment implies increased mismatches between labor supply and demand. These mismatches may reflect two possible underlying factors: first, rapid technological changes in business, including the IT sector, that may have made workers’ skills obsolete; second, the entry of a greater number of middle-aged workers into the labor market because of increased business restructuring, as firms have become more likely to lay off workers in response to economic hardships. The data show imbalances across sectors: manufacturing, construction, and wholesale and retail industries have too many workers while transportation and communication and service industries have too few (Table). Across types of jobs, there is more demand for professional and technical staff and less for management and clerical staff. Since job mismatches are closely connected with long-term unemployment, policy measures such as improving career consultation services could play a useful role in diminishing these mismatches.


Noncyclical Unemployment


Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

Labor Insufficiency/Excessiveness Index

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Source: MHLW.

Incidence of Long-term Unemployment

(As Percentage of Total Unemployment)

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Source: OECD Employment Outlook (2002).

8. Second, long-term unemployment, in terms of both the ratios and the number, expanded during the last decade. In 1990, the ratios of those unemployed: (i) over six months; and (ii) over 12 months to the total unemployed in Japan were below the Weighted average of OECD countries. However, in Japan both ratios increased during the 1990s and by 2001 were broadly in line with those in other OECD countries (Tables). Long-term unemployment rates have increased the most among young and old males. Furthermore, the data on the number of long-term unemployed are more discouraging: the number of unemployed over six months and over 12 months in 2001 were triple those in 1990, because the total number of unemployed in 2001 was more than double that in 1990.

Number of Unemployed

(Ten thousand persons)

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Source: OECD Employment Outlook (2002).

9. Policy actions can alleviate the self-reinforcing nature of long term unemployment. While the increases in long-term unemployment can be mainly attributed to both demand and supply factors, the self-reinforcing nature or hysteresis effects of long-term unemployment should be kept in mind: the longer unemployment lasts, the more people’s skills diminish, and the more difficult it becomes for them to find jobs. Effective policy actions to help the unemployed find jobs earlier can break the vicious cycle.

10. Third, Japan, once free from serious unemployment problems among young people, now faces the same problem as many other advanced countries do. As in other countries, the unemployment rate among young workers was higher than the total unemployment rate in 1990 (Table). That said, the problem was much less serious than in other countries at that time since the youth unemployment rate was just above 4 percent. However, along with the increase in overall unemployment, the unemployment rate among young workers increased to just under 10 percent in 2001, close to the weighted average for OECD countries.

Unemployment Rate by Age

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Source: OECD Employment Outlook (2002).

11. While both demand and supply factors have contributed to high unemployment among young workers, the economic downturn (demand) seems to have had particularly large effects. Since corporations with excessive workers reduce new hiring before firing existing employees, new graduates are always the first to be unemployed. In addition to this demand factor, the changing behavior of young workers is often referred to as a factor in high unemployment among them: some young workers now opt not to find regular jobs and instead work as the need arises. These young people are nicknamed “free-ters”; the government estimated that about two million people, 18 percent of young people, were free-ters in 2000, twice as many as these were eight years ago.5 However, over 70 percent of free-ters surveyed in 2003 said that they had originally wanted to be hired as regular employees. Thus, this phenomenon may be better explained by demand factors than supply factors: fewer attractive jobs have been offered to them amid the long economic slump. The same survey showed that free-ters had poorer morale and lower job skills than regular workers. This suggests the desirability of policies to ensure that more jobs are offered to young people so that they can find more attractive jobs among the offered jobs.

12. Fourth, old Japanese workers suffer high unemployment. In 1990, thanks to generally favorable employment conditions in the past, the unemployment rate for old Japanese workers was below the weighted-average for old workers in all OECD countries. As total unemployment increased, however, the situation changed: the unemployment rate for old Japanese workers increased, and exceeded the weighted average in all OECD countries in 2001. As in the past, the unemployment rate among the old exceeds that among middle-aged workers—the opposite of the case in other countries. This partly reflects a high labor force participation rate among old Japanese people.

13. High unemployment among old workers partly reflects the retirement age system. According to a MHLW survey, 90 percent of Japanese firms set a uniform retirement age, and 89 percent of these firms set the age at 60 years old.6 At the same time, high unemployment among the old workers has only held true for males but not for females. As the labor force participation rate is high among old Japanese males, there may be room for policy efforts to facilitate the provision of appropriate jobs to old workers so as to utilize their labor.

B. Structural Changes in the Labor Market

14. This section describes a key factor underlying the deterioration in labor market conditions: the changing practices of firms in reducing their labor costs, which started in the 1990s.7 There are three main reasons why firms recently tried hard to reduce their labor costs.

