As Japan PM Abe Weighs Labor Reform, IBM Emerges as Test Case

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Prime Minister of Japan Shinzo Abe

When 27-year IBM veteran Martin Jetter came to Tokyo last year, the new president of the technology giant's Japanese arm had a radical idea: hold workers accountable for performance.

Within months of Jetter's arrival, IBM Japan fired a group of workers deemed to be underperforming in the kind of restructuring common in many Western countries but rare in Japan, where the most sought-after jobs have carried a promise of lifetime employment.

International Business Machines is now being sued for wrongful termination in what is shaping up as a legal test case in one of the most divisive and politically charged issues facing Prime Minister Shinzo Abe - whether to make it easier for companies operating in Japan to fire workers.

After years of economic stagnation, the prime minister hopes to shift Japan away from an employment system that prioritizes stability to focus on growth. On a Sunday television show, Abe said he wanted more hiring based on specialization or location - jobs that would offer benefits closer to full-time positions but be easier to cut if deemed no longer necessary - as one of his planned labor market reforms.

Advocates say these reforms would spur hiring and create opportunity for women and younger workers more likely to be stuck in lower-paid contract jobs without legal protection.

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"We need to move away from this notion of lifetime employment. That means all the Japanese individuals should be more independent," said Hiroshi Mikitani, chief executive of internet shopping firm Rakuten Inc and a member of an industrial competitiveness panel that advised Abe on economic reforms.

But critics say the proposals are ill-timed. They would risk putting large numbers of mostly middle-aged men near peak earnings out of work just as the administration is trying to lift Japan from two decades of deflation and stagnant growth. The fired IBM workers are also middle aged.

"What the Abe administration is trying to do with labor reform is extremely dangerous," said Kensaku Sugino, secretary general of JMIU, the union representing dismissed IBM workers. "What is happening at IBM Japan shows what is at stake."

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Jetter, a German national and the first foreigner to head IBM Japan in nearly six decades, pushed ahead with a restructuring that led to the firing of more than two dozen IBM employees who were judged to be underperforming, union officials say. Five workers are suing IBM for wrongful termination.

IBM declined to comment specifically on the court case or make Jetter available for an interview. But in a statement, it said that as a company investing in growth areas, such as big data and cloud computing, "we need to remix our skills within the context of a high performance work culture".

Japan ranked 134th out of 144 countries on the ease of hiring and firing, a World Economic Forum report showed in 2012, a rigidity many economists and executives believe has stifled growth.

Not 'Cut and Dry'

Executives say vague wording in Japanese labor law gives judges broad discretion in settling cases and puts a relatively heavy burden on managers to prove they have made a concerted effort to avoid cutting staff.

"It is not cut and dry in the way it is in many other countries," said Jonathan Sampson, regional director at Hays Specialist Recruitment Japan, a recruiting firm.

The only real option for companies looking to make large cuts has been a voluntary retirement scheme, the method applied to all 180,000 layoffs announced by Panasonic Corp and other Japanese technology companies since 2012.

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The downside of such schemes is that companies are forced to offer buyouts widely. In many cases, the most talented employees take the severance package and go to work at a rival firm.

The IBM case has garnered attention in part because union officials say the company is targeting union members who have received below-average appraisals and giving them short notice to chose between resigning with a payout or being fired.

While it is not uncommon for companies in Japan to manage out poorly performing staff, it is rare to do so in groups at the same time. According to JMIU, IBM has fired 26 union members since Jetter took the helm, including a dozen last month.

In response to lawsuits from three of the five workers suing the company, IBM Japan said in court papers filed in 2012 it had dismissed them only after a concerted effort to help them do better at their jobs.

Backlash

Yasuchika Hasegawa, CEO of Takeda Pharmaceuticals, created a stir in March when he proposed clarifying firing rules and introducing the option of making cash compensation to employees that have prevailed in wrongful termination cases, rather than reinstating them at their old jobs.

The idea triggered an immediate backlash from labor supporters worried it would establish an easy way for companies to cut staff. The head of Japanese Trade Union Confederation said the emphasis should be to improve the plight of "non-regular" employees with little job security, a sector that has grown steadily and accounts for more than a third of workers in Japan.

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The health ministry also challenged the notion it is difficult to cut staff, citing data showing that companies win as many as they lose in wrongful termination cases.

Abe administration officials stepped back from the contentious firing issue in April, indicating it needed further debate. But Abe has pledged to return to the question of deregulation and other reforms to spur growth after the July 21 upper house election, which his party and its coalition partner are expected to win easily.

Still, analysts have cited the backpedalling as one of the key disappointments in Abe's growth strategy announced in June. Robert Feldman, chief economist at Morgan Stanley MUFG, gave Abe a "D plus" grade on labor market reform.

Significant reform will require a major change in mindset.

The stigma of cutting staff has driven many companies to shuffle employees to divisions where they perform menial work or are told their job is to search for work outside the company.

Some employees stay in those posts for years, reflecting both the difficulty of switching companies mid-career and the enduring sense of corporate loyalty in Japan.

In one example, an engineer at copier maker Ricoh Co who earned the distinction of "patent master" for registering more than 100 patents during his career, says he was banished to a logistics subsidiary after refusing to retire.

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The worker, who asked not to be named, says his job now consists of loading and moving cardboard boxes at a warehouse. He won an arbitration case last year, but the company appealed and the case is now in court.

A Ricoh spokesman said it was the company's policy not to comment on an ongoing case.

"If I were younger maybe I would try to go to another company," the worker said, adding that a clause in the buyout offered to him prevented him from joining rivals like Canon Inc.

"I just want to be able to return to my division or to leverage my skills and experience somehow."