Job retention in Japan is second highest in the world – employees stay at an organization for an average of 12 years. Employees just almost never get fired or laid off. Show host Kyota Ko explains the 400-year old reason behind the peculiar business culture.

Japanese businesspeople stay 11.9 years, US businesspeople stay 4.2 years

Hello world, you are listening to the Metro-classic Japanese. My name is Kyota Ko. In this podcast series, I have talked about the cultural and historical reasons behind the world’s oldest companies running for hundreds or even more than a thousand years being almost all Japanese companies. I think the title I gave for it was “Why do Japanese companies stay in business for 500 years?” Please check out the podcast if you’re interested.

And in this podcast, I’d like to touch on a similar theme. So company employees in Japan tend to stick around at a company for quite some time. The average number of years a Japanese businessperson works at a company is 11.9 years, which is second longest among OECD countries, just below the 12.1 years of Italian businesspeople. Just to compare, the US has the shortest average, at 4.2 years. Next comes Korea, at 5.8 years. These are data from the 2018 Databook of International Labour Statistics.

Differences in law

So you can see that in terms of average length of service, Japan and the US are at opposite ends. An obvious reason for this difference is in the difference in labor law of the two countries,

In the US, employees and employers make a contract of employment at will, which basically means both sides can terminate the employment contract with or without a reason, anytime, at will. But in Japan, full-time employees are employed on the premise that they are expecting to continue working at the organization all the way until retirement. And the law makes it difficult for companies to fire employees and even laying off employees. It’s not difficult for employees to quit a company, by the way.

There’s this policy called the principle of appropriateness, and this policy is partially responsible for making employee retention high in Japan. I’m going to read the whole thing because I’m guessing it will surprise you a bit. So here goes. The principle of appropriateness.

“Even in the case where grounds for regular termination exist, the Employer may not always be able to terminate. When, in view of the applicable concrete circumstances, effecting termination is highly unreasonable and unacceptable based on the prevailing attitudes of society, said termination shall be considered invalid as an abuse of the employer’s right to terminate.”

That’s the most number of times I’ve used the word “terminate.” So you might have a few question marks above your head right now. So it says even if firing a particular employee seems sensible, the company may not be able to fire him.

Companies have the right to fire or lay off employees, but they may not be able to exercise the right. If I were a company, I would wonder if I even really have that right.

But this policy is a result of the efforts of Japanese lawyers and courts of the 20th century to protect people from devastating consequences of being laid off. It’s not that the court goes easier on workers and harsher on companies. It has a lot to do with the peculiar nature of Japanese business culture.

Traditional Japanese business culture

Again, Japanese companies have traditionally employed full-time employees assuming that they would stay with them for many, many years even now. In the 20th century, life-time employment was the norm. You joined a company right after graduating high school or college, and that company would become your life-time workplace. You would have been considered weird if you changed careers or found a job at another organization. And the size of your pay check depended on your seniority more so than anything. Your performance mattered less.

This is to say that being laid off or getting fired in Japan used to mean quite a devastating situation for the employee because one, it was not customary for Japanese companies to recruit people who were not straight out of school, and even if the laid-off employee did find a new job, his or her pay was likely to go down significantly because you’d have to start accumulating seniority from scratch again. And lay-offs occur typically during recessions, and in recessions, it’d be even harder to find a new job. To add to that, Japanese companies traditionally didn’t allow their employees to have another job on the side. Their full-time job was basically supposed to be the only source of income. So you couldn’t even have your own little business or acquire any other job skills to hedge your risk of getting unemployed.

So for the longest time in Japan, if a company tried to lay off its employees and the employees brought the issue to court, the company was often reprimanded and told something to the effect of “Considering our country’s business culture and its influence on our reality, laying off an employee will have an almost fatal impact on the person’s life. Therefore, lay-offs need to be a very last resort, and as a business owner, you are to pursue your company’s financial well-being by means of reconsidering your business management strategy or your management team, halting recruitment, cutting corners BEFORE you consider lay-offs. And terminating the employment contract of the plaintiff without having done any of the above is plainly an abuse of your right to execute termination.” This is actually a part of the sentence for a real court case in 1975.

In another court case in 1979, the sentence goes “As a reality of business practices in our country, companies do not return much of their profits to their investors or employees even during business growth, and instead tend to save profits or reinvest them for further growth. Employees accept these practices as they expect the growth of their company to help secure their life-time employment and to enjoy receiving gradual raises. Considering these circumstances, we must say it would be cruel for the company to lay off its employees upon a slump in business.

So the court told the company that was trying to lay off some of its employees that: You get to keep your profits high because your employees don’t demand a big raise during good times, so during bad times, it’s your job to take care of them. That’s Japan for you right there, everyone. Cherry blossoms, temples and shrines are beautiful, sure, but what’s most beautiful is the humaneness in certain parts of Japanese philosophy. I’ve met and had chances to have discussion with a few Japanese judges in my life and I saw a Buddha in every one of them.

Japanese companies aim to maintain employment

And I don’t mean to make villains out of Japanese companies. They are for-profit organizations and upper managements are just doing their jobs. And in fact we could say that these court cases of companies trying to lay employees off were black sheep. Lay-offs are really rare among Japanese companies.