15. First, productivity has grown more slowly than wages. The Cabinet Office (CAO) reported that labor productivity rose by 2.0 percent per year in the 1990s, much subdued compared with the 3.7 percent rate in the 1980s.8 In the meantime, real wage growth declined modestly to 1.0 percent per annum in the 1990s from 1.5 percent in the 1980s, despite a sharp decrease in nominal wage growth to 1.1 percent in the 1990s compared with 3.5 percent in the 1980s (Table). In this regard, the Phillips curve plainly shows that the elasticity of wages with respect to the unemployment rate has been reduced in recent years (Figure). Although nominal wage growth has slowed, due to nominal wage rigidity the slowing has not kept pace with price deflation (that is, deflation may have exacerbated the effects of nominal wage rigidity).

Productivity and Wage Increase

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Source: CAO, MHLW, and MoF.

Phillips Curve, 1960-2002

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

16. By the same token, productivity per Japanese worker remains low. According to the MHLW, hourly productivity per Japanese employee was 20 to 30 percent lower than that in most other G-7 countries in 2000 based on the OECD data. Hourly productivity per employee was 134 in the United States, 134 in France, 137 in Italy, and 129 in Germany, when productivity in Japan was 100.9 This mainly reflects the relatively low productivity of sectors that produce non-traded goods, compared to those that produce traded goods. International Labor Organization (ILO) data in 1999 showed that Japan’s manufacturing industry, which was competing in the world market, had lower unit labor costs than some of its G-7 counterparts including Germany and the United Kingdom.10

17. Second, firms’ payments to workers have increased relative to their value added. Annual corporate surveys by the Ministry of Finance (MoF) showed that in the 1980s, firms spent 70 percent of value added on salaries and wages. The rate has exceeded 75 percent since 1998 (except in 2000), and the increased transfers to employees squeezed corporate net profits. As in the case of real wages described above, deflation and nominal wage rigidity may have contributed to this development.

18. Third, last but not least, the traditional Japanese employment practice characterized by a combination of long-term employment and seniority based wages has become economically less sensible than in prior years. Seniority based wages were efficient for firms particularly when they employed more young workers than middle-aged workers and when high economic growth was expected in the future.11 Today, however, a rapidly aging population, combined with low economic growth, has led firms to hire fewer young workers, while more middle aged and old workers, being paid more than their productivity, have remained. Also, firms no longer expect rapid growth in the future; corporate expectations of medium-term economic growth decreased to just 1 percent in 2003 from 3 to 4 percent in early 1990s (Figure).12


Expected Medium Term (Over the Next 5 Years) Growth

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

19. Against this backdrop, firms needed to reduce their labor costs, and many firms could not maintain the same practice as in the past. Previously, Japanese firms experiencing adverse economic shocks typically did not touch employment of regular workers or their regular wages, which could be called the core of the traditional Japanese employment system. In other words, regular workers were protected and rarely dismissed except in extreme circumstances, such as bankruptcies. Instead, firms reduced buffers for cyclical shocks, such as new hiring, part-time workers, and bonus and overtime payments. In addition, firms moved some employees to more productive departments within the firm, or to their subsidiaries (thereby reducing the parent company’s labor costs).

20. In recent years, amid the prolonged economic slump, firms have started to resort to cutting regular workers’ employment. Many firms have reduced the number of full-time workers, increasingly pushing labor adjustments into the external labor market through unemployment.13 In particular, firms have dismissed more middle- and old- aged workers than previously. More often than not, these workers have been engaged in management or clerical jobs, and their skills have been corporate-specific—which has been one of the roots of increased mismatches in the labor market and longer unemployment.

21. In addition, firms have employed more part-time workers, thereby increasing their future flexibility to adjust labor costs. As a consequence, the share of part-time workers in all the employed has increased to 23 percent in 2002 from about 16 percent in the early 1990s (Table).14 The number of workers sent by temporary job agencies has also increased, partly with the help of recent deregulation measures in this sector.

Full-Time Workers and Part-Time Workers

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Source: MHLW and Ministry of Public Management, Home Affairs, Post and Telecommunications.

Change in Monthly Salary (Nominal) and Consumer Price

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

22. Firms have also started to cut regular wages. Admittedly, total cash earnings per worker, which include bonus and overtime payments as well as regular wages, have been volatile and vulnerable to the business cycle, since bonus and overtime payments have been a buffer for the recession.15 By contrast, regular wages had increased steadily in the past regardless of the business cycle, partly because regular wages were the main focus of the annual spring wage negotiation, known as “Shunto,” between management and labor unions. However, as the need to adjust excessive labor costs became clearer, firms decreased nominal regular wages two years in a row in 2002 (Figure and Box 1).

Changing Labor Unions

Labor unions in Japan have become weaker over a long period of time. The participation rate among workers in labor unions, once well above 30 percent, has been declining, and was just above 20 percent in 2002.

In 1989, major labor unions merged and formed the Japanese Trade Union Confederation (RENGO). By the establishment of RENGO, a majority of labor union workers came to belong to the single confederation. However, the participation rate has continued to decline. Moreover, the number of workers who belong to labor unions was at a peak in the 1990s and began to decrease.


