GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No.17

Labor Relations and Labor Law in Japan

Atsushi Tsuneki and Manabu Matsunaka

November 2008

GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, Japan

Labor Relations and Labor Law in Japan＊
Atsushi Tsuneki and Manabu MatsunakaI.

Introduction

The Japanese economy has provided economists with many puzzles.

It

possesses various apparently unique properties such as the main bank system, mutualshare holdings among group companies in the capital market, vertical relationshipamong firms (keiretsu) 1, and various interventions of the bureaucracy in the market＊

The earlier version of the present article was first written when one of the present authors (Tsuneki)

was visiting the Institute of Law and Economics at the University of Hamburg during 1999-2000; it was
published in German as Atsushi Tsuneki, Arbeitsbeziehungen, Arbeitsrecht und Arbeitslosigkeit in Japan,in ÖKONOMISCHE ANALYSE DES ARBEITSRECHTS : BEITRÄGE ZUM VII. TRAVEMÜNDER SYMPOSIUM ZUR
ÖKONOMISCHEN ANALYSE DES RECHTS (22.-25. MÄRZ 2000) 279 (Claus Ott & Hans-Bernd Schäfer eds.,
2001). We would like to thank the Institute for their hospitality and, in particular, Professor Hans-Bernd
Schäfer for his kind consideration and various fruitful discussions on our research on law and economics.
In this article, we have completely revised the older version and extended it taking into account the
drastic change in the Japanese economy and legal environment after the 1990s. We would like to thankProfessors Tomotaka Fujita, Yuji Genda, Hideshi Itoh, and particularly Fumio Ohtake for their comments
and suggestions on some earlier versions of the present article. All remaining errors are ours.
1

The nature and functions of the Japanese main bank system were surveyed by Masahiko Aoki, HughPatrick & Paul Sheard, The Japanese Main Bank System: An Introductory Overview, in THE JAPANESE
MAIN BANK SYSTEM 3 (Masahiko Aoki & Hugh Patrick eds. 1994). For a summary of characteristics ofJapanese enterprises including keiretsu and so-called Japanese employment system, see D. Eleanor
Westney, Japanese Enterprise Faces the Twenty-First Century, in THE TWENTY-FIRST-CENTURY FIRM:

1

economy.2

A conspicuous example is the so-called Japanese employment custom, which

is usually characterized by permanent employment and seniority.3
Although standard neo-classical economics regarded it as a source of
inefficiency, which goes against the competition in the labor market and leads toconsiderable waste in terms of human resource allocation, so that it is reformed in order
to increase the competitiveness of the labormarket 4 , this argument is unable toexplain why post-war Japan succeeded economically at least until the 1980s, while
protecting the apparently inefficient customs.
It was not until recently that many economists have begun to argue that aseries of properties shown by the Japanese economy should be understood as a rational

CHANGING ECONOMIC ORGANIZATION IN INTERNATIONAL PERSPECTIVE 105, 106-35 (Paul DiMaggio ed.
2001).
2

Basic observations on the Japanese industrial policy were surveyed by e.g., TAKATOSHI ITOH, THE

JAPANESE ECONOMY 196-205 (1992). Recently, there are discussions that cast doubt on the efficacy andeven presence of systems which are said to be peculiar to Japan including main bank and bureaucracy led
industrial policy. See, e.g., Yoshiro Miwa & J. Mark Ramseyer, The Fable of Keiretsu, 11 J. ECON. &MGMT. STRATEGY 169 (2002) (arguing that keiretsu has no substance and hence cannot be a characteristicof Japanese ecnomy); Yoshiro Miwa & J. Mark Ramseyer, Does Relationship Banking Matter?: The
Myth of the Japanese Main Bank, 2 J. EMPIRICAL LEGAL STUD. 261, 272-99 (2005) (arguing that none of
the features of so called main bank system is empirically supported).
3

See, e.g., Kenichi Imai & Ryutaro Komiya, Characteristics of Japanese Firms, in BUSINESSENTERPRISE IN JAPAN: VIEWS OF LEADING JAPANESE ECONOMISTS 19, 23 (Kenichi Imai & Ryutaro
Komiya eds. 1994).
4

See, e.g., GEORGE J. BORJAS, LABOR ECONOMICS 163 (2d ed. 2000).

2

and efficient system that supported the economic success of post-war Japan. 5 In thearea of labor relations, Koike has argued that the apparently group-oriented nature ofJapanese labor relations and organizations can be naturally understood as a superior
economic system to adjust to an uncertain and changing economic environment.6

Somegame-theoretic contributions argued that the labor relations in both the United States
and Japan can be characterized as two possibly efficient equilibrium of the same gameplayed by similarly rational players facing different institutional environments.7
Building on this rationalistic understanding of the Japanese employment
customs, this article discusses the relationship between Japanese labor law andemployment customs. It addresses the question of whether the Japanese labor law
enforced the establishment of the Japanese employment customs, or whether it
adjusted itself to the already established system in the process of post-war economic
development in Japan.
5

We simultaneously consider whether or not the Japanese labor

See, e.g., Masahiko Aoki, Toward An Economic Model of the Japanese Firm, 28 J. ECON. LITERATURE

1 (1990) (survey of the economic analysis of the Japanese firm); RYUTARO KOMIYA, MASAHIRO OKUNO& KOTARO SUZUMURA, THE INDUSTRIAL POLICY OF JAPAN (1988) (economic analysis of Japaneseindustrial policy).
6

See KAZUO KOIKE, THE ECONOMICS OF WORK IN JAPAN 63-68 (1996).

7

See Masahiro Okuno, Monitoring Cost, Agency Relationship and Equilibrium Modes of Labor Contract,

1 J. JAPANESE & INT’L ECON. 147 (1987); Yoshitsugu Kanemoto & W. Bentley MacLeod, The Theory ofContracts and Labor Practices in Japan and the United States, 12 MANAGERIAL & DECISION ECON. 159(1991). See also MASAHIKO AOKI, INFORMATION, INCENTIVES AND BARGAINING IN THE JAPANESEECONOMY ch.3 (1988) (economic analysis of the Japanese Firm).

3

law enhanced the efficiency of the system, both in the economic growth process until the
1980s and the stagnation period that began in the 1990s and has continued until now.
Our basic conclusion is as follows. The Japanese employment custom developed
naturally through an agreement among the members of Japanese employment society
and attained efficient economic performance up till the 1990s. During the time, theJapanese labor law mainly worked toward setting the stage for private bargaining andrespected its agreement instead of enforcing the desirable result directly through legal
regulations.

Through this indirect approach toward labor relations in Japan, at least

part of the Japanese labor law made a highly positive contribution to the attainment of
economic efficiency innate in Japanese labor relations.
After the 1990s, when the long-run stagnation occurred in Japanese economy, themerit of the Japanese employment custom diminished and needed reform.

At thisstage, the Japanese labor law began to adopt a more market-friendly approach in order
to cope with this change in some aspects. However, in some other important aspects, it
has taken the stance of directly regulating the economy, particularly in the area of
employment protection and working hours regulation.

This was exactly opposite to the

deregulation that had been necessary to recover the efficiency of the Japanese economy
after the 1990s.

Due to this mismatched regulatory approach toward Japanese4employment relations, the Japanese labor law has become one important factor thathindered the performance of the Japanese economy.

If this tendency continues, theJapanese labor law will continue to levy huge social costs on the Japanese economic
performance.
The remaining part of the article is organized as follows.

In Part II, the article

first clarifies the contents of the Japanese employment customs, referring to the major
empirical researches on them, and presents the theoretical arguments that support theeconomic rationality of the customs.

We also discuss why the Japanese employment

customs considerably lost their efficiency after the 1990s.
In Part III, the article describes the historical outline of the Japanese labor law,its basic principles, and the various aspects of the Japanese labor law in general. In
Part IV, the article analyses the economic effects of the Japanese labor law. Part IV. A.
justifies our argument that the Japanese labor law made highly positive contributions
to the establishment of efficient Japanese labor relations. Section IV.B. discusses therational adjustment of the Japanese labor law to the structural change of theJapanese economy after the 1990s. Section IV.C. points out the recent development ofregulations in the Japanese labor law. We examine working conditions and thepromotion system, second, employment guarantee, and third, labor market policy, and5

argue that some of them has become an important factor that expand the efficiency
loss of the Japanese economy.

Part V summarizes the overall discussions andprovides some remarks on the future of Japanese labor relations and labor law.

II. Japanese Employment Custom: Fact and Theory
A. Fact Findings
It is now well known that “Japanese employment custom” (JEC hereafter)
can be observed at least for some part in the U.S. and Europe, particularly for certain
large, established companies.8

Therefore, it is not easy to precisely define the actual

characteristics of the Japanese custom of employment.
However, with many careful empirical researches, several distinctive
findings concerning the Japanese employment custom have been reported forcompanies in Japan. First, the long-term employment relationship (LTER hereafter)
applies more to Japan than other developed countries.

It is known that the tendency

for long-term employment exists in some European countries such as Germany orFrance, and even in the large U.S. companies.9 However, the conclusive evidence by
8See, e.g., KOIKE, supra note 6, at 40-41 (indicating that lifetime employment can be observed in the

United States and in Western Europe); Westney, supra note 1, at 109 (discussing similarity and difference
between Japan and other developed countries on employment system including lifetime employment).
9

See supra note 8 and sources cited therein.

6

empirical research shows that on average, Japanese workers stay in the same firm for
longer periods than American workers, and that the turnover rate of the former islower.10

These facts have been confirmed by other empirical researches concerning

Japanese and European workers.11
Second, both white- and at least some of blue-collar workers are embraced
within the same system of long-term employment and career formation based onseniority and merit ratings.12

They experience a wider range of mutually related jobs

than workers in other countries.

At the same time, job demarcation is more ambiguous.

The delegation of de facto authority descends to the lower tiers of the production
hierarchy, so that workers have a chance to utilize their first-hand knowledge in an
attempt to improve the production system of their workplace.13

On-the-job training is

actively provided by the older skilled workers to the younger unskilled workers.14
10

See Masanori Hashimoto & John Raisian, Employment Tenure and Earnings Profiles in Japan and the

U.S., 75 AM. ECON. REV. 721, 721-58 (1985).
11

See, e.g., D.H. WHITTAKER, MANAGING INNOVATION: A STUDY OF BRITISH AND JAPANESE FACTORIES(1990) (providing a comparison between Japan and the U.K.).
12

See KOIKE, supra note 6, at 34-41.

13

See J.R. Lincoln, M. Hanada & K. McBride, Organization Structures in Japanese and US

Manufacturing, 31 ADMIN. SCI. Q. 338 (1986). See also James R. Lincoln & Kerry McBride, JapaneseIndustrial Organization in Comparative Perspective, 13 ANNUAL REV. SOCIOLOGY 289 (1987) (showing
quantitative evidences that support facts stated in the text).
14

Therefore, labor contracts for regular (typical) workers in Japan do not include explicit agreements on

the job contents.

In contrast, labor contracts in the U.S. firms explicitly specify the kind of job and its

performance standards. The authority is held by the management and engineers who derive the job

7

Third, the wage payment system is also common to blue- and white-collar
workers. 15 Wage is determined by seniority and promotion to the higher ranking
hierarchy, which depends on merit assessments but the wage level is only remotely
related to the types of jobs.16

Most empirical researches show that merit assessments

are more important than seniority in this process, and the lifetime earning differencesamong workers are rather large despite the appearance of egalitarianism.17
In contrast, American workers are normally assigned jobs, with a wage directly
attached to the job, which does not necessarily take into account other characteristics
such as skill or education levels.18 A significant amount of wage increase in the U.S.

organization tightly, and workers must simply follow their orders in the process of production. See PETER
B. DOERINGER & MICHAEL J. PIORE, INTERNAL LABOR MARKETS AND MANPOWER ANALYSIS 42-56(1971) (explaining basic facts of the U.S. industry). For the basic facts in Japan, see KOIKE, supra note 6,
at 50-61 & 66-72.
15

See KOIKE, supra note 6, at 26.

