Making Japan work better for workers, and brands

Robert Feldman is one of the best-known economists and social commentators in Japan. He has been advising the most senior members of Japanese industry and government for decades as Morgan Stanley Japan’s chief economist. Currently, he is senior advisor to Morgan Stanley MUFG. 

Japan has become a higher priority for foreign brands and agencies alike as the tourism industry here blooms and the Summer Olympics come to Tokyo in 2020. Yet success in Japan has long eluded outsiders here. One can count the number of foreign communications companies who have grown and been consistently profitable here on very few hands. 

In our interview, Feldman lends insight on key issues facing leaders and brands who work with or in Japan including: the importance of market adaptation;  the unique challenges of the Japanese labor market; the evolution of Japanese corporate governance; and his outlook for the Japanese economy. He also provides practical advice to working people on how best to advance their careers. Robert’s views are seasoned with pragmatism, compassion for working people and what he calls, “conditional optimism.”

What is your role at Morgan Stanley?

My role at Morgan Stanley is senior advisor. What I do mostly is policy research. There are a lot of issues for the Japanese economy that are long-term in nature or require policy analysis that isn’t immediately linked to markets but is extremely important for how people perceive problems.

What will be the main drivers of growth for the Japanese economy?

For the medium term, the only real potential driver for growth is going to have to be technology improvement. When you look in economic theory about growth, basically you see land, labor, capital, and technology as the drivers of growth. This is a supply-side approach. You can’t make things without people and machines. You have to have the technology inside the machine working properly. 

Well, Japan has a labor problem. There isn’t enough. With the overall population already shrinking, but the working population shrinking faster, you have higher productivity of those fewer and fewer workers to support the population as a whole. That’s the issue.

How can Japan maintain its competitiveness if it doesn’t have enough workers?

You start using more machines and better machines. Now that we’ve got all this magnificent technology, there is a huge opportunity for Japan to improve the productivity of every single worker here. 

The other thing is to extend the retirement age, something I’ve been proposing. Because that’s a way to keep people in the labor force. We’ve got a lot of people in their 60s and early 70s who are very, very capable. As long as we can provide them with software and other capital to keep them productive, they are a huge potential source of labor for the economy.

What role will foreign workers play in ameliorating Japan’s labor shortage?

We’ve seen an increase over the last five, six years of about 150,000 foreign workers per year. About 2% of the labor force is now foreign workers.

By global standards that’s not very high. There’s certainly room for increase. But the problem with that is that the decline of the domestic labor force is so fast. Any sort of reasonable estimate of either the availability of foreign workers or the ability of the economy to absorb them suggests that foreign workers will not be enough to solve the labor shortage. 

How can foreign brands can do better here in Japan to win the hearts of Japanese customers and better compete with their domestic rivals?

Performance standards are the key thing. There was a case of adapting a foreign approach to Japanese sensibility that was very successful, which was Aflac (a major US-based insurance company). You know the duck?

In the US, the duck is kind of sarcastic, like a wise guy. When [Aflac HQ in the US] said you got to introduce the duck in Japan -- and Aflac was already a huge business here -- Aflac’s Japan management said, “That kind of a wise guy duck, is not going to make it in Japan. That’s just not going to work here.” And American counterpart said, “No, you have to do this.” So they ended up using the duck but changing its character. The Aflac duck in Japan is a much nicer duck. And the commercials they have here are very, very different in character to the ones they do in the US. They adapted their character and the marketing strategy to Japanese sensibility. It was immensely successful.

The other thing about Aflac that was so fascinating is that they identified a hole in the market. This happened in the early 70s. It was cancer insurance. They got the right people to lobby the right people here and there, to get approval for that kind of insurance product.

So it’s a combination of [both market adaptation and] looking at the holes in the market. What’s an underserved market? Figuring out what the regulatory barriers might be. And then working with the regulators to get that done. 

Many mid-career white collar workers experience a great deal of difficulty changing employers. How can Japan realistically increase the number of older employees if there isn’t demand for their services?