Labour Union Participation

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

Amid the long economic slump, labor unions have shifted their emphasis in annual negotiations (Shunto negotiations) from increasing wages to maintaining employment. In the Shunto negotiation, which first occurred in spring 1955, labor unions have requested uniform wage increases to management. The request has both “base-up” (i.e., base increases) and seniority wage increases. However, as the Japanese economy has worsened and labor unions have been losing influence over employers as a whole, labor unions shifted their emphasis from increasing wages to maintaining employment. As a result, wages are increasingly dependent on worker’ performances, rather than seniority. More significantly, in 2003, labor unions in companies with historically high profits agreed to low wage increase and high bonus payments. The agreement will enable employers to make labor cost adjustment easier in the future.

Wage Increase Set at the Spring Wage Negotiation

(For Workers in Major Corporations)

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C. Job Creation and Job Loss

23. Both job creation and loss have been lackluster in Japan since the early 1990s. Generally speaking, Japan has low rates of job creation and loss, similar to Germany and the United Kingdom and by contrast to the United States, which ranks high in both job creation and loss (Table below).16 Moreover, mainly due to low economic growth, Japan’s net job creation turned negative in the early 1990s and worsened thereafter, different from even Germany and the United Kingdom. The job creation rate has decreased particularly sharply in existing companies, while the job loss rate has increased in both existing and shut-down firms.

Creation and Loss Rate

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Source: OECD Employment Outlook (1996) and Higuchi.

24. Sectors generating high productivity growth have lost jobs, while those suffering low productivity growth have created jobs. Among sectors, the manufacturing sector, which lost the largest number of jobs (over two million) during the 1990s, generated the highest labor productivity growth during the same period. In contrast, the service sector created the largest number of jobs (over three million) but had much lower productivity growth than the average (Table). It is desirable for Japan, indeed for any country, to reallocate capital and labor to sectors with high productivity from those with low productivity, but, assuming the current relation between labor productivity growth and job creation/loss remains in place, high growth in labor productivity in the overall economy could only be realized at the expense of greater job loss. Accordingly, to avoid a jobless recovery, the Japanese economy needs growth in sectors with high productivity and positive net job creation. Unfortunately, it is not easy to identify such sectors. The best way would be to promote deregulation in sectors that are generating low productivity growth due to over regulation. Productivity in these sectors could potentially grow more rapidly through entry of new firms and heightened competition.

Job Creations and Productivity by Sector

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Source: MHLW (2002).

Business Start-ups and Closures

25. The business start-up rate has been declining, and the closure rate has been trending upward (Figure). According to the Ministry of Economy, Trade and Industry (METI), the start-up rate decreased to about 3 percent in the 1990s from about 6 percent around 1980, and the closure rate, which has moved in a more stable fashion than the start-up rate and even upward, surpassed the start-up rate by the early 1990s. At the same time, it should be noted that both of these rates in Japan have been much lower than in the United States, where both rates have been above 10 percent.17


Business Start-up and Closure

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

26. The decline in the start-up rate is of concern because business start-ups have positive spill-over effects. First, newly-created corporations generate more employment than older ones after controlling for corporate size and sectors (Table). Second, cross country data show that a high business start-up rate is correlated with high GDP growth.18 Last, sectors with higher start-ups and higher closures in Japan experienced a higher productivity growth, presumably because of intensified competition.19

Job Creation Rate (Net) by Size/Age of Firms

(Between 1995 and 1996)

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Source: Higuchi (2001) and MITI.

D. Policy Discussions

27. In order to promote structural changes and overcome weakness in the labor market, policies can aim to increase labor mobility and flexibility in the labor market, decrease mismatches in the labor market, and create jobs.

Increase Labor Mobility and Flexibility in the Labor Market

28. First of all, to facilitate the reallocation of labor, the labor market should become more flexible and foster higher labor mobility. In this context, four measures could be considered: clarifying dismissal conditions in legislation, providing portable pensions to more workers, adjusting the treatment of part-time workers in social welfare and tax systems, and improving firms’ management of workers.

Defining Dismissal Conditions

29. Japanese employment protection is strict, according to a number of studies that make international comparisons.20 Although protection in legislation is minimal, judicial precedents require firms to satisfy strict conditions to rationalize their dismissals of workers. Against this background, to reduce workers and labor costs, Japanese firms have relied on voluntary job leaving through early retirement programs. These programs have been widespread and contributed to labor mobility; however, many researchers think that these judicial precedents have made firms too reluctant to dismiss workers because they cannot be reasonably certain ex ante whether their decisions can be defended in court.21

30. Further changes to the law could make it easier for corporations to make necessary labor adjustments. In 2003, the MHLW proposed a bill to the Diet that restated that corporations could dismiss workers in principle—a potential good first step to increase labor mobility in the sense that it could encourage firms to reduce workers if necessary.22 However, due to strong resistance from trade unions and opposition parties, the bill was amended at the Diet by deleting the restatement. Looking forward, clear conditions for dismissals, rather than a principle for dismissals in legislation based on established judicial precedents, could give firms a clearer view on their decision.23

Providing Portable Pensions to Greater Number of Workers

31. Lack of portability of corporate pensions has hindered labor mobility. Previously, once workers changed firms, many of them lost their right to receive corporate pensions based on their previous contribution. In response, the government passed legislation to allow firms to adopt defined contribution pension schemes, effective in October 2001. With the scheme, workers can change jobs and take their previous pension contributions to new firms. By March 2003, 361 firms had adopted this scheme, but the majority of firms have not done so yet. To improve labor mobility, more rapid and widespread adoption of the scheme would be desirable and the maximum contribution amount for the defined contribution pension could be increased.

