Capital and Labour in Japan

Toshiaki Tachibanaki, Atsuhiro Taki, Toshiaki Tachibanaki, Atsuhiro Taki

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781135126919
• Edition: 1
• Topic: Economía
• Subtopic: Teoría económica

Toshiaki Tachibanaki and Atsuhiro Taki emphasise several institutional features in Japan which differ from those in Euro-American countries: for example, the permanent employment and seniority system in wages and promotion, the dual structure, Keiretsu transactions, the main bank system, and intercorporate shareholding. This book examines in particular the distinction between long-run and short-run contractual relationships which produced such features. It presents both the positive and the negative evaluations of the factor market. Exploring the similarities and interdependencies between two important and idiosyncratic factor markets in Japan, this book brings data to hand which until now has only been available in specialist journals.

1 Introduction

1.1 Motivation for this book

This book examines the effect of both the labour market and the capital (or financial) market on economic performance in Japan, Production (that is, output) in either the macroeconomy or a firm is explained by the contribution of labour input and capital input as expressed by the production function, Y = F(K, L), where Y stands for output, K stands for capital, and L stands for labour. Labour input is obtained in the labour market, and capital input is obtained in the capital (or financial) market. The principal concern of this book is to examine how these two markets, called factor markets, have worked in the Japanese economy.

One of the most important features in the Japanese factor markets is the distinction between the long-term contractual relationship and the short-term contractual relationship. Such a distinction will be explained in detail in Chapter 2. It would be sufficient to call attention to the following fact, in order to understand the distinction, that there are two groups in the labour force. The first group stays longer in one firm without much labour turnover (i.e. permanent commitment to the firm), while the second group changes employers fairly frequently, and the majority of this group have only a short-term duration of employment in one firm. Regarding the capital market, the main bank system and intercorporate shareholding, which will be explained in detail in Chapter 2, represent the long-term contractual relationship. For the former, a firm does not change the bank which lends the largest amount of funds to the firm, while firms hold shares in each other without buying and selling them for the latter. The important point is that there is a long term relationship in both lending and shareholding activities in the corporate finance system. Needless to say, there are many firms and banks which do not hold such long-term relationships, and some of shares are in frequent transactions.

The above examples suggest the fact that there is a clear distinction in the Japanese factor markets, i.e. the first is the agents who commit to the long-term contractual relationship, and the second is the agents who do not commit to it. This book attempts to examine who (i.e. workers), and which firms and banks commit to the long-term contractual relationship, and those who do not commit. Various statistical and econometric methods are adopted to identify who commit and who do not. Also, serious attention is paid to the discussion of the economic rationality of both the long-term relationship and the short-term relationship in the factor markets as well as the economic effect of these relationships.

One important concern of the book is to examine the effect of institutional rales and settings on the economic performance. It is sometimes suggested that the Japanese institutional particularities in the labour and capital markets originated from her cultural and historical backgrounds, in particular the oriental or Asian cultural background, which have nothing to do with economic rationality or Anglo-Saxon type rational behaviour in economic activities. One of the purposes of this book is to propose both theoretically and empirically that the Japanese institutional particularities emerged largely based on economic rationality rather than non-rational motivation. For example, the long-term contractual relationship in both the labour and the capital markets contributed to the better working of the macroeconomy (i.e. growth of the economy) or the firm (i.e. productivity). This economic rationality encouraged the long-term contractual relationship and contributed positively to the economy. The book examines the reason why this positive effect was achieved, and presents the empirical evidence based on various statistical and economic methods. Of course, various institutional particularities in Japan are discussed, before such empirical evidence is presented.

The above positive side, however, does not propose that the long-term contractual relationship always induces such an encouraging story. It sometimes produces a negative effect. The most important negative outcome is observed for persons who are unable to commit to the long-term contracts in the labour market. For example, their wages are considerably lower than those of long-tenured workers, and their working conditions, including a higher possibility of becoming unemployed, are likely to be inferior. Such a negative interpretation was given, for example, by Tachibanaki (1996b) who showed an increasing inequality trend in contemporary Japan.

Another important reservation is that the merit of the long-term contractual relationship cannot be attained in all countries of the world. We can observe several countries which do not have long-term contractual relationships but have short-term relationships (say, frequent labour turnovers, neither main bank system nor intercorporate shareholding). Typically, this applies to the United States, where the economic performance has been excellent in the past 70-80 years in general. It is impressive that the economic performance is better in the United States than in Japan, in particular during the period when the Japanese economy has been in a serious recession in the early 1990s. Several economists in Japan attribute the recent serious recession, no prompt recovery and predicted economic decline in the Japanese economy in the long term, to inflexibilities or rigidities caused by long-term contractual relationships in both the labour and the capital markets in Japan, indicating either that it is not easy to discharge or lay off employees in a recession under a long-term employment contract, or that it is difficult to find available and flexible funds under the main bank system and/or intercorporate shareholding.