In 1974, there was an economic depression caused by the global oil crisis. Oil prices increased by 70% because of war in the Middle East, and Japan relied heavily on import oil from the Middle East – as high as 80% of our oil was imported. So everyone had to save electricity by turning lights and neon signs off everywhere. Between 1974 and 1984, the cost of many businesses around the world skyrocketed, so as you can imagine, unemployment rates went up rapidly, particularly in the Western world. In the US, it increased from 5% to 9%. In the UK, it went up from 3% to 11%. Meanwhile in Japan, unemployment went up from 1.5% to around 2.5%. And even that 1% increase was shocking for Japanese people back then.

It’s said that there is a gap in attitude towards employee retention, and the gap has to do with the difference in the way companies came about in these cultures.

How the first companies started in the East and West

During the Age of Discovery between the 15th and 17th century, when European countries were competing in colonizing the rest of the world, trading companies such as the Muscovy Company and East India Company were being set up. These English companies started as co-foundations or joint stock companies, which means several merchants and wealthy people agreed to share the risks and benefits of business ventures like overseas trading in Asia.

But that’s not how companies came about in Japan. From around the 17th century, when Japanese people were all wearing kimonos and samurais were still walking around with swords on their waists, all merchants had a privately owned business. Mom-and-pop shops. Some of these businesses grew into family businesses, and then a select few families grew their businesses into big enterprises. These families typically had many offsprings because they wanted to make sure their business had an heir.

But when they had like half a dozen sons, now they wanted to make sure their assets didn’t go different ways because that would weaken the family. So they decided that they would keep all their money in one organization instead of having their children inherit money and properties individually. The organizations took part of their profits and distributed allowances to all the family members AND servants. And so we had the first companies in Japan.

If you live in Japan, you may recognize some of the examples I’ll give you right now. The Mitsui and Sumitomo trading/banking/real estate/chemicals/insurance monster group companies got their starts as family businesses in the 17th century. Mitsubishi the banking/electric/automotive/shipbuilding/real estate/metals/everything else monster group company is another such organization.

Employees are considered like family at Japanese companies

So anyway, when these Japanese companies were still relatively modest in size, they treated their servants like family members because they would serve for the mega family forever and ever. The servant families had been servants for generations. And there was nothing strange about that because since the Middle Ages, families served for another family with greater power, especially in the world of samurais. The ancestors of the Mitsui, Sumitomo, and Mitsubishi families were all samurais.

So employees are seen as pseudo-families in Japanese companies. Of course you don’t get along with every family member, but you don’t lay off family members just because the economy entered a recession. Recessions are to be endured and overcome together, is the basic philosophy of Japanese companies.

Japanese business role model Kazuo Inamori

I’d like to give you an example of a Japanese business owner who has lived the Japanese business philosophy of treating employees as if they are family members. His name is Kazuo Inamori. He is a legendary businessperson who founded the ceramics and electronics manufacturer Kyocera which has grown into a $20 billion business now, he then founded a telecommunication services company now called KDDI which is now a $67 billion business, and he also is known for restructuring Japan Airlines which went bankrupt in 2010.

He’s still alive but I need to remind myself constantly that he’s a living legend because he’s aged at 88, and he looks like a divinity in all his photos on the Internet. He is like a godly figure in the world of Japanese business. He even has his own museum. I’ve been there actually. It’s a museum of the history of the companies he has founded and of his business philosophy. If you have a chance to visit Kyoto and you’re interested in business, please stop by Inamori Library. There’s a really good guide there who can show you around and explain stuff and answer questions in English.

So Mr. Inamori, after founding his small ceramics company, he eventually came up with a company philosophy that is “to pursue the physical and mental well-being of all employees.” This was in 1961.

And in the aforementioned 1974 oil crisis, like various other Japanese companies, Mr. Inamori kept all his employees although they couldn’t work at their factories because there was no oil. It’s said that he had them grow flowers around the factories. Sales went down by 90%, but he still managed to keep the company in the black without laying off anyone. Mr. Inamori says, in hindsight, all the cash his company had accumulated was for saving all his employees and their families from starving. He is often criticized by investors for keeping a lot of cash in the company and not returning much to investors, but this is his reason.

Job security in Japan

So anyway, it’s really not common for Japanese companies to lay off or fire their employees. I don’t think it would even occur to most upper management people in Japan that lay-offs are even an option during tough times, unless there’s really nothing else they could do.

As a matter of fact, in the last two months under our new COVID-19 reality, the US has had over 11 million job terminations. In Japan, we have had a bit under 10,000 terminations. That’s it. And even if we take the difference in population into consideration, job loss in Japan would only be 1/40 of the US.

So is your life set once you join a Japanese company? Of course not. If your performance is outrageously low or you cause too much trouble, it’s still unlikely that you will get fired, but it’s likely that you will get relocated. If you were working in the city and you had too much friction with your boss, chances are you will find yourself reassigned to a position in a very rural outpost, or if you’re nearing the age of 50 but you’re still a manager not a director, chances are you will be relocated to a small desk in the corner of the office, not given any important task whatsoever so that you’ll be viewed as redundant luggage from your colleagues. An early retirement package will be presented before you every year until you finally take it in order to save yourself from going crazy.

The retirement package is not a bad deal at all, but it is the company’s indirect way of saying “Why don’t you take a long vacation because that’ll be less costly than having you as a part of the company?” So that’s another secret – a dark secret, of Japanese companies not firing their employees.

So I think you can see that employee retention is high at Japanese companies because of a cultural reason. Although job mobility has become much higher now that Western values and world views have made it into Japan, we still see Japanese companies trying really hard to hold onto their staff.

Employee retention seems even higher in Italy. So I wonder what their story is. Anyway, I hope you enjoyed this episode. それでは、またお会いしましょう。