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84 4 JAPAN: LIBERALIZATION FOR OUTSIDERS, PROTECTION FOR INSIDERS The 1990s were a critical turning point for Japan, a country whose economic system was centered on the nonmarket-based strategic coordination of capitalism .1 After the bursting of the asset bubble in the early 1990s, the Japanese economy plunged into a protracted recession and its state-led developmental strategy combined with nonmarket-based strategic coordination, long seen as the model of Japan’s postwar economic “miracle,” turned out to be problemridden . In addition, the collapse of the conservative political system in 1993, dominated by the Liberal Democratic Party (LDP), which had ruled Japan since 1955, heightened political uncertainty in elections.Although the LDP was able to regain power within less than a year, it had to seek coalitions with small parties in order to form a ruling bloc and ensure a legislative majority in the Diet.2 These political and economic challenges have imposed severe pressure on the stability of the Japanese model of capitalism over the following two decades.3 To resuscitate the country’s faltering economy, Japan’s policy makers promoted a series of reforms, including labor market reform, financial reform, corporate reform, and fiscal reform (Amyx 2004; Aoki, Jackson, and Miyajima 2007; Gourevitch and Shinn 2005; Schaede 2006 and 2008; Schoppa 2006; Tiberghien 2007; Vogel 2006). Among these, labor market reform in particular offers a very intriguing empirical case. First, despite its economic quagmire over the past two decades, Japan did not initiate across-the-board labor market reform meant to transform its rigid labor institutions into a neoliberal model represented by easy hiring and firing practices. While Japan adopted labor market liberalization for non-regular workers, it maintained (and even reinforced) its high level of JAPAN 85 employment protection for regular workers. Second, contrary to the beliefs about Japan’s postwar egalitarian and middle-class society (ichioku sōchūryū shakai), its labor market reform deepened inequality and dualism along the lines of employment status (e.g., regular workers versus non-regular workers) and firm size (e.g., large firms versus SMEs). Last, all these processes and outcomes of reform did not provoke any serious political confrontations between business, labor, and government , unlike reform in Korea (as will be elaborated in chapter 5). This chapter explains the ways in which the institutional features of the Japanese labor market—the institutionalized practices of employment protection covering a large proportion of the workforce and the configurations of decentralized industrial relations—affected selective labor market reform for outsiders and increasing labor market inequality and dualism between insiders and outsiders over the past two decades. I begin with a series of institutional changes in the Japanese model of capitalism and the consequences of these changes on the labor market, and I elaborate how Japan’s labor market institutions adjusted to economic distress and changing business environments during the 1990s and 2000s. The second section below lays out the positions of business associations and organized labor on labor market reform and labor adjustment strategies. It describes the similarities and differences of policy positions on labor market reform across business and labor as well as within each group across different industrial sectors, focusing in particular on the automobile, electronics, and steel industries. The third section examines in detail the political procedures of Japan’s labor market reform by closely analyzing episodes of reform of employment contracts, working conditions and hours, and social protections. It elaborates the political interactions between societal interest groups, bureaucrats, and politicians and political parties , whose interests and strategies for reform were shaped by the existing institutional arrangements of employment protection systems and industrial relations. Although the key factor in labor market reform is the interaction of employment protection systems and decentralized industrial relations, this section also takes into account the effects of recent political changes (e.g., the centralized policymaking authority, coalition governments, and the divided control of the Diet) on Japan’s reform. Finally, I summarize the empirical findings and provide implications for the future of Japan’s labor market. Institutional Changes and Continuities in the Japanese Model of Capitalism Japan has been classified as one of the primary examples of coordinated market economies (CMEs), composed of the interdependent institutional pillars of debt 86 CHAPTER 4 financing, stable inter-firm relations, cooperative industrial relations and wage moderation, and specific skills-based training systems (Aoki 2001; Gourevitch and Shinn 2005; Hall and Gingrich 2004; Hall and Soskice 2001; Soskice 1990 and 1999; Streeck andYamamura 2001;Yamamura and Streeck...


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