16

See Hashimoto & Raisian, supra note 10, at 728-32; A. L. Kalleberg & James R. Lincoln, The

Structure of Earnings Inequality in the United States and Japan, 94 AM. J. SOCIOLOGY S121, S140-S145(1988).
17

See Toshiaki Tachibanaki, The Determination of the Promotion Process in Organizations and of

Earnings Differentials, 8 J. ECON. BEHAV. & ORG. 603 (1987); Toshiaki Tachibanaki, Education,
Occupation, Hierarchy and Learnings 7 ECON. EDUC. REV.221 (1988) (empirical researches showing that
promotion and associated increase of earnings differentials are more critically dependent on evaluation
rather than seniority) ; Hiroyuki Fujimura, Seiseki Satei no Kokusai Hikaku [International Comparison of
Merit Ratings], 362 NIHON RODO KYOKAI ZASSHI 26 (showing that wage increase is rather inelastic toseniority).
18

See sources cited in supra note 16.

8

occurs when workers move up the job ladder. 19

Moreover, Koike observed that

although the features explained above in relation to Japanese firms broadly applies towhite-collar workers in large companies in the U.S. and Europe, they are characteristicof Japan in that this system is extended to blue-collar workers.20
Fourth, labor unions are not industry-based unions as in the Western countries,
but company-based ones. 21 The labor union has a long-term relationship with theemployer and represents all workers of an enterprise, including both white- andblue-collar workers. 22 The management of the firm is chiefly determined by innerpromotion, and those selected for the management usually have some experience inlabor union activities. 23 Therefore, management and labor are more likely to havecommon interests, and the labor union indirectly has the power to influence the19

See KOIKE, supra note 6, at 54-61; DOERINGER & PIORE, supra note 14, at 65-71. The facts pertaining

to the U.S. are also broadly applicable to major European countries. See also MITSUO ISHIDA, CHINGIN NOSHAKAIKAGAKU: NIPPON TO IGIRISU (1990) [Social Science of Wages: Japan and Britain] (pointing out
this difference chiefly in comparison with Japan and the UK.).
20

See KOIKE, supra note 6, at 13-27.

21

See ITOH, supra note 2, at 226 (1992); TAKASHII ARAKI, LABOR AND EMPLOYMENT LAW IN JAPAN

164-65 (2002).
22

See KOIKE, supra note 6, at 212-16.

23

See e.g., Hiroyuki Fujimura, Keieisha no Kyaria to Hōshū no Jittai [The State of the Career andPayment of Managers], in GENDAI NIHON NO KŌPORETO GABANANSU [Corporate Governance in Modern
Japan] 135 (Takeshi Inagami & Rengō Sogō Seikatsu Kaihatsu Kenkyusho eds. 2000).

9

management decisions through discussions between labor and management.24
Fifth, there are many non-regular workers (atypical workers) such as part-timeworkers and dispatched workers that are differentiated from regular workers inpromotion, payment, and employment guarantee. 25 Therefore, the Japanese labormarket has a dual nature, wherein the part of the market that consists of regular
workers is internalized within the firm, while non-regular workers participate in an
outside spot market and engage in more frequent career turnovers. Note that this dual
nature is universally observed in the developed capitalist countries.26 However, it ischaracteristic of the Japanese economy to clearly distinguish regular and non-regular
workers at the time of recruitment.27
These five properties apparently depict the group-oriented nature of the JEC,
in view of the respect for the protection of employment and seniority, cooperative
behavior among workers at the shop-floor, close connection between labor and24

See KOIKE, supra note 6, at 195-216 (indicating the detailed international comparison of the functionsof the labor union and its performance evaluation).
25

Recently the percentages of these atypical workers are increasing particulary in service sector. See, e.g.,

Ryuichi Yamakawa, Labor Law Reform in Japan: A Response to Recent Socio-Economic Changes, 49
AM. J. COMP. L. 627, 628-29 (2001).
26

See DOERINGER & PIORE, supra note 14, at 164-83 (discussing the existence and its economic

implications of the dual labor market in the US).
27

It is said that atypical workers have been dismissed before regular workers in recession and therefore

served as buffers. See Yamakawa, supra note 25, at 629.

10

management, strictly distinct treatment of regular and non-regular workers and so on.28
Alternative interpretations on the JEC and its economic success have been
provided by using psychological or comparative-sociological approach such as amae
(dependence) or Confucianism where the nature of the JEC is attributed to thementality or spiritual tradition inherent in Japan. 29 However, this culture-based
explanation of Japanese industrial relations is doubtful first because the custom that isobserved, at least partially, for all developed capitalist countries other than Japan.
It is also questionable from the historical point of view. As pointed out by
several researchers, this custom did not exist from the beginning of the Japanese
economy. It was newly established in the 1940s during World War II as a part ofwartime economic regulations, and maintained itself through the democratization
program to strengthen the position of laborers led by the Allied High Command after
the war.30 The Japanese management has retained this method from the high growth28

See, e.g., JAMES C. ABEGGLEN & GEORGE STALK JR., KAISHA, THE JAPANESE CORPORATION 198-99(1985) (attributing these properties of Japanese firms to the group-oriented nature of Japanese).
29

For the brief summary of the cultural theory of Japanese industrial relations, see MARCUS REBICK, THE

JAPANESE EMPLOYMENT SYSTEM 18-19 (2005). Abegglen & Stalks Jr. asserted that Japan asgroup-centered society which was formed by the value system based on the Confucian ethic. ABEGGLEN& STALKS JR., supra note 28, at 198. See also RONALD DORE, TAKING JAPAN SERIOUSLY (1987)(asserting the contribution of Confucianism on the Japanese system of enterprise and society); MICHIOMORISHIMA, WHY HAS JAPAN SUCCEEDED (1982) (analyzing the effect of Confucianism adapted to Japanon the economic development of Japan since Meiji Restoration).
30

See, e.g., WILLIAM. B. GOULD, JAPAN’S RESHAPING OF AMERICAN LABOR LAW 17-43, 106-16 (1984);11

period until the 1980s, since it displayed a good performance during the period. Before
the 1940s, the Japanese economy had a classical market system with a competitive
labor market that facilitated the highly frequent turnover of workers. The possibility ofpermanent employment and participation of labor in management was very limited,
and labor unions were industry-based, not enterprise-based unions, as observed in otherdeveloped countries.31
B. Appraisal from the Theoretical Point of View
The JEC is usually characterized by its egalitarianism based on the LTER andthe seniority system with respect to promotion and remuneration.32 However, in reality,
the process of promotion and remuneration is far more meritocratic than it appears,
based on the assessments of the employer. In addition, on-the-job training (OJT
hereafter) activity is linked to the process of frequent rotations to accumulate workers’
firm specific human capital.

Tetsuji Okazaki, The Japanese Firm under the Wartime Planned Economy, in THE JAPANESE FIRM:
SOURCES OF COMPETITIVE STRENGTH 350, 357-59 & 369-70 (Masahiko Aoki & Ronald Dore eds. 1994).
31

For the detailed explanation of the situation of the labor market in Japan before 1940’s, see W.

Galenson & Konosuke Odaka, The Japanese Labor Market , in ASIA’S NEW GIANT: HOW THE JAPANESEECONOMY WORKS 614 (Hugh Patrick & Henry Rosovsky eds. 1976). See also ANDREW GORDON, THE
EVOLUTION OF LABOR RELATIONS IN JAPAN (1985) (survey on the historical development of Japaneselabor relations).
32

See, e.g., ITOH, supra note 2, at 210-13 (summarizing this conventional wisdom for Japanese industrial

relations).

12

It has been observed that production systems do not only deal with routine
work, even if it appears to be a highly technological process that should be optimized
with respect to the engineering methods. 33 There are always uncertain accidents,
demand shocks, or technological innovations that require adjustments in the production
system.

According to Koike, human capital and termed intellectual skills become

necessary to deal with this problem. 34 This is common knowledge related to the
production system to which the laborer belongs and which is developed by the Japanese
OJT that requires workers to train in a broad class of jobs.35 Japanese firms have an
advantage in coping with unexpected shocks by using the accumulated first-handknowledge of workers on the production process. 36 This is combined with a workorganization that has a broader division of jobs and in which authority is delegated to
the lower tiers of workers in the production hierarchy. This approach has allowed
Japanese firms to frequently experience higher productivity than other developed
countries.
Such a system succeeds only when workers are offered incentives for making
efforts to accumulate strictly firm-specific intellectual skills. This includes the33

See KOIKE, supra note 6, at 63.

34

Id. at 63-68.

35

Id. at 68-72.

36

Id. at 241-59.

13

willingness to rotate among various types of jobs depending on the economic
environment or the process of OJT, and the willingness of senior workers to accept andtrain young workers on the job. It is well-known from the classical human capital theory
that a competitive labor market does not ensure an efficient level of investment in
firm-specific human capital.37 Owing to the firm-specific nature, firms do not have an
incentive to pay for workers’ investment effort, and given this expectation, workers lose
their incentive to invest. Even explicit contractual arrangements cannot solve theproblem due to the problem of third-party verifiability.38

As courts cannot observe thelevel of human capital investment, a worker will not invest if he is paid prior toinvestment: further, he will be less motivated to invest as he cannot rely on a firm’s
promise to pay later for the same reason of verifiability.
To solve the problem of under-investment in firm-specific human capital, it isnecessary to provide incentives for workers to invest and for firms to pay appropriately
for the workers’ efforts: i.e. the LTER should be a self-enforcing implicit contract that
does not involve verifiability problems.
37

Several features of the JEC listed in theSee, e.g., Jacob Mincer, Investment in Human Capital and Personal Income Distribution, 66 J. POL.

ECON. 281 (1958); Jacob Mincer, On-the-job Training: Costs, Returns and Some Implications, 70 J. POL.
ECON. 50 (1962) ; GARY S. BECKER, HUMAN CAPITAL: A THEORETICAL AND EMPIRICAL ANALYSIS WITH
SPECIAL REFERENCE TO EDUCATION (2d ed. 1975).
38

It is a basic problem taken up by the incomplete contract theory. See Oliver E. Hart & John Moore,

Incomplete Contracts and Renegotiation, 56 ECONOMETRICA 755 (1988).

14

previous section can be understood as a system to provide incentives for workers toinvest in human capital.
One important trait of the Japanese LTER is that the short-run pay is inelastic
to observable performance measures. At first sight, the compensation related toperformance indexes such as output, sales, or profits appears to stimulate workers’
efforts. However, this type of an incentive payment encourages workers to improve theirshort-run performance, without being interested in the accumulation of intellectual
skills that are useful in the long run. Therefore, this type of compensation may sacrificelong-term productivity gains to short-run performance due to the accumulation of
intellectual skills.39
When the observable performance measures do not completely reflect the efforts ofworkers and the direct monitoring of workers is not very expensive, this type of
incentive pay does not hold any advantage for firms. These two conditions apply to
Japanese organizations in which the group production system is developed and in which
the management is more concerned with long-term efficiency. This is the main reason

39

See Hideshi Itoh, Japanese Human Resource Management from the Viewpoint of Incentive Theory, in

THE JAPANESE FIRM: SOURCES OF COMPETITIVE STRENGTH, supra note 30, at 233, 240-57 (arguing that
the Japanese system of human resource allocation and remuneration is both rational and efficient).