Adjusting Treatment of Part-time Workers in Social Welfare and Tax Systems

32. The social security and tax systems have distorted incentives facing part-time workers and their employers in deciding their working hours. According to a report by the study group on part-time working (2002) under the MHLW, many part-time workers have refrained from working longer hours beyond income thresholds in the health insurance, employees pension, unemployment insurance, and tax system. According to a survey, 27 percent of part-time workers have maneuvered their work hours and incomes in order to evade tax or social security premiums payments or to receive more favorable tax exemptions for their spouses. As a result, one can find clear discontinuities in the distribution of work hours of part-time workers.

33. Under the current systems, these part-time workers’ behaviors are broadly rational; therefore adjustments in the systems are needed.24 In the case of health insurance, part-time workers are exempted from paying premiums unless their hours exceed a certain threshold. This exemption discourages them from working longer hours, since their net incomes would decline when their gross incomes surpassed the threshold. Moreover, they have nothing to lose by these maneuvers: most of these part-time workers are housewives and covered by the insurance of their spouses. Corporations also respond strategically to the threshold. The threshold makes corporations, who co-pay the premium, to allow part-time workers to work only short hours in order to save their premium payments. Lowering or eliminating the threshold could provide better incentives for part-time workers to work longer hours.25

34. This issue has been discussed for a long time with little progress; however, part-time workers have become increasingly important, underscoring that it is all the more important to take actions now. As noted above, corporations are more and more reliant on part-time workers, and according to surveys an increased number of part-time workers engage in the same job as regular workers and have the same degree of discretion in their work. The government now intends to halve the threshold in the pension system.

Improving Firms’ Management of Workers

35. As explained above, under the system of long-term employment and seniority based wages, wages and positions for most workers have differed from their productivity. Generally speaking, young people have received a wage that is below their productivity, and old people have received a wage that exceeds their productivity. On the one hand, this system can guarantee fair returns to workers in the long run, and firms can expect higher loyalty from workers and can provide more training to improve workers’ capacity. Thus, this system could boost productivity growth. On the other hand, the system inherently would undermine incentives for workers to change jobs and thus could hinder labor adjustments even when rapid structural changes are necessary for the health of the economy.

36. Against this backdrop, Japanese corporations can usefully change the management of labor, including through wage setting and promotion, to put more emphasis on workers’ productivity. For a long time, Japanese firms have tried to modernize their labor management and accelerated reforms in response to increasingly difficult situations: many firms have introduced a performance based wage system for some workers, often for high-ranked or old workers, and expanded the scope of its application. However, in most cases, their efforts so far seem gradualist: there is a sense that there is much room left to materialize full-fledged reforms. Accelerated efforts by firms are warranted, since these reforms can benefit the overall economy, in addition to the firms themselves.

Decrease Mismatches in the Labor Market

37. As seen in section A, mismatches in the labor market have increased. In theory, three factors would create mismatches: skill mismatches, imperfect information, and preferences of workers and firms. Efforts in the following areas could help to address these problems.

38. First, although the government has gradually promoted deregulation measures in the labor market, further deregulation would be useful. Thanks to the measures taken so far, firms are able to rely more on workers sent by temporary job agencies, as mentioned in section B. In 2001, about 1.75 million workers were sent to firms by these businesses, triple the number of seven years ago. However, there may still be room left for further deregulation, which would contribute to making the labor market more flexible. To give two examples:

  • Temporary job agencies. Until 1999, temporary job agencies were able to send workers only to listed 26 industries. In 1999, these agencies became able to send workers to all business sectors in principle with several exceptions, for a maximum duration of one year. In 2002, the maximum duration for workers over 45 years old was extended from one year to three years. In addition, as a relevant bill just passed the Diet and will be effective by March 2004, the maximum duration for all age groups will be extended to three years. However, it might be useful to extend the maximum duration even further, say to five years, or abolish the limit, as requested by the Council for Regulatory Reform of the government (2002). Moreover, deregulation in the manufacturing sector has been delayed. It was excluded from the liberalization in 1999 and had not been liberalized thereafter.26 The recent bill allows temporary job agencies to send workers to manufacturing firms for a maximum duration of one year—less than the three years in other sectors.