Yeah, it’s very hard because of the way the labor market laws work. If you’re in your 40s, and then try and sniff around to see if there’s something a little better out there, what you discover is that there is a big-company discount. A potential employer will look at you and see that you’ve been in a big company for a long time and say, “this person probably has big-company disease. So they might not work in our environment very well.”

Now the people in their 40s and even 30s are figuring this out. They’re realizing that working for a big company may be stable, but it doesn’t necessarily help you improve your skills. Of course, big companies are beginning to realize this and are trying to do something about it. It’s a problematic part of the labor market that the labor rules and laws are a barrier to people acquiring the skills they need to stay employed.

If you’re in your 40s, and then try and sniff around to see if there’s something a little better out there, what you discover is that there is a big-company discount.

For example, if you’re a 40 something working in a big company, and you have a pretty stable future for the next 20, 25 years, you don’t feel a lot of crisis about what’s going to happen next. That’s one source of trouble. If you’re not thinking about what happens next in a world where technology is moving, you’re going to find yourself on the short end of the stick -- probably sooner than you think. 

In addition, because of the way personal identity works, your identity is attached to the corporation. If [your colleagues perceive you as someone who] would actually go and work someplace else, this makes you a little bit questionable as a colleague. It’s not normal for people to job hop.

Generally speaking, there are few internal incentives within Japanese companies to improve skills, especially if it means taking time away from the job. How can people stay competitive?

This [lack of internal company incentives to upgrade skills] is recognized as a problem. There have been a couple things the government has done to try to encourage companies to send people out to get more education. In the end, the workers themselves to assert. They will need to say, “Look, I’m not going to put up with this. I’m going to go out and improve myself.”

You have to go out and learn new skills yourself because the company is not going to have your best interests in mind when it makes personnel decisions. Nor should it. Because the company’s supposed to maximize profit for the company, not for you.

In a way, what I’m doing at Tokyo University of Science -- where I teach on the weekends -- is a precursor of what things are going to look like. I teach in a program called Management of Technology. The average age of the students is 41. They all are working full-time jobs and come to school on Thursday and Friday nights and all-day Saturday.

They are mostly science and technology people. They haven’t studied economics, they haven’t studied management, they haven’t studied accounting. Yet they’re rising in their firms and want to do something different. So, they’re trying to do is acquire skills to make themselves more valuable to their firms or to some other firm. 

You have to go out and learn new skills yourself because the company is not going to have your best interests in mind when it makes personnel decisions. Nor should it. Because the company’s supposed to maximize profit for the company, not for you.

Wages are generally uncompetitive when compared with other advanced countries for workers with advanced technical skills. How will Japan compete?

A few companies realize that they just can’t get the talent they need at current wages. So they’re changing the wage structure. 

There are also a lot of very, very smart people in China, India, other developing countries who would love to come to Japan and work. For a while at least, the ability to come here and work in a lovely environment – Japan’s a wonderful country to live in -- is extremely attractive. The fact that immigration rules are getting tighter in a lot of countries around the world now gives Japan a huge opportunity to get some immensely talented people to come in. 

What is the relationship between wages and productivity in traditional Japanese companies? Why does this matter?

[Looking at the chart above,] if you think of the wage as sort of a straight line going up, there is an entry-level wage that just kind of goes straight up until retirement. That’s the age-dependent wage. Productivity at young ages is probably low, because the workers don’t know the company well. But productivity goes up quickly. It’s like the path of a rocket – low at the start, high in the middle, low again toward the end.

After a couple of years at the firm, a worker’s productivity is going to exceed the wage. The company making money off this. In a way, it’s a deposit that the worker is making in the company. 

The lifetime employment system is, in a way, a prison without walls. Because the incentive is not to leave.

Once worker productivity starts coming down, it falls below the wage at higher ages. Then the company is losing money. The worker’s technology’s a little bit old. His/her understanding of the world is a bit out of date. But the worker still receives that high wage, which is based on age, not productivity. So the wage is above the productivity after a point. That continues for a few years until you hit retirement age.

Now, there’s a little assumption there that someone doesn’t quit in the middle. If a worker quits in the middle, what happens to those years that the worker accepted a wage below their productivity? What happens to that deposit? It’s gone. 