15

that this type of short-run incentive pay has not prevailed in Japan.40
In the JEC where wage payment is inelastic to both short-run performances
and types of jobs, the incentive to work hard and train is provided by the promotion
process and the associated increase in wages that occurs in the long run. As explained in
the previous section, merit assessment matters more than seniority, and the lifetime
earning differences among workers are considerably large.41 As promotion is based on
subjective assessments rather than objective measures, the effort of workers is more
effectively aligned with the intentions of the management.
This process of promotion can be interpreted as a type of tournament whereinfirms are committed to the lifetime employment of workers and their appropriate
40

In other developed countries such as the U.S., it is also known that the remuneration system is not very

elastic to the short-run performance indexes, at least for large companies and with the exception of thecompensations for executives, although this tendency is not as conspicuous as in the case of Japan.
However, they adopt a different system of remuneration from Japan in that wages are directly attached tojobs instead of persons. See DOERINGER & PIORE, supra note 14, at 65-71. This system of wages
determined by the types and difficulties of jobs also works as a strong incentive device to increase
workers’ efforts, since this system works as a tournament among workers for the limited number of good
positions. For a theoretical analysis of this type of economy, see Lorne Carmichael, Firm-Specific Human
Capital and Promotion Ladders, 14 BELL J. ECON. 251 (1983); James. M. Malcomson, Work Incentives,
Hierarchy, and Internal Labor Markets, 92 J. POL. ECON. 486 (1984); W. Bentley MacLeod & James M.
Malcomson, Reputation and Hierarchy in Dynamic Models of Employment, 96 J. POL. ECON. 832 (1988).
However, this system is not effective for the accumulation of intellectual skills either, since workers do
not have an interest in learning broad class jobs or in helping to develop the skills of other workers. Thissystem is also the cause of organizational inflexibility in a changing environment, since any drasticchange in the job design is protested by the workers in high positions in the hierarchy.
41

See supra note 17 and accompanying text.

16

remuneration. 42 Here, the management determines the position of workers in thehierarchy depending on seniority and their long-term performance at the workplace.
This mechanism provides sufficient incentives for workers to work hard and invest into
firm-specific capital provided that the promise of the firm to remunerate workers is
reliable.
Unfortunately, this system has a disadvantage in that it may protect against
the moral hazard that firms renege on the wage payment to workers who do makesufficient efforts. As the amount of effort and wage which should be payed for that effort
cannot be completely verified, the firm has an incentive to cut the wages of workers,
although their job performance and accumulation of firm specific human capital are
sufficient. Owing to this absence of credibility, workers are not willing to invest in
human capital, and the LTER will fail.
To rectify this disadvantage, this implicit contract should be self-enforcing
through the bargaining between the employer and the labor union. Here, employers
must keep their promise of remuneration in order to protect their reputation because
they fear that labor unions will retaliate in the future by not cooperating with the42

The idea of tournament was originally provided in Carmichael and Malcomson. See Carmichael, supranote 40; Malcomson, supra note 40. Then it was adapted to the analysis of Japanese labor relations. See
Kanemoto & MacLeod, supra note 7; Yoshitsugu Kanemoto & W. Bentley MacLeod, Firm Reputationand Self-Enforcing Labor Contracts, 6 J. JAPANESE & INT’L ECON. 144 (1992).

17

management.43 For example, they might go on a strike or bargain for a higher wage
increase or better working conditions in the following year’s negotiations. As a result of
this negotiation process, it may succeed in attaining efficient reputation equilibria inthe long run.
C. Interpretation of the Stylized Facts and Some Other Implications Derived from
Economic Theory
The theoretical analysis in section II.B. makes the rationalistic interpretation of
the stylized facts in the JEC possible. Long-term employment and seniority wages are
actually interpreted as devices to provide incentives to workers for the efficientaccumulation of firm-specific skills, 44 and ambiguous job demarcation and thedelegation of authorities to the lower tiers of production hierarchies are regarded asmechanisms facilitating the use of firm-specific skills for the improvement of the
production system. 45 The intra-firm labor union is used for the communication
between labor and management, and the negotiation in the intra-firm is more

43

See Kanemoto & MacLeod, supra note 42 (applying the reputation effect to the analysis of Japanesefirms.). The reputation effect was first put into economic analysis by Klein and Leffler. Benjamin Klein &Keith. B. Leffler, The Role of Market Forces in Assuring Contractual Performance, 89 J. POL. ECON. 615(1981).
44

See supra notes 41 & 42 and accompanying text.

45

See supra notes 33-40 and accompanying text.

18

important than an industry-wide problem.46

The dual nature of the Japanese labormarket can be naturally understood as the returns provided to the regular workers
for their extra effort in investment into the firm-specific human capital, which was
not necessary for non-regular workers.
To explain why certain efficient traits that characterize the Japanese LTER are
observed in the Western countries, but only for white-collar workers in large firms, it isnecessary to consider the conditions for the bargaining process between labor andmanagement in order to perform effectively. It is well known that the coordination of
expectations between two players is necessary for attaining efficient reputation
equilibrium. 47 More concretely, firms should build a good reputation to keep theirpromises with the workers.
This observation seems to imply that the Japanese system of management can
only be introduced for the class of workers that is relatively protected against thebusiness cycle or technical innovations, since it is this type of workers that firms cankeep promises regarding remuneration for long time and their words become credible. It

46

See supra note 43 and accompanying text.

47

For the general discussion on this issue, see, e.g., David Pearce, Repeated Games: Cooperation andRationality in ADVANCES IN ECONOMIC THEORY: SIXTH WORLD CONGRESS 132 (Jean-Jacques Laffont ed.
1992); DREW FUDENBERG & JEAN TIROLE, GAME THEORY ch. 5 (1991).

19

is exactly the class of workers that belong to white-collar in the large companies. 48
This theoretical argument further provides some insight on the relative decline of
the effectiveness of the JEC. The world economy after the 1990s is partly characterized
by the drastic technological progress led mainly by the development of information
technology and financial engineering.49 When new businesses and industries came into
existence, old technologies became obsolete within a short span of time. As the merit of
JEC lies in the accumulation of firm-specific knowledge in the long run, it is more
effective in an economic environment growing at a stable rate and with relatively small
technical changes. It is therefore said that Japan needs a new system of labor relations
and labor market to cope with this change.50

III. Structure of the Japanese Labor Law
A. Historical Origin
Section II.A indicated that the Japanese employment custom was introduced
during the 1940s through wartime regulations, developed during the high economic48

If firms in other countries do not have a good reputation, workers will strongly oppose the introductionof the Japanese system of management, which gives more discretionary power to the employer. See
Kanemoto & MacLeod, supra note 42, at 146.
49

See REBICK, supra note 29, at 41-42 (discussing this technical change and its effect on the career

patterns of standard employees in Japan).
50

See, e.g., id. at 32.

20

growth period, and was well established by the Oil Shock that occurred in the 1970s.51
The labor law was not sufficiently developed before World War II. There wereseveral laws that regulated individual labor relations, such as protecting minor or
female laborers, determining minimum safety standards, and number of working
hours.52 There were also laws for regulating employment agencies and the requirementof workers’ accident compensation insurance.53 In addition, during war times some laws
were enacted to control minimum wage54 and work time.55 These laws formed the basisof the enactment of the post-World-War-II laws, but they were very insufficient ascompared to today’s standards.

Many tragic cases concerning the working conditionsof laborers, particularly female or minors, have been reported.56 Furthermore, labor
movements were repressed under criminal law, and efforts to legislate labor unions met

51

See supra notes 30 & 31 and accompanying text.

52

Kōjōhō, [Factory Law] Law No. 46 of 1911; Kōjōhō Shikourei [Ordinance for Enforcement of FactoryLaw], Imperial Ordinance No. 193 of 1916.These had been repealed when Labor Standards Law (Rōdō
Kijunhō) were enacted in 1947.
53

Rōdōsha Saigai Fujohō [Worker’s Injury Assistance Law], Law No. 54 of 1931; Rōdōsha Saigai Fujo

Hokenhō [Worker’s Injury Assistance Insurance Law], Law No. 54 of 1931.
54

Chingin Tōseirei [Wage Control Ordinance], Imperial Ordinance No. 128 of 1937.

55

Kōjō Shūgyō Jikanrei [Factory Employment Hours Ordinance], Imperial Ordinance No. 127 of 1937.

56

Those tragedies can be easily found in reports by government agencies, in nonfiction books, and in

novels in those days. See, e.g., NŌSHOUMUSHŌ [Ministry of Agriculture and Commerce], SHŌKOU JIJŌ[Commercial and Industrial Affairs] (1903).

21

with failure, until the end of the war.57
The situation changed drastically after the war. The Allied High Commandpromoted a social policy for protecting workers and their Labor Union activities, as apart of its democratization program toward Japan. The Labor Union Law was enacted
in 194558 and it was revised in 1949 to its present form.59 At the same time, with thesupport of the new law and reflecting the urgent economic conditions of the post war
period, the union density (rate of the union membership among workers) exceeded
50%.60In addition, there were changes in the area of individual labor relations. The
New Constitution of 194661 established the basic right to work, defined the principles

57

See KAZUO SUGENO, JAPANESE EMPLOYMENT AND LABOR LAW 5-8 (Leo Kanowitz trans. 2002).

Although great deal of effort had been put into legislating laws for unions from 1919, it finally failed in
1931. But many discussions had been made in that process and this made rapid legislation of union laws
just after World War II possible. See id. at 7-8; KAZUO SUGENO, RŌDŌHŌ [Labor Law] 5-6 (7thsupplemented 2d ed. 2007).
58

Rōdō Kumiaihō [Labor union Law], Law No. 51 of 1945.

59

Rōdō Kumiaihō [Labor union Law], Law No. 174 of 1949. For brief summary on formation andamendment of Labor Union Law in English, see Mitsunari Doko, The Labor Relations Commission as an
Organization to Resolve Collective Labor Disputes, 3 JAPAN LABOR REV., no.1, at 32, 32-35 (2006).
60KŌSEI RŌDŌSHOU [Ministry of Health, Labour and Welfare], RŌDŌKUMIAI KISO CHŌSAJIKEIRETSUHYOU DAI 1 HYOU [Basic Survey on Labor Union Table 1] (2006) (indicating that in 1947 theunion density rate had been 45.3% and it increased to 53.0% in the next year. In 1949, the year in which
present Labor Union Law was legislated, the rate raised to 55.8%).
61KENPŌ [The Constitution of Japan].

22

for the legislation on labor conditions,62 and guaranteed the right to organize andbargain and act collectively.63 In 1947, the Labor Standards Law64 and the Workers’
Accident Compensation Law65 were promulgated, which complemented the insufficient
pre-war laws and raised the level of protection of laborers to the International Labour
Organization’s (ILO) International Labour Standards. Further, the basic laws on
unemployment were voted during this period to cope with the disastrous labor market
conditions.66 The basic framework of the Japanese labor law was constructed between
1945 and 1955 and continues to be used even today.67
B. Basic Principles
Next, we will describe the basic principles on which the Japanese labor law isfounded. First, as well as in other contracts, there is freedom of contract andconsequently the contract between a worker and an employer is enforceable.68 In reality,
62

See id. art. 27 (providing that standards of working conditions including wage, rest time shall be set up

by law).
63

See id. art. 28.

64

Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947.

65

Rōdōsha Saigai Hoshou Hokenhō [Workers’ Accident Compensation Law], Law No. 50 of 1947.

66

To cope with unemployment caused by deflationary policies under Dodge Line, Unemployment

Insurance Law was amended and Emergency Countermeasures Law was enacted. See SUGENO, supranote 57, at 9-10. For details of situation of employment in these days, see RŌDŌSHOU [Ministry ofLabour], SHOWA 24 NEN RŌDŌ KEIZAI NO BUNSEKI [Analysis of Labor Economics 1947] ch.2 (1947).
67

See SUGENO, supra note 57, at 8-10.

