Why Japan Isn't Making the Cuts

Postponing the inevitable pain of major layoffs extracts a high price, but one Japanese managers are willing to pay

By Brian Bremner

Back in the late 1980s, Sony founder Akio Morita accused U.S. corporate chieftains of "human rights" abuses for shedding thousands upon thousands of workers during America's grueling wave of restructuring. And given the current slump in the U.S., news of layoffs coming from companies like Lucent, AT&T, and General Electric is getting plenty of play in the Japanese press.

But this time around, Japanese executives aren't frowning at their U.S. counterparts. Instead, I suspect they envy the power and flexibility that allows the Americans to slash costs quickly as the business cycle warrants. In the U.S. business world, when things go bad, you feel the pain right up front -- at least workers and shareholders do.

It's a different story in Japan, of course, where the past decade has been all about putting off the pain for as along as possible. From a human perspective, that's admirable -- but less so when you consider the additional costs imposed by a glacial approach to restructuring that has allowed problems to linger without resolution.


  As competition grows increasingly global, Japanese executives are at a huge disadvantage vs. rivals in America and Europe. IBM's Louis V. Gerstner and Daimler Chrysler's Jürgen Schrempp have much more freedom to make tough choices and pull off massive overhauls of their companies to ensure long-term survival or to react to a changing business environment.

That doesn't mean they always pull off brilliant recoveries or that they avoid cutting too deeply and hurting themselves in the process. But contrast this with Japanese restructuring plans of the past few years: Typically, they involve cutting a few thousand jobs here through attrition, and a slight pullback from production there -- even when the situation cries out for much more.

Managers such as Minoru Makihara at Mitsubishi or Taizo Nishimuro of Toshiba are no slouches. In terms of candlepower, experience, and knowledge of foreign markets, they're certainly world-class. All the same, these guys have trouble effecting big change in a society that doesn't tolerate massive layoffs.


  While that's changing, Japanese executives remain at a disadvantage in other ways as well. For instance, years of lax accounting and poor cash management have left Japan's pension plans a complete mess. HSBC Securities analyzed the balance sheets of 1,100 large, listed companies and estimated they have a collective shortfall of $200 billion in their pension plans.

In the U.S. and Europe, companies often have the luxury of offering early-retirement benefits to convince senior -- and expensive -- managers that it's time to move on. That doesn't make the whole process of letting employees go any cheaper, but it does make the winnowing a little more humane.

True, layoffs remain painful and life-altering events for factory hands, back-office employees, and members of junior management. But getting sacked in the U.S. or Europe doesn't carry the painful social stigma that it does in Japan. In the '80s, fired autoworkers left Detroit and moved to the Sun Belt. Not all were able to match their former salaries and benefits, but plenty of others went on to new careers by pulling up stakes and starting over.


  Getting laid off matters greatly in Japan. For starters, a typical worker's sense of personal identity is wrapped up in his job. For another, Japanese society isn't all that mobile. Few people exit Hokkaido to gamble on a new career and life in Kyushu. In a way, Japan's big jump in suicides, which spiked in the late 1990s as the economy sputtered, reflects one of the consequences Japanese bosses must consider when deciding the fates of their workers.

But making painful and tough calls on layoffs shouldn't be considered the equivalent of a war crime. I do admire the tendency in Japan to look at such decisions as an absolute last resort. And Japanese managers have a lot of cultural restraints that make their jobs much tougher than their counterparts in the West. (They also get paid a lot less.)

Still, it's hard to get away from the idea that Japan -- a land of weak balance sheets and overinvestment in all manner of industries -- has a lot of heavy lifting to do in the years ahead. Might it be better to accept the economic pain and, yes, higher joblessness up-front in order to clear the brush for a real recovery, instead of the fits-and-starts economy of the past decade? It's a choice only the Japanese can make.

Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BW Online

Edited by Beth Belton

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