Abstract
This article analyzes changes in Japan's employment system during the course of the Heisei depression, with an emphasis on the employment strategy used by firms. Unlike previous depressions, the Heisei depression is characterized by severe financial instability. Real-estate loans during the bubble era became non-performing from the early 90's, which made the financial system unstable. A financial crisis, however, was barely warded off by the "discretionary policy" of the Ministry of Finance. In fact, during the period from 1995 to the beginning of 1997, the real economy did show a recovery. In November 1997 a financial crisis broke out, and it deepened thereafter. During this financial crisis, firms curbed their investment and households their consumption, causing the total demand to shrink rapidly. Under this macro economic environment, firms started a price war due to their peculiar price setting method, and at the same time adopted the employment strategy of cutting labor costs, reflecting the shift of business goal from "market-share" to "profit rate". These measures created the micro foundation for a deflationary spiral. In this process, fully utilizing new and old methods for flexible employment adjustment, firms significantly changed the employment system. Even though the financial crisis has subsided since the spring of 2003 (an official announcement of financial "normalization" was made in the spring of 2005), firms have been maintaining such an employment strategy in order to increase their profit rate. Structural change in the employment system is most clearly demonstrated in (i) the increase in unemployment and non-regular workers among young people, which is causing serious social problems; and (ii) the dysfunction of the mechanisms of macro economy - the decline in compensation of employees is suppressing the final demand and deflation is continuing, as the situation presents itself. The simplistic employment strategy (as well as pricing strategy) of firms stems from the absence of an innovative management strategy. To rectify this situation, it is necessary to overcome the "flexible labor market" ideology, which is not supported by empirical evidence. It is further necessary to strengthen labor legislation and the enforcement system, thereby giving firms an incentive to formulate innovative strategies. It is not "employment system" but "corporate management" which requires structural reform.