68

See id. at 3-4. Freedom of contract is a basic principle in Civil Law. Without laws modifying or

restricting this freedom, parties of contracts are free to agree upon whatever provisions they want and it23

it is not so free as it may first appear. It is commonly explained as follows. Since thebargaining power between workers and employers is extremely unequal, labor contracts
can be rather unfair and unreasonable in determining the terms of working conditions.69
Hence supporting the laborers who only have a weak bargaining power in order torectify this unfair distribution of the bargaining power and to facilitate the attachmentof fair and reasonable agreements in labor contracts is justifiable.70
For this purpose, there are three approaches adopted in the Japanese labor law.
First, it provides compulsory minimum standards for working conditions such as
wages, 71 working hours, 72 and safety. 73 They are regarded as protecting workers
against unfair outcomes that arise when the conditions for labor is completely left for
free negotiations between them.74
There are also regulations against discriminatory treatment. Once hired,

will be enforceable, as long as it is not against public policy. MINPŌ [Civil Code], art. 90 (providing that
contracts and other acts should be nullified if it is against public policies). Labor laws function as a
restriction on this freedom.
69

See id. at 76.

70

See id.

71

See Saitei Chinginhō [Minimum Wage Law], Law No. 137 of 1959, art. 5, paras. 1 & 2. For details,

see infra note 131 and accompanying text.
72

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 32, paras. 1 & 2.

73

See id. art. 42; Rōdo Anzen Eiseihō [Labor Safety and Health Law], Law No. 57 of 1982.

74

See SUGENO, supra note 57, at 18.

24

employers may not treat employees discriminatory by race, sex, ideology, and so on.75
While discriminatory treatment by nationality, race, ideology and others are explicitly
prohibited only after workers are hired (i.e. discrimination at the stage of recruitment
and hiring is not explicitly restricted), discriminatory treatment by sex at the stage ofrecruitment and hiring employers, such as excluding female from recruiting, 76 isseverely prohibited by Equal Employment Opportunity Law.77 It has long been argued
that Japanese female workers are discriminated against in the recruitment process andin their treatment within the firm: therefore, they are unable to hold regular positionsin the LTER.78 To rectify this situation, the Equal Employment Opportunity Law79 was

75

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, arts. 3 & 4 (prohibiting discriminatory

treatment of employees in general); Koyō no Bunya ni okeru Danjo no Kintōna Kikai oyobi Taigū noKakuho ni Kansuru Hōritsu [Equal Employment Opportunity Law], Law No. 113 of 1972, arts. 5-9(prohibiting especially discrimination by gender).
76

See Rōdōsha ni taisuru Seibetsu wo riyū to suru Sabetsu no Kinshitou ni kansuru Kitei ni sadameru

Jikou ni kanshi, Jigyounushi ga Tekisetsu ni Taisho surutameno Shishin [Guidelines on Appropriate
Measures Employers should Take concerning Provisions Prohibiting Sexual Discrimination of Worker],
2006 RŌKOKU 164, art. 2, para. 2, item 2.
77

Koyō no Bunya ni okeru Danjo no Kintō na Kikai oyobi Taigū no Kakuho ni Kansuru Hōritsu [Equal

Employment Opportunity Law], Law No. 113 of 1972, art. 5. The Duty of employers to provide womenwith equal opportunities as compared with men was not mandatory until 1997 amendments of Equal
Employment Opportunity Law. For the 1997 amendments, see Yamakawa, supra note 25, at 636-40.
78This difficulty can be explained by using the statistical theory of discrimination. See Edmund Phelps,

The Statistical Theory of Racism and Sexism, 62 AM. ECON. REV. 659 (1972); Joseph E. Stiglitz,
Approaches to the Economics of Discrimination, 63 AM. ECON. REV 287 (1973). Japanese firms require
workers who work on a long-term basis to accumulate firm-specific human capital. In this sense, female
laborers have a high risk of early retirement to raise their children, as it is difficult to determine whether

25

enacted in 1985 and developed to its present form in 1997.80
Second, to rectify the unequal bargaining power between labor andmanagement, it guarantees workers the right to bargain collectively by forming
unions.81 Third, to improve the labor market mechanism, information and employment
placement service is provided by public employment agencies, 82 and those seeking
individual female workers really wish to work in the long run. This provides sufficient reason to firms totreat female workers unfavorably, even if they have no discriminatory ideas.
79

Koyō no Bunya ni okeru Danjo no Kintō na Kikai oyobi Taigū no Kakuho ni Kansuru Hōritsu [Equal

Employment Opportunity Law], Law No. 113 of 1972.
80

See ARAKI, supra note 21, at 108-22. The harmonization of work and family life has been one of the

top legal policy agenda in order to cope with those problems. There has been a steady increase withregard to the share of female labor force holding permanent positions in firms in Japan from 1975 until
today. See REBICK, supra note 29, at 113-18, Tbl. 7.2 (explaining recent extension of female labor force
in Japan and indicating that the percentage of women in management posts has drastically increased since
1980s). It shows that this problem will be expected to disappear gradually for the reasons below. First,
Japanese society is rapidly aging and hence it is essential for firms to employ female labor force as
regular employees. Second, along with the change of industrial structure, the importance of the LTER is
relatively diminishing, and the reduction and increased flexibility of working hours has been realized
partly supported by the reform of labor law.
81

See KENPŌ [The Constitution of Japan], art. 28. Rights and privileges of labor unions and duties of

employers are provided in Labor Union Law (Rōdō Kumiaihō). For example, Labor Union Law provides
exemption from criminal punishment for actions in appropriate strikes. Rōdō Kumiaihō [Labor union
Law], Law No. 174 of 1949, art. 1, para. 2. See also KEIHŌ [Penal Code], art. 35.
82

See Shokugyou Anteihō [Employment Security Law], Law No. 141 of 1947, art. 5. Until 1999, private

employment placement service was strictly restricted to only few jobs and employment placement service
was generally provided by governmental agencies. In 1999 amendments of Employment Security Law
and Worker’s Dispatching Law, this regulation was largely changed to liberalize restrictions on private
employment placement service and to remove governmental monopolization. See Takashi Araki, 1999
Revisions of Employment Security Law and Worker Dispatching Law: Drastic Reforms of JapaneseLabor Market Regulations, 38 JAPAN LABOR BULLETIN, no.9, at 5, 5-12 (1999); Yamakawa, supra note
25, at 642.

26

employment can receive subsidies, which includes unemployment benefits.83

C. The Long-Term Employment Relationship and the Protection of Employment
Section II.A. pointed out a stylized fact that the LTER prevails in theabove-middle sized Japanese companies. Due to the nature of LTER, considerable partof the woriking conditions is not explicitly written in the individual contracts. 84
Therefore, work rules (shūgyou kisoku) and collective agreements among union(s) andemployer (Rōdō Kyouyaku) become important since they have a function of filling the83

See generally Koyō Hokenhō [Employment Insurance Law], Law No. 116 of 1974; Rōdō Hoken no

Hokenryō no Choushūtō ni kansuru Hōritsu [Law Concerning Collection of Labor Insurance Premium],
Law No. 84 of 1973.
84

See infra section III D. As for the term of labor contract, it had been severely restricted to write afixed- term labor contract. Before 1998 amendment, article 14 of Labor Standards Law in principle
prohibited fixed-term labor contracts that last longer than one year. See Hiroya Nakakubo, The 2003
Revision of the Labor Standards Law: Fixed-term contracts, Dismissal and Discretionary-work Schemes,
2 JAPAN LABOR REV., no.1, at 4, 7 (2004). This restriction was said to protect workers from being boundtoo long and therefore being deprived of freedom of resignation. See SUGENO, supra note 57, at 188-91.
Since it can be circumvented easily and the fear of obligatory servitude became obsolete, the restrictions
have been gradually liberalized. See Takashi Araki, Changing Employment Practices, Corporate
Governance, and the Role of Labor Law in Japan, 28 COMP. LABOR L. & POL’Y J. 251, 276-77 (2007).
1998 amendment made certain exceptions: for certain types of labor contracts, such as scientificresearch, the maximum period may be three years. See Yamakawa, supra note 25, at 632. Further
liberalizations were made in 2003 amendment. In the amendment, maximum period for all types of labor
contracts became three years. Also, for certain types of contracts maximum period was extended fromthree years to five years. See KŌSEI ROŌDŌSHOU [Ministry of Health, Labour and Welfare], KAISEI RŌDŌKIJUNHŌ NO GAIYOU [Summary of Amended Labor Standards Law] 2 (2003), available at
http://www.mhlw.go.jp/topics/2003/11/dl/tp1111-1a.pdf.

27

gaps. Also statutory and case law that restrict the power of employer wil be critical insome situation such as dismissals.
The LTER is not the same as a series of contracts, which are renegotiated andupdated every one to five years but is “a type of labor contract that has not specified its
duration”. 85 Under Civil Code, both parties of this type of contract can cancel thecontract at will: i.e. employers have the freedom to dismiss employees and workers havethe freedom to resign. Civil Code provides that both employers and employees canterminate labor contract without fixed-term at their will and in this event labor
contracts will be terminated two weeks after the request to terminate is made.86 Also
Labor Standards Law traditionally had provided only few explicit restrictions on
dismissal.87
But the freedom of dismissal has been strictly restricted under the doctrine ofabusive dismissal that has been formed by case law. This doctrine has its foundation in
the basic principle of Civil Law which prohibits abusive exercise of rights. 88 This
principle of the abusive exercise of a right was first applied to the dismissal disputes

85

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 14, para. 1.

86MINPŌ [Civil Code], art. 627, para. 1.

87

E.g., Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 19 (prohibiting dismissal during

periods of leave by maternity or by injury or illness caused by work.). See SUGENO, supra note 57, at 474.
88

See MINPŌ [Civil Code], art. 1 para. 3.

28

through the accumulation of a majority of judicial decisions by the lower courts, which
commenced immediately after the war and was particularly confirmed during and after
the 1973 Oil Shock.89 It was endorsed by the Supreme Court’s decision in the late1970s.90 Then the doctrine of abusive dismissal had been codified in Labor Standards
Law in 2003,91 and the provision has been moved into new Employment Contract Law92
that came into force on March 2008.93
In sum, employers can dismiss workers only when there are reasonable grounds
89

For the formation of doctrine of abusive dismissal, see Ryuichi Yamakawa, Nihon no Kaikohōsei[Japanese Law of Dismissal], in KAIKOHŌSEI WO KANGAERU [Examining Law of Dismissal] 3, 4-7(Fumio Ohtake et al. eds., 2002).
90

E.g., Ichilawa v. Nihon Shokuen Seizou K.K., 29 MINSHŪ 456, 457-58 (Sup. Ct., Apr. 25, 1975);

Shiota v. Kōchi Hōsō K.K., 268 RŌDŌ HANREI 17, 18-19 (Sup. Ct., Jan. 31, 1977).
91

Before 2003 amendment, Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 18-2

provided:
A dismissal shall, where the dismissal lacks objectively reasonable grounds and is notconsidered to be appropriate in general societal terms, be treated as an abuse of that right andinvalid.
Id., translated in LABOR STANDARDS ACT 13 (Japan Institute for Labour Policy and Training
trans. 2003).
For a brief summary of doctrine of abusive dismissal and 2003 amendment, see Nakakubo, supra note 84,
at 13-18. For about new Employment Contract Act, see infra note 92.
92

Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 16. This provision is

identical to the former article 18-2 of Labor Standards Law and the latter provision was deleted fromLabor Standards Law according to the legislation of new Employment Contract Law. See id.
Supplementary provision art. 2 (providing the deletion of former articles 18-2 of Labor Standards Law).
93

The Japanese approach on employment protection ranges between the level of European countries suchas Germany and France, wherein there are explicit legislations regulating dismissals and in Anglo Saxon
countries (US, UK, Canada, Australia, New Zealand) wherein the at-will based employment policy isadopted. See OECD, OECD EMPLOYMENT OUTLOOK 2006, at 96 & fig. 3.9 (2006).