In summarizing the above arguments, it can be concluded that it is not possible to proclaim that the long-term contractual relationship in the labour and/or capital market always affects economic performance in a positive way. Whether it has a positive effect or a negative effect depends upon the country, time, industry, or even the firm. This understanding is particularly important for Japan in view of the negative aspect for the agents who are unable to enjoy the privilege of a long-term contractual relationship.

1.2 Content of each chapter

Chapter 2 presents a general overview of the labour and capital markets in Japan. It discusses several institutional characteristics which are different from the working of the labour market and capital market in other countries. The discussion is largely descriptive without any serious attempt of both theoretical and empirical analyses, and thus it serves as an introduction to subsequent studies in this book.

The chapter focuses on, needless to say, the distinction between the long term contractual relationship and the short-term one in both the labour and capital markets, and shows the economic implications of the distinction, namely both the positive impact and the negative impact. One important feature in this chapter is to examine the relationship between the long-term contractual relationship in the factor markets and corporate governance structure in Japan. In particular, the interaction between several features in the capital market such as (i) reliance on external financing (largely debt financing) rather than equity financing, (ii) main bank, (iii) Keiretsu transactions, (iv) intercorporate shareholding and corporate governance, is examined.

Another important discussion in Chapter 2 is to evaluate one new aspect, i.e. complementarity between capital and labour, which may raise productivity as a whole when the two factor inputs work as complements. There have been various forms or definitions of complementarity in economic science. This chapter discusses them, and provides readers with different economic implications and various methods of investigation. In particular, the reasons for possible favourable effects of complementarity are presented and discussed. Finally, preliminary empirical evidence on complementarity is presented in the Appendix to Chapter 10.

Chapter 3 presents several analyses of labour mobility. Labour mobility here is interpreted in a fairly broad sense. Thus, the chapter is concerned not only with labour mobility among various labour force statuses such as (i) employed, (ii) unemployed and (iii) not in the labour force, but also with labour turnover which specifies changes in employers without changing labour force statuses. In sum, it investigates the subject which deals with changes in labour force status and labour turnover. Obviously, this subject is interested in the distinction between longer duration of employment and shorter duration of employment.

One important contribution of Chapter 3 is a much broader classification of labour force status, i.e. so many different statuses in employment, which can be distinguished by both employees versus self-employed, and the size of the firm among employees. The first distinction enables us to evaluate the effect on macroeconomic performance, in particular labour market performance such as employment and unemployment. The second distinction enables us to draw the economic influence of both larger firms and smaller firms, since it is generally understood that long-term contractual relationships are provided only for employees in larger firms, although this is not based on any written contracts but is only implicit.

This chapter applies various statistical and econometric methods such as the estimation of transition probabilities among various labour force statuses, the estimation of the determinants of transition probabilities, and the estimation of labour turnover functions and attempts to identify who is likely and unlikely to change labour force statuses, and at the same time who is likely and unlikely to stay longer in one firm. The reasons for these distinctions are also presented.

Chapter 4 examines a similar subject to the previous chapter, but applies a completely different estimation method, namely, duration analysis. It is called reliability analysis in engineering, or survival analysis or failure analysis in medical science. Although the duration method is applied in estimating the duration of unemployment, it is used for the duration of employment in view of longer average duration of employment in Japan than in Euro-American countries.

The three principal interests in this chapter are as follows. First, there is a great concern in the literature as to whether a parametric approach or a nonparametric approach is preferable in the estimation of duration analysis. Thus, it is attempted to find statistically which approach is desirable. Also, a large number of density functions are examined in a parametric approach. Second, the reason for the termination of employment is crucial in the estimation, namely whether it is voluntary or involuntary. It also has great macroeconomic implications. A competing risk model is used to investigate this issue. Finally, a serious attempt is made to identify statistically which variables are important for the determination of job durations, among many variables such as age, occupation, education, size of firm, industry, etc. The empirical result can shed light on the understanding of the Japanese labour market.