  • Job placement services. Private business had been allowed to make placements only for certain types of jobs on the “positive list” until 1999, when the government changed the method of listing from a positive list to a negative list. Even after this liberalization, a number of regulations have remained and hindered the development of placement services. For example, even for job placement services that charge no fees, the MHLW has discretion in approving local governments and other public entities (except schools) that wish to provide these services. As for job placement services that charge fees, private business could not gain a single nationwide license and needed to apply office by office. Also, these corporations that run the job placement business cannot operate certain businesses such as restaurants. Against this backdrop, the MHLW proposed a bill to the Diet to abolish some of these regulations, and the Diet passed the bill. The new measures will be in place by March 2004. However, there is still room left for further deregulation, particularly on job placement services that do not charge fees.

39. Second, increased availability of job search consultations could reduce unemployment. Improved job search consultation can help workers understand labor market conditions and ease the process of finding a job. Preceding studies show that early consultation after losing a job has strong effects in shortening the period of unemployment.27 However, public job introduction offices in Japan have only one-sixth of the workers of those in the United States or Germany and thus can provide only limited consultation services to job-seckcrs. The government target to train 50,000 new career consultants by 2007 is expected to have positive effects in reducing unemployment, particularly if labor demand increases.28

40. Third, job training could be made more effective. In Japan, as in most other countries, public entities provide job training courses to the unemployed. Although these entities have revised their courses to reflect changes in the skills that are in demand, they may not have kept pace with an accelerated pace of structural change in labor demand, and thus continued efforts are needed. In this connection, greater use of private services by contract might help to address this issue.

41. Fourth, better information sharing can reduce mismatches related to imperfect information. The MHLW established a “Shigoto Joho Net (Job Information Network)” website, which provides job-offer information from both public and private job placement services. This improved dissemination of information has started just recently, and there may be scope for private businesses to expand their involvement.

42. Fifth, better job information could be provided to young people when they choose jobs. Surveys show that many young workers who left jobs just after entering firms became “free-ters,” and that if they had chosen better matched jobs, they may have stayed in the firm. Some welcome steps have been made, but much more can usefully be done. The MHLW has started five new job placement offices exclusively for young people since 2001. These offices placed over 32,000 jobs in FY2002. Internships for students, which can help them learn about jobs, have not been common in Japan. Expanding these internships could help young people find well matched jobs. The government has recently started to encourage internships, but so far the number of participating firms and students seems limited.

43. In the midst of high unemployment among young people, in June 2003 four Ministers drafted a policy package to promote youth employment, including improved capacity building that links practical business training with regular educational programs and strong support to business start-up projects. In addition, echoing the appeal by Ministers, associations of private firms, namely, Nippon Keidanren and the Japan Chamber of Commerce and Industry, showed their intention to cooperate with the government, for example in receiving more interns. These could be useful steps. However, the impact of the package is not yet clear, and further improvements to coordination among ministries would be welcome.

Create More Jobs29

44. In addition to the measures above to improve the functioning of the labor market, job creation can alleviate unemployment and related problems. In fact, many of the measures described above work best only if accompanied with an increased number of job offers. In Japan, where more jobs were lost than created in recent years, policy actions to create jobs would be usefully strengthened and accelerated. In particular, job creation can be pursued in a market-friendly manner, which is likely to be long-lasting; temporary solutions, for example, increasing public works spending to hire more workers in construction, should be avoided. The following are possible policy measures regarding deregulation, business start-up, foreign direct investment (FDI), and international visitors.


45. Further deregulation of private business has substantial potential to bolster economic growth and job creation. For past deregulations, CAO estimated that the consumer benefits of deregulation in major sectors accumulated to ¥15.7 trillion (¥124,000 per capita) by FY2000, over 4 percent of estimated national income.30 For example, deregulation in telecommunication in the 1990s boosted business opportunities, brought huge profits to firms, provided innovative services to customers, and created jobs. CAO’s estimate suggested that consumer benefits amounted to over ¥4 trillion in the domestic telecommunication sector.

46. Looking forward, a study group in the influential Council on Economic and Fiscal Policy (CEFP) in 2001 estimated that of about five million jobs to be created in the service sectors in the next five years, about two million would depend on government deregulation. Child care, elderly care, and medical services are included in the sectors it discussed. In 2003, Japanese government established a new special group, which proposed a beefed-up job creation program with comprehensive background research, and the CEFP endorsed the program.31 To allow these job increases to materialize, the report suggests that the government needs to make steady progress in deregulation. In addition, many people including private business and researchers suggest further deregulation in the areas of postal service, electricity, and gas. The deregulation could have large effects on economic growth and job creation.

47. Meanwhile, the Council for Regulatory Reform of the government has called for improved competition in the highly regulated “markets made by public institutions” (medical services, social welfare services, education, and agriculture markets).32 Also, the CAO estimated in May 2003 that regulatory reforms in medical, nursing and child care services could increase GDP by 0.92 percent. The highlight of the Council’s call was to allow for-profits corporations to run hospitals or schools or own agricultural farms. However, according to the Council, relevant ministries such as the MHLW argued that if such corporations ran hospitals, they would charge higher fees by providing excessive medical services. The progress by the end of June 2003 has fallen short of the Council’s aims.