29

to do so.94 The doctrine required that to dismiss an employee, there must be objectively
reasonable grounds so that it could receive general social approval.95 For example, anorder of dismissal based simply on the subjective sentiment of the employer cannot bepassed under this principle. When the decision of dismissal is judged illegal, employer iscompelled to continue the relationship96: moreover, as the labor contract relationshiphas continued during the period between the invalid dismissal and the judgment
voiding the dismissal, workers can claim the wages for this period.97
This doctrine was originally formed in the case when the behavior of anindividual worker is not appropriate. Then during the recession, particularly after the1973 Oil Shock this doctrine was extended to the case of adjustment dismissal.98 This
was the time when the Japanese custom of employment adjustment was firmly
94

See SUGENO, supra note 57, at 479.

95

See, e.g., Nihon Shokuen Seizo, 29 MINSHŪ at 457; Kōchi Hōsō, 268 RŌDŌ HANREI at 18.

96

See Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 16 (providing that suchdismissal will be invalid). See also SUGENO, supra note 57, at 482. This does not always mean that
employers must put the abusively dismissed workers on the position he had assumed before. Rather it
protects workers because the employer must pay wages as long as the labor contract is in effect. See
Yamakawa, supra note 89, at 8. In sum, this provides an incentive to the employers who dismissed an
employee unduly to restore her on an appropriate position or to negotiate with her for voluntary
resignation. In the latter case, the employer will be paying some extra compensation.
97

See SUGENO, supra note 57, at 483.

98

See, e.g., Shimazaki v. Tōyō Sanso K.K., 330 RŌDŌ HANREI 71, 78-79 (Tokyo High Ct., Oct. 29,

1979) (indicating that the doctrine of abusive dismissal rights is applied to the cases of adjustment
dismissals); Miyake v. Asahi Jigyou Kyoukai Charitable Corp., 427 RŌDŌ HANREI 63, 64 (Sup. Ct., Oct.
27, 1983). See also Yamakawa, supra note 89, at 8-9.

30

established. This custom was in sharp contrast with the system in the U.S., wherein ashortage of demand is promptly adjusted to by laying off workers.99 At least in the large
companies in Japan, dismissal was avoided by restricting overtime work, suspending
mid-career hiring, transferring and farming out workers to related companies,
terminating the employment of non-regular workers, and soliciting voluntary
retirement by old workers.100 Dismissing typical workers was not regarded as the first
option employers should take in recessions.
The Doctrine of Abusive Dismissal required the four conditions below as justcauses for the adjustment dismissal101:(1) the urgent necessity of dismissal for the continuation of management,(2) duty of efforts to avoid dismissal,(3) propriety of the selection criteria for the dismissed,(4) procedural propriety.
Condition (1) is the presupposition for adjustment dismissal.102 In judging
99

See KOIKE, supra note 6, at 92-94 (about the system of employment adjustment in the US).

100

Courts recognize that workers normally expect for lifetime employment and firms employ workers on

the premise that workers would expect so. See, e.g., Miyake v. Asahi Jigyou Kyoukai Charitable Corp.,
427 RŌDŌ HANREI 64, 65-66 (Fukuoka High Ct., Oct. 24, 1979); Echi v. Chiyoda Kakō Kensetsu K.K.,
629 RŌDŌ HANREI 19, 23 (Tokyo High Ct., Mar. 31, 1993).
101

See, e.g., Tōyō Sanso, 330 RŌDŌ HANREI at 78-79. See also SUGENO, supra note, at 487-89.

102See, e.g., Toyoda v. Maruman K.K., 787 RŌDŌ HANREI 18, 27 (Osaka D. Ct., May 8, 2000)(indicating that necessity for adjustment dismissal had decreased and invalidated the dismissal.).

31

condition (1), Japanese courts have taken a view that adjustment dismissal should bereasonable means to resolve present or future deficits.103 As mentioned just above, evenwhen there are deficits, courts regarded that adjustment dismissal is a solution that canbe selected only after reasonable efforts to avoid dismissal are taken.104 Thus, in courts’view, employers should first search some ways to avoid adjustment dismissal.105 With
regard to condition (3), if there are no objective standards for the selection or if thestandards are deemed objectively unreasonable, the adjustment dismissal will be
void.106 Condition (4), virtually implies the duty to explain and consult with the Labor
Union in good faith, and is consistent with the method of employment adjustment ofJapanese firms stated above.107
When the disputed dismissal is judged as being void, the employer must pay thewages for the period in which he was dismissed, in the same way as in the case of

103

See, e.g., Tōyō Sanso, 330 RŌDŌ HANREI at 78-79.

104See, e.g., id. at 78; Asahi Jigyou Kyoukai, 427 RŌDŌ HANREI at 64; Maruman, 787 RŌDŌ HANREI at

28.
105

But this is not to mean that employers should test all available means before dismissing workers foradjustment. See, e.g., Hirata v. Nakamichi K.K., 775 RŌDŌ HANREI 71, 80-81 (Tokyo High Ct., July 23,
1999) (rejecting the argument of plaintiff workers that defendant firm could have taken means other thanadjustment dismissal such as work sharing on the ground that those means did not seem to function wellin the defendant corporation.).
106

See SUGENO, supra note 57, at 489.

107

See supra notes 98-100 and accompanying text.

32

individual dismissals. 108 Contrary to European countries, 109 the option to end theemployment relationship without an agreement of the worker, but in exchange for thepayment of some compensation when the dismissal is judged as void is not permissible
in Japan.

D. The Long-Term Employment Relationship as Relational Contract
The LTER is essentially incomplete in terms of aspects other than employment
duration as well, due to its nature of relational contract under the condition of bounded
rationality.
First, the LTER takes the form of a group contract, the contents of which are
specified by the work rules (shūgyou kisoku), which generally apply to all workers in a
firm.110 In most developed countries, the outline of the rules of a firm is regulated by theminimum standards set by the collective bargaining at the industry level, and theco-determination system between employer and workers’ council decides the details of
the rules.111

108

For the effect of invalid dismissals, see supra notes 96 & 97 and accompanying text.

109

See ARAKI, supra note 21, at 27.

110

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, arts. 89, 92 & 93; Rōdō Keiyakuhō[Employment Contract Law], Law No. 128 of 2007, art. 7.
111

See SUGENO, supra note 57, at 495-96.

33

In Japan, the employer’s right to set the work rules is the basic norm in the
LTER. The employer has the power to set the rules and an inclusive right of direction
and orders to the employees.112 The Labor Standards Law requires every employer toframe work rules with regard to the main items113 and to make them known to all
workers.114 The framing and the change of work rules must be submitted to the publicagency known as the Labor Standards Inspection Office〔Rōdō Kijun Kantokusho〕 sothat they are supervised as being subject to the legal regulations and collective
agreements among employers and workers.115 As such, the work rules substantiallygovern the labor contract.
It is therefore important to reflect the opinions of laborers within its content.
Its most developed form is the co-determination system in Germany, wherein work rules
are determined with the consent of the workers’ council.116 If there is no agreement,

112

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 90; Rōdō Keiyakuhō[Employment Contract Law], Law No. 128 of 2007, art. 7. See also SUGENO, supra note 57, at 115-19.
113

Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 11; Rōdō Kijunhō [Labor

Standards Law], Law No.49 of 1947, art. 89, paras. 1-10.
114

Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 106, para. 1; Rōdō Kijunhō

Shikoukisoku [Ordinance for Enforcing Labor Standards Law], Ministry of Health and Welfare
Ordinance No. 23 of 1947, art. 52-2.
115

See Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 11; Rōdō Kijunhō[Labor Standards Law], Law No.49 of 1947, art. 89 & art. 92, para. 2.
116

See SUGENO, supra note 57, at 113.

34

then it is arbitrated by a public agency.117
In Japan, it is obligatory for the employer to seek the workers’ opinions.118
However, it does not mean that employees (or union(s) of the firm) have veto power
regarding the changes of work rules. If there is an agreement on changes of working
conditions among workers and employer, the changes will be effective.119 In principle, if
the amendment of the work rule is against workers’ interest, it is necessary to gain theconsent of the workers. 120 However, there are an important exception on theamendment of work rules: even if it is against the interest of workers, employers canamend the work rules and consequently change the working conditions unilaterally
when the following two conditions are met.121
117

KAZUO SUGENO, SHIN-KOYOU SHAKAI NO HŌ [New-Law At Employment Society] 57 (Supp. ed.

2004).
118

Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 11; Rōdō Kijunhō [Labor

Standards Law], Law No.49 of 1947, art. 90, para. 1.
119

See Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007, art. 8. This is so whether

the changes of working conditions are provided in work rules or in individual employment contract
between a particular worker and the employer.
120

Id. art. 9 (providing that except for the case where the conditions provided in article 10 of the

Employment Contract Law are met, the workers cannot change the work rules against the interest of theworkers unilaterally) . New Employment Contract Law became effective in March 2008 and theprovisions regarding the changes of work rules are one of the major contents of this law. Article 9 of thislaw is confirming that employers cannot always change the work rules against the interest of theemployees without their consent. See Kōsei Rōdōshou Rōdōkijunkyoku Kantokuka [Inspection Divisionof Ministry of Health, Labour and Welfare Labour Standards Bureau], Rōdō Keiyakuhō no Gaiyou [TheOutline of Employment Contract Law], 1351 JURIST 34, 38 (2008).
121

Rōdō Keiyakuhō [Employment Contract Law], Law No. 128 of 2007 art. 10.

35

First of all, the workers must be informed of the amended work rules whichreflect the change of working conditions.122 Second and more important condition is thatthe amendment of the work rules must be reasonable considering various factors
including the necessity of the changes of the working conditions, extent of thedisinterest workers will suffer and the process of amendment.123 In reality, the work
rules are framed and revised through negotiations with the Labor Union, since theimplementation of these rules is impossible without the Labor Union’s support.
It can be said that Japanese employers are required to protect employment
more intensely than employers in other developed countries because of both social
norms and legal doctrines. In exchange, they are given a greater power of discretion to
122

Id.

123

Id. This is based on the case laws about the changes of work rules. See, e.g., Yoshikawa v. Shūhoku

Bus K.K., 22 MINSHŪ 3459, 4363-64 (Sup. Ct., Dec. 25, 1968) (indicating that change of the work rule
must be reasonable and affirmed the change of the defendant corporation in order to introduce mandatory
retirement age); Satō v. Dai Shi Ginkou K.K., 51 MINSHŪ 705 (Sup. Ct., Feb. 28 1997) (in affirming the
judgment of Tokyo High Court, the Supreme Court held that the change of work rules which extends the
mandatory retirement age of defendant bank from 55 to 60 but in turn reduces the wages is valid. In thiscase, before the change of work rules defendant bank had already hired employees over 55 until 58 on thework conditions that is substantially same as the work condition just before the mandatory retirement andtherefore the change of work rules could be considerably disadvantageous to the employees. The court
affirmed the change on the ground that the necessity of the change was so large, the wage after the change
is still high compared to other firm and the union of defendant bank had negotiated and agreed on thechange.) Article 10 codified the summary of these case laws. See Takashi Muranaka, Rōdō Keiyakuhō
Seitei no Igi to Kadai [The Significance and problems of the Legislation of Employment Contract Law],
1351 JURIST 42, 43-45 (2008). For the cases of work rule changes involving reduction of wages, see infra
notes 132 & 133 and accompanying text.

36

set the work rules based on working conditions, personnel affairs, and enterprise orderand discipline.
E. Working Conditions
The LTER is based on OJT and career promotion. In this process, the Japaneselabor law has given employers the freedom to control personnel matters and enterpriseorder and discipline without much legal intervention. The legal bases are the work rulesthat form the main body of the labor contract in the LTER.
First, firms have the freedom of recruitment and Japanese employers havesignificantly more discretion in this aspect124 than those in the U.S., wherein legislation
on discrimination in the labor market is developed and thus discretion in hiring andrecruitment is constrained.125
Following recruitment, it is customary for Japanese firms to require active
human capital investment by workers. This OJT is conducted only on the initiative of

124

See, e.g., Takano v. Mitsubishi Jushi K.K., 27 MINSHŪ 1536, 1543-46 (Sup. Ct., Dec. 12, 1973) (inremanding the case to Tokyo High Court, The Supreme Court indicated that in principle article 14 of theConstitution, which prohibits discriminatory treatment, does not restrict the discretion of firms in hiringand recruitment stage and thus investigating and asking about political ideology of candidate of recruit is
not deemed illegal.).
125

See ARAKI, supra note 21, at 60-62. But as mentioned earlier, Equal Employment Opportunity Law

prohibits discriminatory treatment by gender at the stage of recruitment and hiring (Koyō no Bunya ni
okeru Danjo no Kintō na Kikai oyobi Taigū no Kakuho ni Kansuru Hōritsu [Equal Employment
Opportunity Law], Law No. 113 of 1972, art. 5). See supra notes 76-80 and accompanying text.