Chapter 5 investigates a different subject from the previous two chapters which were concerned with labour mobility and job tenure. It investigates wage determination which takes into consideration the Japanese institutional particularities in employment and wages. The most important particularity, which is taken into account in this study, is seniority payment which specifies that wages increase in proportion to employees' tenure in the firm. There are several controversies about the effect of job tenure on wages. A theoretical model proposes a future course of each employee's qualification and their employer, and thus is able to estimate the growth path of their wages for their entire career. Of course, it is assumed in the model that the majority of employees stay in their current firms. When an employee changes his employer, the model predicts a change in his future course of wages in a different way. The effect of job tenure is not only an issue in Japan, but also in the US. Japan, however, has several different features regarding job tenure. Therefore, this chapter constructs a theoretical model of wage determination which takes into account a large number of stylized facts on wages and labour markets in Japan, and attempts an empirical test based on this model.

Several important variables, which are taken into account both theoretically and empirically in this study, are productivity of an employee, size of firm, education, labour turnover, etc.

The second section of Chapter 5 provides a serious empirical test under the model constructed here, using individual observations of wages and other information. The empirical result indicates that a theoretical model for nochangers (i.e. employees who have never changed employers) is satisfactory in the empirical analysis, while a model for changers requires further analysis.

Chapter 6 examines one aspect of corporate finance empirically. As Chapter 2 presented several stylized facts regarding the working of the capital market and corporate finance, intercorporate shareholding is one of the most crucial features. Incidentally, we pay the highest attention to this feature throughout the capital market analysis in this book. This chapter examines the relationship between intercorporate shareholding and the lending activity of financial institutions. The main bank system is also investigated, although it is not the major concern in this chapter.

Banks, trust banks, long-term credit banks and life insurance companies are the principal institutions which commit to intercorporate shareholding as well as non-financial firms. There are several motivations for financial institutions which want to hold other firms' shares as examined in Chapter 2, and these will be discussed in Chapter 6. One of the most important of these is to maintain a long-term contractual relationship with the client firms. In particular, this contributes to stabilizing lending business with them. The chapter is concerned with this aspect, namely the relationship between intercorporate shareholding and lending activity for various categories of financial institutions.

The study is fairly comprehensive in the following sense. First, it examines carefully a large set of data on both shareholding activity and lending activity. Second, various statistical methods such as transition probabilities, measures of mobility, etc. are applied to examine a change and a direction in rank in shareholdings and lending activity of financial institutions. Third, the differences among various categories of financial institutions such as banks, trust banks, life insurance companies, etc. are examined regarding the relationship between intercorporate shareholding and lending activity, including a discussion on corporate finance. Finally, special attention is paid to a financial institution which holds the largest shares and the largest lending amount to a particular firm. This examination sheds light on the story of the main bank system.

Chapter 7 presents evidence on how the main bank system works. The main bank system has several characteristics such as the largest lender, the largest shareholder, exclusive financial transactions in several areas, possible rescue activity when a client firm is in serious financial trouble, sending personnel from the bank, etc. This chapter is concerned with the personnel relationship between the bank and client firms. It is quite common in Japan for parent firms in the Keiretsu (intercorporate) relationship to send their employees to a subsidiary firm temporarily or permanently. It is understood that the bank also sends its employees to client firms. Unfortunately, we do not know the real story about it. Several subjects such as 'why', 'for what purpose', 'with what qualification', etc. are examined regarding personnel sent from banks.

It is examined statistically whether or not various forms or qualifications exist among those employees who have been sent by banks. Some employees may be sent as top executives of the client firms. Some may be sent only as financial specialists. It should be interesting to enquire into the following subjects, such as 'To what positions at the client firms are they sent?', 'What role are they expected to play there?', 'At what age?', etc. By examining the personnel data of several representative banks, it is feasible to find various interesting observations on 'dispatched personnel' from the bank such as age, positions both before and after sending, positions in their final career, and the industry. Also, of course, the subject of the reasons for 'dispatched personnel' is investigated. At the same time, the difference between banks and non-financial parent firms regarding the characteristics of 'dispatched personnel' is investigated. The observed differences between the two categories show the economic implications of 'dispatched peronnel' from banks more clearly, and shed light on the main bank system.

We understand that intercorporate shareholding is one of the most important features in the capital market in Japan, in particular in the area of corporate finance. Chapter 8 investigates this feature. Concretely, it examines price determination of stocks under the condition that the major part of shares of one firm are held by a limited number of other firms, and thus transactions of these shares are less frequent than those held by individual investors.

There are several economic effects of intercorporate shareholding or cross-holding among firms. For example, a lower rate of ROE, a lower cost of capital, a higher volatility in stock prices, a lower dividend payout, etc. are raised. This chapter is concerned with two aspects, namely volatility and mean reversion in stock prices, and presents several empirical results after showing a theoretical model.

Intercorporate shareholders are supposed not to respond rationally to expected monetary returns to shareholding, while individual investors are supposed to behave rationally to seek the highest return. As was shown previously, the reason for irration...