48. Amid the continued debate on deregulation between the Council and ministries, special zones for structural reform, a recent initiative by the government, promise to provide good pilot studies for deregulation measures. Ministries, which are uncomfortable with nationwide application of certain measures, have agreed to introduce some measures in limited local areas on a trial basis. In the special zones, for example, for-profit corporations are allowed to run nursing homes for the aged and to operate farming on leased farmland.

49. Local governments have shown much interest in this initiative, applying for 129 plans in April 2003, of which 117 were approved by the national government. Some of these plans are expected to generate large positive effects in local economies and employment. Furthermore, successful pilot deregulation measures could be applied nationwide in the future (Box 2).

Special Zones for Structural Reform

The government crafted the system of special zones for structural reform to bypass strong opposition to nationwide introduction of reform measures and to make trial implementation of these measures in some local areas. In addition, the government intends to extend successful cases nationwide. These measures provide regulatory exceptions or preferential treatments to private entities but do not entail fiscal transfers such as subsidies or tax reduction. The initiative started in 2002, and first zones were approved in April 2003.

Structure. The system consists of two pillars, namely, authorization of preferential measures and approval of special zones. Both pillars are based on proposals from the public and will repeat from time to time:

  • First, preferential treatments are proposed by local governments, private businesses including foreign corporations, and citizens. Based on these proposals, the government authorizes measures and sends a bill to the Diet for its approval. The process repeats from time to time and the new preferential treatments will be continuously added to the toolbox of these measures. The first law was passed in December 2002, which included measures such as around the clock customs clearance, preferential treatment of border entry and stay for foreign researchers, and (limited) entry by for-profit corporations in producing agricultural products. The amended law, which included measures to enable easier entry to local liquor production, was passed the Diet in May 2003.

  • Second, local governments choose measures from the toolbox and apply for approval of their plan to the national government. Applications are routinely received. The first set of 117 applications was approved in April and May 2003, and 49 zones applied in July 2003 in the second round process. A promising special zone on distribution, approved in April, gained preferential treatment including in custom fees, around the clock customs clearance, and access to government research facilities. The special zone is estimated to produce an additional ¥574 billion and create 21,900 jobs in the area in FY2007.

Assessment and nationwide application. The regulatory measures in the zones will be assessed by an independent third-party committee, which will hold its first meeting in early August. The committee will make its first recommendations to the Prime Minister by the end of the year on whether these measures should be applied to the nation as a whole.

The introduction of the special zones so far has been generally regarded as good progress in deregulation and structural reform. Political support from local governments, which are often very influential on national policy issues, has underpinned the progress. However, the success of the structural zone system mostly hinges on whether forceful measures will be added to the toolbox and whether measures will be extended to the country as a whole.

Support of Business Start-ups

50. Some policy actions have been taken to boost business start-ups, with positive (albeit marginal) effects. The minimum capital requirement in the Commercial Code was eased, prompting the establishment of thousands of corporations within several months. In addition, while Japanese industries and academics have not had close relations, METI set a target to create 1,000 venture firms that are based on the fruit of academic research. METI decided to spend ¥120 billion for this initiative including through subsidizing joint projects of industries and academics and estimated that 800 corporations will be created by 2004.

Foreign Direct Investment and International Visitors

51. Japan has received an extremely low level of inward FDI, suggesting that it has not utilized its potential and is missing out on new technologies and business models that inward FDI could have brought. Inward FDI is much less than outward FDI. Outstanding Japanese inward FDI was just 1.1 percent of GDP in 2000, while outward FDI was 6 percent. Moreover, inward FDI was far below the 28 percent of GDP in the United States, 32 percent in the United Kingdom, and 22 percent in Germany. Japan has underutilized its resources to attract inward FDI, including the world second-largest market, abundant highly skilled human resources, and innovative technologies. A survey on FDI by the United Nations Conference on Trade and Development (UNCTAD) indicated that Japan ranked 131st in 140 countries in an outstanding amounts index but ranked 14th in another index for investment potential.

52. Although Prime Minister Koizumi has recently set a target for inward FDI, the prospects for achieving the target are unclear. In January 2003, he declared that Japan would double outstanding inward FDI in his key speech to the Diet. Based on the speech, the government took quick action to establish the office of “INVEST JAPAN” to disseminate information. These were welcome steps to the right direction. However, other measures released by the Japan Investment Council do not seem much different than past proposals.33 This is partly because the national government has few effective measures left to introduce: regulations for both domestic and foreign businesses are fairly equal, and low FDI seems to have been mainly due to high prices (including wages) in Japan and the fact that it is a mature market with low expected return.34

53. Accordingly, it could be useful to provide greater incentives to attract more inward FDI. Since investments are closely related to local employment, local government initiatives have been strongly urged. Beyond equal treatment, local authorities could consider providing favorable treatment including reduced taxes on foreign investment, as many other countries have been doing.