37

the firms.126 The demand for OJT is linked with frequent rotations to train in various
types of jobs. In addition, employers have broad discretion regarding personnel
reassignments at least for typical workers (whose work place and/or job types are notexplicitly restricted under employment contracts).127 Sometimes, its violation results inpunitive dismissal. The law supports the system by admitting the employers’ right toorder and conduct OJT.128 As explained before, the Japanese wage payment system is
not strongly associated with the type of job or location of the office.129 Hence, theemployers’ having substantial discretion with regard to personnel affairs does notdirectly lead to serious damages for employees.130
F. Wage Payment
With regard to the other aspects of working conditions, wage payment isclearly the most important matter. One legal restriction is the regulation of minimum

126

See SUGENO, supra note 117, at 135.

127

See, e.g., Moribe v. Kyūshū Asahi Hōsō K.K., 757 RŌHAN 21 (Fukuoka High Ct., July 30, 1996)(judging that there was no restriction of job types and therefore the reassignment of was valid), aff’d, 757
RŌHAN 20 (Sup. Ct., Sep. 10, 1998).
128

See ARAKI, supra note 21, at 132-36.

129

See supra section II.A.

130

In contrast to the recruitment stage, discriminatory treatment using personnel reassignments bynationalities, ideologies, sexes or union activities are strictly restricted once hired. See Rōdō Kijunhō[Labor Standards Law], Law No.49 of 1947, arts. 3 & 4; Koyō no Bunya ni okeru Danjo no Kintō na
Kikai oyobi Taigū no Kakuho ni Kansuru Hōritsu [Equal Employment Opportunity Law], Law No. 113
of 1972, arts. 5-9. See supra notes 75-77 and accompanying text for further details.

38

wages. 131 For the wage payment system in the LTER, again, the autonomy of the
management and laborers is broad. Naturally the wages under LTER must not be lower
than the minimum wage, but there are no legal regulations with respect to the types ofwage payments such as seniority, performance pay, or wages attached to the job.
Bonus or retirement payments are not even legally required.
Owing to its importance, there are relatively more legal disputes concerning
wage payments than other matters. In particular, during the Oil Shock and the 1990s
recession, a drastic change in wage payment was often required for the survival of firms,
and this unexpected change was frequently contested.
With respect to its legal arbitration, the courts flexibly accepted thisadjustment by considering the “reasonableness” of the revision of work rules on
payment, adopting a synthetic judgment for each case.132 One basic doctrine is that it is131

In Japan, there are regional (for each prefecture) minimum wages and industrial minimum wages.

These are based on investigation by Minimum Wage Council (Saitei Chingin Shinsakai). See Saitei
Chinginhō [Minimum Wage Law], Law No. 137 of 1959, art. 16. Employers must, in principle, pay atleast these minimum wages to workers (id. art. 5 para. 1) and Labor Standards Inspector (Rōdō Kijun
Kantokukan) has the authority to investigate, inspect and question in order to ensure the performance of
employers’ duties (id. art. 38).
132

See Yoshikawa v. Shūhoku Bus K.K., 22 MINSHŪ 3459, 4363-64 (Sup. Ct., Dec. 25, 1968); Satō v.

Dai Shi Ginkou K.K., 51 MINSHŪ 705 (Sup. Ct., Feb. 28 1997); Murose v. Michinoku Ginkou K.K., 54
MINSHŪ 2075 (Sup. Ct., Sep. 7. 2000) (denying the effect of work rule amendment that resulted in the
reduction of the wage for workers who are above 55). See also SUGENO, supra note 57, 228-29, 489-91.
For the law on the change of work rules, see supra notes 119-123 and accompanying text.

39

not impossible for employers to changes the payment system, at least it is judged
indispensible to protect the employment of workers.133
The more significant restriction to support real wages in Japan after the late1980s came rather from the regulation of working hours. 134 The Japanese Labor
Standards Law that adopted the 48 hour workweek system was substantially revised in
1987 and, with gradual reduction of working hours, by 1997, the principle of the 40 hour
workweek was put completely into practice.135 When employers require overtime or
rest-day work, employers must make an agreement with the Labor Union (or the
representative of majority of the employees in the office) and must file the agreementwith the Labor Standards Inspection Office.136 In addition, employers must pay a wage
premium for such work. 137 Although it has been said that Japanese workers are

133

See, e.g., Tamura v. TM K.K., 1641 RŌDŌ KEIZAI HANREI SOKUHOU 22 (Osaka D. Ct., May 28,1997) (in affirming the reduction of wage as part of reconstruction of defendant corporation, the court
affirmed that there was no objection by plaintiff and the reduction was not against the public policy. On
the other hand, the court denied the effectiveness of cut of plaintiff’s wage allegedly was due to the poor
result of his job.) See also ARAKI, supra note 21, at 52-55. But in contrast to minor changes of work rules,
it is not so easy to reduce the wage unilaterally. See, e.g., Michinoku Ginkou, 54 MINSHŪ at 2093-94.
134

See generally SUGENO, supra note 57, at 259-60.

135

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 32, para. 1 (providing that “anemployer shall not have a worker work more than forty hours per week”). See also id. art. 32, para. 2(providing that “an employer shall not have a worker work more than eight hours per day for each day of
the week.”).
136

Id. art. 36, para. 1.

137

Id. art. 37, paras. 1 & 3.

40

overworked, working hours have continuously declined since the end of the 1980s
because of the new legal regulations and the beginning of the recession.138
G. Labor Union and the Dispute Resolution System
As the LTER is an incomplete contract, there are always chances of disputes
concerning the interpretation of the contract to occur. The following are the two types ofdispute resolution systems: bargaining and negotiation organizations and publicagencies for the arbitration of the disputes.
In the former resolution system, the most important player is the labor union.
The recent density of Japanese labor unions is below 20%.139 This is much lower than the
post-war rate of 50%140: however, it is higher than that in other developed countries suchas France or the U.S., wherein the union density is around 10%.141 Japanese labor

138

See KŌSEI RŌDŌSHOU [Ministry of Health, Labor and Welfare], HEISEI 19NEN-BAN KŌSEI RŌDŌHAKUSHO SHIRYOUHEN [2007 White Paper on Welfare and Labor: Data Appendix] 118 (2007). In reality,
it is very difficult to compare the working hours of different countries because of the difference ofinstitutions and the nature of statistics. As a reference, White Paper on Welfare and Labor provides thedata of the yearly working hours of the production workers in manufacturing in various countries in 2004.
According to this data, workers in Japan and the U.S. work for approximately 1950 hours, those in the
UK work for about 1900 hours, and those in France and Germany work for about 1530. See id. With
regard to this data, the working hours of Japanese workers are still much higher than those of the workers
in European countries: however, it is coming closer to the level of the U.K. and the U.S. See id.
139

See id. at 140.

140

See id.

141

OECD, OECD EMPLOYMENT OUTLOOK 2004, at 145 (2004).

41

unions are enterprise unions.142 Though they often join an industrial federation ofunions, industry-level collective bargaining is not common.143 In the case of industrial
union, the negotiation aims at setting the criteria for generally regulating the labor
conditions in the labor market. In contrast, Japanese labor-management negotiations
mainly deal with intra-firm disputes.144 In particular, after 1960, when the enterprise
unions 145 began to establish the cooperative labor-management relationship andstrengthened their management participation functions, Japanese labor unions grewcloser in substance to the workers’ council in Europe than to the European labor
unions.146
In the Japanese labor union law, the right of labor unions is strongly protected,
reflecting the legislative intent immediately after the war to promote the right of142

See SUGENO, supra note 57, at 500.

143

See ARAKI, supra note 21, at 164.

144

Note, however, that by using Shun-to (Spring Wage Offensive), labor unions also coordinate

enterprise-level negotiations for the yearly increase in wage rates to a reasonable level, while adjusting itto the macroeconomic conditions of the year. See, e.g., REBICK, supra note 29, at 77 & 79.
145

Even in small firms wherein labor unions do not exist, joint labor-management committee often exist:

these committees perform the same role. See id. at 81-82.
146

Unlike the European countries, the trial of labor unions to support political parties that have the ability

to form a cabinet was not successful at present. See ARAKI, supra note 21, at 79. Instead, labor unions
dispatch representatives to government administrative organizations in order to reflect their views in theeconomic policy of the government. See SUGENO, supra note 117, at 11 & 296-97.

42

laborers.147 It consists of the right to organize, bargain collectively, and take collective
action.148 These days, explicit collective actions are rare, and collective bargaining is
replaced with a more informal negotiation known as labor-management consultation.149
However, these rights of the labor unions definitely hold the effect of a threat point in
the negotiation and have served to promote the position of laborers.
The

agreements

betweenworkers

andemployersformedthroughlabor-management negotiations are either established as collective agreements (Rōdō

Kyouyaku), which are superior to work rules,150 or induce changes in the work rules.151
The system of labor-management consultation not only serves to improve the working
conditions of laborers but also materializes the participation of labor in management,
particularly when the managerial environment changes drastically.
When disputes cannot be resolved, public agencies engage in arbitration. In thecase of collective disputes, the Labor Commissions (Rōdō Iinkai) intervene.152 Although
it is a part of public administration, its members are chosen from outside, such as
147

See Rōdō Kumiaihō [Labor union Law], Law No. 174 of 1949, art. 1 (providing that main aim of the

Law is “to elevate the status of workers by promoting their equal standing with their employers inbargaining.”).
148

See id. art. 6.

149

See ARAKI, supra note 21, at 179-80.

150

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 92, para. 1.

151

See SUGENO, supra note 57, at 114-15.

152

See Rōdō Kumiaihō [Labor union Law], Law No. 174 of 1949, art. 20.

43

academics or lawyers and representatives of unions and employers, 153 and its
independences from the bureaucracy is guaranteed.154 The basic principle of the Labor
Relations Commissions is to respect the labor-management autonomy so that usually it
does not compel the resolution of the disputes.155 Though it orders remedial measures torectify the consequences of unfair labor practices, it has no prosecution division, unlike
its American counterpart. 156 Owing to the development of the labor-management
consultation system, the number of cases dealt with by the Commissions isdiminishing.157
Individual disputes may go on to civil litigation. As Japan does not have a
special Labor Court, the disputes are treated as normal civil cases. The most importantfeature of individual disputes in Japan is the small number of litigations. There are only
2000-3000 civil cases related to labor disputes that are filed to district courts every
year.158 This is in sharp contrast with European countries such as France and Germany,

153

Id. art. 19, para. 1.

154

See ARAKI, supra note 21, at 191-93.

155

See SUGENO, supra note 57, at 673-74.

156

See ARAKI, supra note 21, at 193-94.

157

See KŌSEI RŌDŌSHOU, supra note 138, at 140.

158

See Saikō Saibansho Jimusōkyoku Gyōseikyoku [Administrative Affairs Bureau, Supreme Court],

Heisei 19 nendo Rōdō Kankei Minji, Gyōsei Jiken no Gaikyō [Outline of Labor Relations Civil and
Administrative Cases for 2007], 60 HŌSŌ JIHŌ 2421, 2447 (2008) (2246 cases filed in 2007. From 1998
to 2007, 1708 to 2519 cases are filed.).