The lifetime employment system is, in a way, a prison without walls. Because the incentive is not to leave. If that’s the case, why bother acquiring the skills to change jobs? Because a) you lose your deposit and b) you have the discount when you’re in the [wider job] market. It’s a system that destroys talent. [Please see the chart above]

What do you think are the barriers for foreign companies to succeed in Japan?

It differs by industry. [As for the advertising and media industry] as I understand them, and I’m not an expert, everything comes down to the quality of the labor you can hire. My sense is that the young generation is very talented. They don’t believe that the lifetime employment system is a good idea. They are willing to go to the highest bidder and work for a few years. They will switch if it makes sense and they won’t switch if it doesn’t.

The issue here is: can you hire young people that have both the technical skills and language skills to be good workers for you? That’s where I think incentives come in.

My sense is that the young generation is very talented. They don’t believe that the lifetime employment system is a good idea. They are willing to go to the highest bidder and work for a few years. They will switch if it makes sense and they won’t switch if it doesn’t.

There are job markets around the world where you can look for good talent to work in Japan. One of the key things is figuring out how to find the right people for the job. Showing potential recruits some kind of future is also very, very helpful.

Basically, it is what firms have always done when there’s a labor shortage, which is a substitute capital for labor, or new business models for labor.

It’s extraordinarily difficult to be hired in Japan if you’re not fluent in Japanese. Do you see any signs that this situation is changing?

What I’m hearing from senior management now is that increased pressure on them to generate higher returns is actually making managers more flexible in who they hire.

In addition, there are some changes in corporate law that require disclosure of what you pay retired senior executives, who stay on as advisors. This information has to be disclosed and can be questioned at the shareholder’s meeting. The rules require disclosure of the role of these advisors precisely. The rules make it easier for the current president of the company to say, “sorry, goodbye.” This change will immensely improve the ability of the company president to actually run the company.

On the surface, this looks like a change of corporate law. It’s actually a change of social structure. What I’m expecting and hoping is that this pressure for higher returns will impact the personnel policies as well. And I’m beginning to see that.

What are the advantages of non-Japanese companies have here?

One advantage foreign companies have is less discrimination against women. I don’t think Japanese companies set out to discriminate against women. The culture is just that way. But the foreign companies, for years and years, have had far fewer barriers to hiring and promoting talented women. I think that’s done both the companies and the workers a great favor.

How important are the Olympics for the development of the Japanese economy? 

It’s not the Olympics that matters, it’s what they leave behind. What kind of new capital stock will the country have as a result of the Olympics to make it more prosperous long term? There’s physical capital, human capital, and then intangible capital.

The physical capital stock is going to improve a little bit. We’ve seen a few more facilities and railroads, and they’re improving the railroad stations and such. So that’s cool. I think much more important, is the fact that we’ve already seen a large increase in tourism. Even more is going to come. 

Mostly, it’s contact between Japan and a lot of other foreign countries that has never happened before. If somebody comes to Japan and says, “here’s this neat thing. We could really use this back in my country. Maybe I could import it.” They’ll be able to find somebody in Japan and say, “Hey, I wanna sell your product in my country.”

What Japan needs is a much denser set of connections between regional Japanese companies and the global markets. That’s going to happen when people come to the Olympics and see what’s available here.

I think that’s one of the most important elements that the Olympics will leave: new connections call it connectivity capital.

Are you optimistic about Japan’s future?

I’m what I call “conditionally optimistic.” Because I see immense talent here. I see a lot of opportunities for capital deepening and for new technology to be used efficiently. But there has to be enough sense of crisis to actually adopt the new technology.

One of the reasons that Japan has been a little bit slow on IT is that companies are comfortable. There’s not that much pressure on them to change things because they’re kind of doing okay. The financial institutions and investors don’t beat them over the head for higher returns, although that’s changing. The faster that changes, the more the company management will say, “I’ve got to get this stuff done.”

So I would say that we need fewer vested interests, not that other countries don’t have the same problem. But we need more competitive markets in order for people to feel the incentives to get this right. 

Barry Lustig is managing partner of Cormorant Group, a Tokyo-based business and executive search strategy consultancy.