54. Similarly, Japan has had few international visitors. In 2001,16 million Japanese went abroad while only 5 million foreigners visited Japan, resulting in net travel outflows of ¥3.5 trillion (0.7 percent of GDP) in the balance of payments. Japanese tourism is seen as uncompetitive compared with neighboring countries, mainly because valuable tourism assets at home are underutilized, and because of high domestic prices.35 As a result, not only do few foreign people visit Japan but also many Japanese opt to go abroad. Referring to this imbalance between inward and outward visitors, the Prime Minister (in the same speech as mentioned FDI), declared that Japan would double the number of international visitors by 2010. Much seems to be left for both the government and tourism businesses in order to attract both domestic and international visitors and to create more jobs in this sector.

ANNEX I Measure of Unemployment

Both Japan and the US follow the definition of the unemployed by the International Labor Organization. People are classified as unemployed if they meet all of the following three criteria: they had no employment during the period; they were available for work at that time; and they made specific efforts to find employment sometime during the period. However, statistics in these two countries have different treatments as shown in the table.

Different Treatment in Statistics

article image
E: employed, U: unemployed, N: nonlabor force

The Ministry of Health, Labor and Welfare (MHLW) estimated the Japanese unemployment rate as of August 2001 following the U.S. standard, which resulted in a lower rate than under the Japanese standard:

Japan’s Unemployment Rate

(August 2001)

article image
Source: The MHLW “White Paper on Labor Economy 2002.”

ANNEX II Estimate of Noncyclical Unemployment Rates

First, estimate α and β in the following equation.


where u: unemployment rate for employers (excluding self-employed).

  • v: vacancy rate.

Second, define u* as equilibrium unemployment rate for employers.

(u* equals the value of u when u = v). Then,

In(u*)=[In(u)βIn(v)]/(1β)U=EE×u*/(100u*)u**=U×100/(E + U)(%)

where U: number of unemployment at equilibrium.

  • EE: Number of the employed (excluding those self-employed).

  • E: Number of the employed (including those self-employed).

  • u**: noncyclical unemployment rate.

Source: MHLW “Roudou Keizai no Bunseki (Heisei 14 nen ban) (White Paper on Labor Economy 2002)”.

ANNEX III Aging Population and Long-Term Labor Supply

As discussed in the main text, a labor demand shortage is likely to be a serious problem for Japan for several years to come. Looking forward in the long run, however, the labor supply shortage due to the aging population could become a more serious problem. In fact, Japanese labor force was at a peak in 1998 and has been modestly declining since then. Since the labor force includes both employed (including self-employed) and unemployed, it is less prone to the business cycle than employment, so this probably represents a structural decline.

Japan’s population is aging more rapidly than most other advanced countries’. The total fertility rate, which shows how many children are born per female, has continued to decline and reached 1.36 in CY2000.1 According to the medium variant projection of the government population projection, total population will be at its peak in 2006. The government also estimated that Japan will lose about 2.9 million of the labor force of people aged 15–54 by 2010, adversely affecting growth.

Against this backdrop, increased labor participation will be critical for Japan to keep its economy afloat. Increased participation by females, old people, and foreign workers has a potential to contribute.

Female Workers

As for the labor force participation rate, there is a unique hollow (M-shaped curve) for Japanese women (Figure). Although the rate for Japanese women as a whole is above the OECD average, fewer women in their 30s are in the labor force. The hollow is mainly attributed to need to care for children. Typical Japanese females work as full-time workers in their 20s after graduation, and retire and stay at home when they have young child/children. They return to work as part-time workers in their 40s. At the same time, many Japanese women with high education would not return to work once they leave jobs, presumably because they are not re-hired as full-time workers and paid less (Higuchi (2001)). To remove the hollow, it would be necessary to provide better child care services for parents and correct distorting social welfare treatment and employment practice for women, in particular for part-time workers (see Section D). Success of these measures can increase the female labor force in the future.


Labor Force Participation Rate (2002)

Citation: IMF Staff Country Reports 2003, 282; 10.5089/9781451820560.002.A005

Aged Workers

As the population ages, old people become more important as a source of the labor force. People aged 55 and over in the labor force were 8.0 million (15 percent of the total labor force) in 1975, and increased to 15.8 million (24 percent of the total labor force) in 2002. Looking forward, the government predicted that these people will further increase by 3.2 million during 2002-10. Although the labor force participation rate for Japanese old people is already high, room is left for further increases. In particular, an increase in the mandatory age of retirement, which is set by firms, would have positive effects.

Foreign Workers

Japan does not open its labor market to foreign unskilled workers and thus has received a limited number of foreign workers. However, foreign workers have become more important in the real world businesses. According to a government estimate, the number of foreign workers including illegal ones was 260,000 in 1990. The number increased to 710,000 in 2000. As a result, foreign workers now exceed 1 percent of total employment. Given the huge deviation in wages between Japan and other countries in the region, the supply of foreign workers will continue to be strong. If Japan can solve social and economic problems related to receiving foreign workers, Japan may be able to benefit from them and overcome a possible shortage of the labor supply in the future.

1 National Institute of Population and Social Security Research, “Population Projection for Japan: 2001–50.” To maintain the same population, the total fertility rate needs to be above 2.08.