44

wherein 160,000-600,000 cases are treated per year by the Labor Courts.159
There are numerous ways to explain why Japan experiences a much lower
number of litigation than Western countries. The first explanation attributes this to thefact that the culture of avoiding disputes is inherent in the Japanese population.160 The
second explanation is the high litigation cost due to the small number of lawyers andjudges, while the third is the development of a system to promote out of court
agreements.161

In the case of labor disputes, labor-management consultations and theadministrative schemes to promote pre-trial agreement are particularly developed.
With the addition of high costs of litigation, everything possible is done to prevent
disputes from going to courts.
H.Labor Market Policy
Finally, let us briefly look at the labor market policy in Japan. The Doctrine of159

Id. at 375.

160

See, e.g., Takeyoshi Kawashima, Dispute Resolution in Contemporary Japan, in LAW IN JAPAN: THE

LEGAL ORDER IN A CHANGING SOCIETY 41 (Arthur Taylor von Mehren ed. 1961).
161

This problem was studied in J. Mark Ramseyer & Minoru Nakazato, The Rational Litigant:Settlement Amounts and Verdict Rates in Japan, 18 J. LEGAL STUD. 263 (1989). In the case of a car
accident compensation that it chiefly studied, it exclusively chose the third explanation, i.e., the broad
possibility of an out-of-court compromise due to the transparency of judgment of Japanese courts, andargued that the Japanese party that was injured in the accident has sufficiently claimed its right tocompensate for its loss. Id. at 278-81 & 289-90. In the case of labor disputes, however, we believe thatthe protection of the right of workers is not sufficient in the present system. Although the bargaining
power of labor unions is effective in protecting employment and the average wage level, it is not effective
enough in preventing the infringement of the individual right of workers.

45Abusive Dismissal162 is an important element of the employment policy in Japan. The
other policies dealing with the labor market also emphasize the protection of
employment as its basic objective. For this purpose, the need for active intervention of
the government in the labor market is explicitly stated.163 In practice, the policies
mentioned below are important.164
First, private employment agencies had been strictly regulated, considering the
problem of exploitation by intermediaries, which had often been a serious social
problem before World War II.165

Instead, Public Employment Security Office, a publicagency, in principle, had monopolized placement and vocational guidance activities.166
Second, unemployment benefits are provided to help unemployed workers.167 Third,
public measures have been taken for the development of the vocational abilities ofworkers. 168 Fourth, financial support is also offered to promote the employment ofelders, 169 and handicapped people, 170 partly for the purpose of providing equal

162

For the doctrine of abusive dismissal, see supra notes 88- 109 and accompanying text.

163

See Koyō Kankei Chōseihō [Employment Measures Law], Law No. 132 of 1966, arts. 1, 3, & 4.

164

For the survey of the Japanese law of the labor market, see SUGENO, supra note 57, at 31-73.

165

See supra note 56.

166

See Rōdō Kijunhō [Labor Standards Law], Law No.49 of 1947, art. 6.

167

See generally Koyō Hokenhō [Employment Insurance Law], Law No. 116 of 1974.

168

See generally SUGENO, supra note 57, at 48-51.

169

See Koyō Hokenhō Shikoukisoku [Rule for Enforcement of Employment Insurance Law], Ministry ofLabour Rule No. 3 of 1975, art. 104 (providing subsidies for certain employment of elders). For an

46

opportunities to workers. Fifth, the employment measures are designed to support
depressed industries and areas.171
As the list of policies above shows, the support to the unemployed people andthe subsidization for the protection of employment form the main body of the policies,
reflecting its objective of promoting employment security. A conventional wisdom ofneoclassical economics tells the latter as the type of policy that simply preserve theinefficiency of the market, thereby impeding competition.172 After 2000s, when firms
began active employment adjustment, and the unemployment rate approached the 5%
level, 173 Japan’s employment policy is shifting its emphasis from protecting the

explanation of Japanese Law concerning employment of elders, see Noboru Yamashita, Act Concerning
Stabilization of Employment of Older Persons, 4 JAPAN LABOR REV., no.3, at 71 (2007).
170

In essence, Law for Promotion of Employment of Handicapped People provides that if a firm (onlythose usually employ more than 300 employees) employs handicapped workers less than certain
percentage (1.8%) of total workers then the firm has to pay penalties. See Shōgaisha no Koyō no
Sokushintō ni kansuru Hōritsu [Law for Promotion of Employment of Handicapped People], Law No.
123 of 1960, art. 53; Shōgaisha no Koyō no Sokushintō ni kansuru Hōritsu Shikourei [Ordinance for
Enforcement of Law for Promotion of Employment of Handicapped People], Ordinance No. 292 of 1960,
art. 18. In contrast, if a firm employs handicapped workers more than that percentage then it will be
subsidized. See Shōgaisha no Koyō no Sokushintō ni kansuru Hōritsu [Law for Promotion of
Employment of Handicapped People], Law No. 123 of 1960, arts. 49 & 50.
171

For present situation concerning regional employment, see Minoru Ito, Measures for Supporting

Regional Job Creation in Japan, 5 JAPAN LABOR REV., no.1, at 85, 92-99 (2008).
172

See, e.g., HARVEY S. ROSEN, PUBLIC FINANCE 303-10 (2d ed. 1988) (arguing that subsidies anddifferential tax treatment among production factors create deadweight losses to the overall economy).
173

See MINISTRY OF HEALTH, LABOUR AND WELFARE, WHITE PAPER ON THE LABOUR ECONOMY 2005, at

3-4 (2005), available at http://www.mhlw.go.jp/english/wp/l-economy/2005/dl/01-01.pdf.

47

pre-existing employment to absorb the existing unemployment.174 The drastic reform of
the labor market law is now in progress, as will be shown in section IV. B.

IV. Economic Consequences of the Japanese Legal Policy on Labor Relations
A. The Relationship between Labor Relations and the Labor Law in JapanThe JEC and Japanese labor law developed in parallel after World War II. Is itthen possible to state that the Japanese labor law enforced the establishment of JEC?
As the basic principles of the Japanese labor law suggest, the legal system and its
principles were influenced by Western society, particularly the U.S., after World War
II.175

Therefore, it is difficult to say that those laws enacted through the reform after

the World War II themselves established the development of the JEC, whichcharacterized the post-war Japanese employment system.
Furthermore, the Japanese labor law at least in part respects the autonomy oflabor and management by establishing only the basic framework concerning industrial
relations. There are not many laws that enforce or even point toward the JEC, andhence, it can be said that the labor laws only set the frame and the base of theautonomous negotiation under which the LTER had been developed spontaneously. In
174

See ARAKI, supra note 21, at 31-32.

175

See GOULD, supra note 30, at ch. 2 &106-16.

48

other words, labor laws restricted freedom of contracting in some part by setting theminimum standards or by regulating the way of negotiation but the LTER is somethingthat emerged within that restriction as a set of contracts (in the economical sense). Thisobservation corresponds with our theoretical conclusion concerning the JEC in section
II.B. that the LTER in Japan can be regarded as an implicit contract, which continues
for a long period and which is self-binding between employers and employees. Let us
review the details.
First, with respect to individual labor relations, the JEC possesses uniquefeatures in its promotion and payment systems such as broad discretionary power ofmanagement on the working conditions and personnel administration or flexible andreliable wage payment. As explained in section II.B, this is the feature of the Japanese
LTER that has led to an increase in the productivity of workers and has provided
incentives for them. Therefore, it is regarded as the most important part of the LTER by
which Japanese firms keep their economy strong.
However, these features are not specified within the verifiable contract
between worker and employer when the worker is hired. They are guaranteed by thework rule that is set autonomously through the agreement between employers andworkers, and the legal intervention in this autonomy is not so affirmative but is49

restrained.
One important exception is the area of employment protection, wherein the
explicit regulation by The Doctrine of Abusive Dismissal was effective. Even in the caseof adjustment dismissal, it is not clear whether the doctrine indeed directly reinforced
the employment protection. As we explained in section III.C., this doctrine began withthe adjustment of the judicial decision to the social norm of the LTER: it was rather longafter the establishment of the custom of the LTER that this doctrine had its explicit
regulatory effect due to the accumulation of precedents. In other words, the LTER was
originally established as a social norm in Japanese employment society and the doctrine
led the real economy only partially toward the protection of the LTER by legal
enforcement.
The same is the case with regard to the Japanese labor union law. The
long-term cooperative relationship between the Labor Union and management is a key
aspect of the superiority of the LTER in Japan,176 as was discussed in Part II.177 For
example, in the several recessions that Japan experienced since the Oil Shock, thisconsultation system has contributed to the improvement of the organization of firms

176

See KOIKE, supra note 6, at 207-16; Kanemoto & MacLeod, supra note 42, at 145-46.

177

See supra notes 21-24 and accompanying text.

50and industries while protecting employment.178 Even during the long-run stagnation
after the 1990s, this consultation system essentially succeeded in maintaining acooperative relationship between labor and management while drastically restructuringfirms.179
Further, having been introduced immediately after the war with the U.S., it isnoteworthy that the Japanese labor union law never forced, or even expected this formof labor union. The social and economic circumstances experienced by Japan after the
war created the enterprise labor union,180 as in the case of other JEC. It is possible todevelop

thiscustomonly

bystrictly

respecting

thefundamental

rule

of

“labor-management autonomy”.181
In summary, the Japanese legal system has made important contributions as a
sub-system to the social enforcement of the JEC merely through setting a reasonablestage for the mutual agreement between labor and management. With the protection of
the right of workers and the autonomy of parties guaranteed by the legal framework,
labor and management autonomously adopted the system of JEC as a type of implicit

178

See SUGENO, supra note 117, at 12 & 304-07.

179

See ARAKI, supra note 21, at 166. Even today, the Japanese unemployment rate is approximately 5%.

See KŌSEI RŌDŌSHOU, supra note 138, at 15.
180

See ARAKI, supra note 21, at 165-66.

181

Id. at 165-166.

51

contract in post-war Japan.
It may be noteworthy to mention a covert but important legal aspect for theestablishment of the JEC. The Japanese legal system for minimizing individual labor
disputes has greatly contributed to the efficient management by decreasing disputecosts to firms and protecting their power of discretion. At the same time, however, it
seems that the high cost of litigation and the social pressure for pretrial agreements
have made it difficult to bring lawsuit.182 It has been argued that a new system ofindividual dispute resolution, which is more accessible to individual workers, should beorganized.183
B. Adjustment of Labor Relations and Labor Law to the Structural Change of the
Economy after the 1990s
Following the 1990s, the merit of the JEC diminished because of the active
technological innovations. Firms are required to shed unwanted labor to cope with thelong-run macroeconomic stagnation. Therefore, it was necessary to restructure the182

See Kazuo Sugeno, Judicial Reform and the Reform of the Labor Dispute Resolution System, 3 JAPANLABOR REV., no.1, at 4, 5-6 (2006) (indicating the backgrounds of small numbers of labor litigations inJapan).
183

See, e.g., id. at 8-12 (discussing the need for reform of individual labor disputes resolution system).

For labor tribunal system under Labor Tribunal Law (Rōdō Shinpanhō) of 2004, see Katsutoshi Kezuka,
Significance and Tasks involved in Establishment of a Labor Tribunal System, 3 JAPAN LABOR REV., no.1,
at 13, 16-27 (2006).

52existing industries, and develop new industries that embodied new technologies byusing the market mechanism, including the migration of labor force from old to new
businesses and industries. As we will see below, while in some areas of the labor law,
this reform was actually put into effect, the regulation of labor relations and labormarket has been tightened in other areas leading to the aggravation of distortionary
effects on the economy. This section discusses first the competition-promoting change
and the next section discusses the efficiency-decreasing regulations.
The reform of the JEC by law was first put into practice by using its flexible
legal structure. As pointed out in the previous section, the Japanese labor law does not
reinforce or even push in the direction of an LTER as the typical employment relation in
Japan. It allows for various types of labor contracts. In effect, the present labor
contracts in Japan allow more specific and individualized contracts other than the
LTER. The Japanese wage payment system based on seniority is also being reformed toreflect performance measures more directly.184 As the awareness of laborers changes,
they are willing to accept these changes.185 This change allows for richer options forworkers and will be efficiency enhancing in the present economic environment, where184

See KŌSEI RŌDŌSHOU [Ministry of Health, Labour and Welfare], HEISEI 19NEN-BAN RŌDŌ KEIZAI NOBUNSEKI [Analysis of Labor Economics 2007] 105-08 (2007) (indicating that making wage more reactive
to workers’ performance has become popular).
185

See ARAKI, supra note 21, at 70-73.

53technical progress, and the diversification of labor force such as female-labor,
middle-aged and older workers, and foreigners deepen rapidly. The general theory oflabor contract within the Japanese labor law is sufficiently broad to cope with thispossible change.
In the area of labor market law, more explicit reforms are currently in progress.
To cope with the rapid change in the economic environment, the Japanese labor law has
recently begun to emphasize the activation of the external labor market by the
deregulation of the private employment agency business186 and public support to thevocational training provided to the unemployed.187 The law for subsidizing employment
in depressed industries has been abolished188 and instead a subsidization policy related
to newly created industries such as those pertaining to information, environment,
medicine, and welfare industries was implemented.189 At the same time, unemployment186

For the deregulations concerning workers dispatch, see supra note 82 and accompanying text.

187

See KŌSEI RŌDŌSHOU, supra note 138, at 223-28 (explaining measures for vocational training).

188

Tokutei Fukyou Gyoushutō Kankei Rōdōsha no Koyou no Antei ni kansuru Tokubetsu Sochihō [Lawon Special Measures Concerning the Stabilization of Employment in Specified Depressed Industries],
Law No. 39 of 1983 was abolished in 2001. This abolition was a part of reform of labor market law in2001 which in turn was in line with the deregulation policy of Japan after bubble economy.
189

Koyō Taisakuhō [Employment Measure Law], Law No. 132 of 1966 was amended. This amendment

was also a part of the reform in 2001. See KAZUO SUGENO, SHIN-KOYŌ SHAKAI NO HŌ [Employment
System and Labor Law] 88-93 (Supplemented ed. 2004). In this reform, law regarding regional
employment was also amended. See Ito, supra note 171, at 88-91 (explaining policy and legal changes
concerning regional employment after 2000).

54

benefits are enhanced in order to provide a safety net to cope with increasing
unemployment.
It can be said that the present employment policy in Japan not only uses the
JEC to protect employment but also supports the adjustment ability of the external
labor market mechanism and tries to integrate these two previously distinct policies toestablish full employment.
C. Potential Sources of Economic Distortion by Legal Regulations on Japanese Labor
Relations
In some other areas, the direction of the present Japanese labor law
emphasizes the direct regulation of the labor relations rather than respecting theautonomy. This seems in contrast to the required deregulation to recover the efficiencyof the economy and has resulted in considerable welfare cost since the 1990s.
First, the regulations of wages are likely to reduce the efficiency of theeconomy. One such direct legal restriction is the minimum wages legislation,190 whereina considerable amount of resource allocation waste has been created for allocating labor
for small business and part-time workers.191 With respect to workers covered in the

190

For law regarding minimum wages, see supra note 131 and accompanying text.

191

See RICHARD POSNER, ECONOMIC ANALYSIS OF LAW 322-55 (7th ed. 2007) (discussing the welfare

implications of the legal regulation on minimum wages).

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LTER, a more significant regulation of real wages was the result of the reduction in
working hours. According to a recent influential empirical research, some significant
part of the slowdown of the Japanese economy in 1990s can be explained by thisregulation.192
The equal opportunity regulation for male and female workers and a similar
regulation for protecting foreign workers will be further tightened in the near future.
In its procedural aspect, the recent development of the judicial reform in Japan intends
to expand the capacity of the judiciary, including an increase in the number of lawyers
and more accessibility to the use of litigation.193 With this reform, more labor-related
disputes will be contested and the right-consciousness of individual employees will beenhanced in the near future. One of the aims of this reform is to establish individual
rights and the rule of law more firmly in Japanese employment society. It should be
admitted, however, that economic efficiency would be sacrificed by decreasing thediscretionary power of employers for disciplining workers.
192

See Fumio Hayashi & Edward C. Prescott, The 1990s in Japan: A Lost Decade, 5 REV. ECON.

DYNAMICS 206 (2002) (suggesting that the strengthened legal restrictions on working hours significantly
contributed to the slowdown of the macroeconomic performance of the Japanese economy in the 1990s).
193

See Shihō Seido Kaikaku Shingikai [The Justice System Reform Council], SHIHŌ SEIDO KAIKAKUSHINGIKAI IKENSHO: 21 SEIKI NO NIHON WO SASAERU SHIHŌ SEIDO [Recommendations of the Justice
System Reform Council : For a Justice System to Support Japan in the 21st Century] (June 12, 2001) (thebasic summary of the idea of the judicial reform in Japan). The English version of this recommendations
are available at http://www.kantei.go.jp/foreign/policy/sihou/singikai/990612_e.html.

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Let us consider the economic effect of the Japanese employment security
more in depth. We consider, first, the effect on the allocation of labor among various
firms and industries, and second, the effect on the accumulation of firm-specific humancapital. If we consider the frictionless neoclassical competitive labor market, the effecton the allocation of labor is neutral to resource allocation including the unemployment
rate, since the strict protection of workers is completely offset by the reduction of wage
rates.194 However, it is sometimes difficult to make such adjustment smoothly. For
example, when firms are required rapid restructuring because of the unexpected changeof the economic environment, firms are usually constrained by labor law not to makedrastic reduction of wages. In such cases, firms are required to hire unwanted high-costlabor so that the allocation of labor should be distorted by the employment protection.
Next, if we consider the effect on the firm-specific human capital, there is a
widespread belief that employment protection enhances the incentive of workers tomake such investment.195 In reality, this argument does not hold true, since the workers
protected by the employment protection law have no incentive to make such an effort,

194

See Edward P. Lazear, Employment -at-will, Job Security, and Work Incentives, in EMPLOYMENT,UNEMPLOYMENT AND LABOR UTILIZATION 39, 46-52 (Robert A. Hart ed., 1988).
195

See, e.g., Hiroyuki Chūma, “Kaikoken Ranyou Hōri” no Keizai Bunseki [Economic Analysis of“Doctrine of Abusive Dismissal”], in KAISYAHŌ NO KEIZAIGAKU [The Economics of Corporate Law] 425,
444-50 (Yoshiro Miwa et al. eds., 1998).

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since their job is legally protected without any effort.196 So, a punishment was rather
necessary for the workers who did not accumulate firm-specific human capital.
In the absence of a method other than dismissal for this punishment, it is truethat employment protection destroys that innate efficiency in the JEC discussed in
section II.B., wherein the long-term relationship between the enterprise and union
makes possible the efficient accumulation of firm-specific human capital as a reputation
equilibrium. However, it is possible to punish the workers by a reduction in wages or a
step-down of offices and positions or by suspending the expected promotion of theemployee. In this case, the employment protection policy is again neutral to resource
allocation. As we discussed above, the regulations on working conditions, such as
regulations against discriminations and work time regulation are being strengthened
after the 1980s. In view of these extended limitations on the discipline of workers, tightemployment protection is more likely to be a factor in diminishing the efficiency of theJapanese labor relations in the accumulation of firm-specific human skills.
All in all, the overall development of regulations on working conditions andemployment seems to have made it more difficult for firms to restructure, and for labormarket to allocate labor force among various industrial sectors more appropriately,196

See Lazear, supra note 194, at 54-56.

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impeded the accumulation of skills of workers, and barred new industries from entering
the market due to the increase in labor cost. As its consequence, more unemployment
and the substitution of regular workers with part-time workers occurred, particularly inthe younger generation.
Main empirical researches on the effect of employment protection on the labormarket performance confirmed the above conjecture: i.e. that employment protection
causes a negative effect on the labor market.197 Given these empirical contributions, it
seems to us that the strengthening of the employment security that developed after the
1970s in Japan caused welfare loss to the Japanese economy.

V. Conclusion
This article discussed the functions of the Japanese labor law in relation to
the Japanese system of labor relations, which we refer to as the JEC. We first selected
the characteristics of the JEC as compared with Western countries. In the LTER thatprevails in Japan, workers must follow orders from the employer with respect to OJT
197

See, e.g., Edward P. Lazear, Job Security Provisions and Employment, 105 Q.J. ECON. 699, 706-17(1990) (empirically showing that the employment protection policy not only increases unemployment but
also creates the tendency to replace the permanent positions of workers with part-time workers.); James
Heckman & Carmen Pages-Serra, The Cost of Job Security Regulation: Evidence from Latin American
Labor Markets, 1 ECONOMIA 109 (2000) (empirically showing that employment regulation decreases theemployment rate, especially for the younger generation).

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and other personnel affairs, enterprise order and discipline. They also accept subjective
merit ratings by the employers. Employers are, in turn, committed to the permanent
employment of workers and appropriate payment of wages for their efforts, without
depending on the managerial environment. This efficient outcome is characterized by ahigh level of accumulation of firm-specific intellectual skills to attain high productivity
and low unemployment.
Since this system is in principle realized as a self-enforcing social equilibrium,
it is not enforced directly through the Japanese labor law. However, in several aspects,
the Japanese labor law has served as a subsystem to support this efficient social
equilibrium. First, Japanese employers are, by law, allowed more discretionary freedom
for controlling laborers than the employers in the West. This facilitated the capability of
employers to reassign workers and increase investment in firm-specific skills through
OJT. The limited access of workers to litigation also served to protect this system.
Second, the rights of the workers are strongly protected to guarantee a favorable
position in the collective bargaining with management and this made it possible toguarantee an appropriate reward to the employees who made sufficient effort in theaccumulation of firm-specific human capital. Third, labor-management autonomy
remains broad with regard to dispute resolution, so that legal regulation and60

arbitration are not actively pursued. This principle made it possible to realize theefficient reputation equilibrium through the long-term relationship between unions andemployers.
At present, it is unclear whether the JEC will prevail in the future. If it is not
the case, one possibility is that Japanese firms may not protect this custom by reneging
on the payment of the workers’ effort, pursuing short-run profit. Then, the JEC will betransformed into a neo-classical competitive market system. Although we regard it asless efficient than the JEC in its successful state, it might be the case that the labormarket allocation of human resource may be even superior to that by an internal labormarket in the present economy, wherein technical innovation is active and thediversification of labor force is developing, since firm-specific human capital is relatively
less important in this type of economic situation. If this is the case, this transition isfavorable for the efficiency of the overall economy. In this case, however, appropriate
legal measures should be considered as a safety net for workers who belonged to the
LTER but were reneged on the payment for their efforts.
Another possibility is that Japanese workers may demand more comfortableworking conditions, while protecting the legal regulations on employment security. In
this case, Japanese employment society will converge to an economy with lower

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productivity and a higher unemployment rate, as observed in European countries.
In any case, as long as the JEC is the product of the labor-management
autonomy, which was not directly enforced through law, it is unlikely for the law to havea decisive power for its protection in the future. However, it is important that the law
should not have a negative efficiency effect through inappropriate legal intervention inlabor relations.
For example, it does not seem necessary to regulate working hours toharmonize with “World Standards” through legal enforcement. For the sake of efficiency,
it is much more reasonable to leave the matter to the individual agreement between
workers and employers. At the same time, employment security measures should not bechosen to preserve the unproductive sector of the economy, impede the development of
new and productive industries, and to rescue unwanted or unmotivated workers. Given
the need to extend the regulation on the working conditions, particularly with respect toequal opportunity policies for sexes, ages, nationalities, and rapid technical innovation,
the relaxation of the protection of employees is necessary for the discipline of laborers
and spectral adjustment in Japanese employment society in the near future.

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