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Prepared by Takuo Komori (ext. 37613).


The next chapter will discuss employment insurance issues in more detail.


On Beveridge curves, movements either to the lower right or to the upper left represent cyclical labor adjustments. Movements to the upper right/the lower left indicate increases/decreases in noncyclical unemployment. For more discussions of Beveridge curves, see Mortensen and Pissarides (1999).


The estimate was based on the relationship between vacancy rates and unemployment rates (See Annex II for details). The cyclical unemployment rate, unsurprisingly, has also increased.


In this survey, the government defined young workers as those aged between 20 and 34.


MHLW (2003). The survey was of firms that had 30 or more employees.


Osawa et at (2002) compared recent developments in employment and wages with those in the past recessionary periods and identified two characteristics as unique to the late 1990s: Employment and wages have become more responsive to economic fluctuations, and growth rates for both employment and wages have structurally fallen.


In addition, total factor productivity growth deteriorated to 0.2 percent in the 1990s from 1.6 percent in the 1980s.


Against this backdrop, Japanese workers work for long hours (1,821 hours per year in 2000, compared to 1,482 hours in Germany in the same year).


ILO, “Key Indicators of the Labour Market 2001–02.”


Under the seniority wage system, workers with short work experience are paid less and workers with long experience are paid more than their respective productivity. Thus, workers have incentives to stay longer in the same firm. This enables firms to provide more training to workers to increase labor productivity than would otherwise be the case.


CAO (2003b).


The focus in the text is on involuntary labor adjustment. More broadly, with respect to the labor flow, most of the labor flow consists of recruitment and turnover, rather than involuntary labor adjustment such as dismissals (Teruyama (2003)).


The MHLW (2002) pointed out a paradox that wages for regular workers have increased faster than those for part-time workers although firms are shifting from regular workers to part-time workers. The MHLW hinted at a possibility that nominal wage rigidity for regular workers and deflation kept their wages higher than they should have been and drove firms to hire more part-time workers.


In the Monthly Labor Statistics released by the MHLW, total cash earnings consist of scheduled (regular wages), non-scheduled (overtime payments), and special (bonus payments) cash earnings.


OECD (1996) and Higuchi.


METI’s survey shows that many people who aim to start businesses face problems of financing and lack of know-how (it also shows that that starting a business is more difficult for younger people). METI, “White Paper on Small and Medium Enterprises in Japan 2003.”


For example, OECD (1999). Employment protection is hard to gauge because it is closely related to employment customs, which differ significantly across countries. Also, although employment protection is often indexed for the purpose of comparison, such indexation relies on arbitrary judgment. Nakata (2001) examined various papers that ranked countries’ employment protection using indexation, and found significant inconsistencies across papers: some ranked a certain country as high while others ranked the same country as low.


However, the government explained that the bill was not aimed at increasing dismissals, but at preventing disputes between employers and employees by restating that abuse of dismissals is unlawful. In addition, even under the new proposal, firms would continue to face uncertainty about how dismissal decisions would be judged in court.


Some countries, such as the United States, have dismissal legislation that specifies detailed conditions and procedures and compensation requirements (Nakata (2001), and Ikezoe (2002)).


As for the tax treatment, the distortion has its roots partly in misunderstanding. A survey showed that many part-time workers maneuvered their work hours in the mistaken belief that their household income would decrease if they worked longer. Most of them answered that they were willing to work longer if their household incomes would increase. Therefore, if not for the misunderstanding, these part-time workers would work longer hours (Study Group on Part Time Working (2002)).


There is some risk that part-time workers might decide not to work at all, to avoid premium payments. However, for many of these workers their incomes are a significant part of their households’ regular income.


Researchers attribute the delay in the manufacturing industry to stronger labor unions.


Studies show that effects of job search consultation services depend significantly on labor demand. When the demand is high, workers that engage in consultations are more likely to find jobs, but when the demand is limited, effects of consultation are elusive (Higuchi (2001)).


Despite the current labor demand shortage, a labor supply shortage could be a serious problem in the long run (see Annex III).


However, the revised report lacked an evaluation of progress in creating jobs between 2001 and 2003. Meanwhile, Nippon Keidanren, the largest and leading forum of Japanese corporations, estimated a much more modest 2.3 million increase in service sector jobs during the next ten years, although it is not directly comparable with the group estimate endorsed by the CEFP (among other differences, Nippon Keidanren’s number was a net increase while the group estimated the gross increase).


The Council, for example, published its “Seven Recommendations” for promoting the inward FDI in April 1999. Its most recent report in March 2003 is similar to this “Seven Recommendations.”


Governmental procedures have sometimes been referred to as obstacles for foreign investment, but with little clear explanation on details (just an impression). The recent report by the Japan Investment Council merely indicated that “the impression of unclear procedure has already impeded FDI.” Informal barriers including the nature of the business environment and practice are also pointed out as factors.


Japan Tourism Advisory Council.

Japan: Selected Issues
Author: International Monetary Fund