By Ichiro Suzuki
Japan Airlines (JAL) is in trouble. Of course it is. Which carrier on earth could possibly be not in trouble in this unprecedented downturn in the aviation industry? For the first five months of this fiscal year through August 2020, JAL’s number of passengers is down 96.3% and 82.2% on international and domestic routes respectively, from a year ago. These are sadly and not surprisingly the numbers commonly shared among carriers around the world. What is surprising, however, is JAL’s insistence on holding onto its current workforce, denying laying off any employee. JAL’s management tries to weather this perfect storm hoping it goes away sooner rather than later.
It is commendable for the management to combat a severe economic downturn in this fashion. Perhaps this is stakeholders’ capitalism at its best, which is gaining tractions in the financial market in recent years: protecting employees and the community not giving everything to shareholders, who may have been rewarded financially far too much already. Of course, employees are requested to pay some prices, too. New hirings are freezed indefinitely. Their regular pays and bonuses are cut, a deep one on the latter. JAL employees reportedly endure an 80% cut in their next bonuses. (One might think why they receive bonuses at all amid the unprecedented depth of their employer’s trouble. But this is Japan where bonuses are often considered as an extension of salaries.) Voluntary retirement is encouraged for non-union member senior staffs though it is highly unlikely many people put their hands up and leave on their own volition in this particular circumstances. We are in this together, the JAL management thinks.
From a broader perspective, costs to this approach are paid not only by shareholders and stakeholders but also by society as a whole. Most immediately, aspiring students at flight attendant schools, affiliates of airlines, have suddenly lost a chance to start a career that they have dreamed of for years, due to hiring freezes. College students who had hoped for different positions with airlines are also cut out of a chance to enter the industry. (JAL and its rival ANA have been highly popular work places among college students who study in the humanities field, and who are embracing Illusions with airlines. This is a developing countries’ phenomena. Though Japan got out of developing country ranks half a century ago, mindset of people toward carriers has changed very little. Despite trendy and posh images attached to airlines, it is a highly cyclical, high fixed cost industry that suffers severe downturns one in a while. Students in the U.S. know this and shun the industry.) Hiring freezes by airlines or other industries matter gravely, since the time of college graduation often gives young men and women only one entry point in their life to well established Japanese companies. It is the only entrance to a ladder of corporate life based on a life time employment system. There are not too many second chances if they miss this time when they are 22. With no control over when to be born, one can be totally unfortunate to be given a birth in a particular year due to a deep recession 22 years later, as 2020 has turned out to be the worst year for new recruits. The system is totally unfair. Corporate Japan is slowly moving toward hiring people with work experience at other places, but life time employment practices continue to persist. This system once worked when Japan was growing like gangbusters, just like China until recently. It no longer fits the needs of the 21st century when the Japanese economy hardly grows, and skills required for jobs are changing rapidly and its population is declining slowly, with fewer younger people than before.
On top of all these things, there is another serious flaw in a way Japan deals with a severe economic downturn, that is “we are in this together” mindset. It aims to spread the pain as thinly as possible among as many people as possible. This Japanese way of sharing hardship tries to minimize lay-offs while imposing pay cuts on everyone. Jobs are saved, but with smaller paychecks for these jobs. This is how the Japanese society has survived the last 30 years since the burst of a historic bubble at the beginning of the 1990s. This has kept the labor market from imploding. The unemployment rate didn’t go higher than 5.7%, registered in 2009 in the middle of the global financial crisis. It also kept a division in society from becoming larger, as it happened in the U.S. notably.
However, here is a price. It is widely believed among economists that the nationwide pay cuts have deeply ingrained deflationary expectations among almost all the people. Their expectations got fixated on no rise of their pay. In an economy where lay-offs concentrate the pains among the unlucky minority, pay can still rise for those who are not so unlucky. Expectations for higher salaries/ wages stay in the economy, leading to the willingness, albeit reluctantly, to accept price hikes on goods and services. In Japan consumer revolts fiercely against price hikes. They stage a strike against higher prices. On a consumption tax hike of just a few percentage points, the economy goes to a stand still due to buyers’ strike. Consumers have accepted an absence of pay hikes probably on condition of no price hikes. These two factors have formed a delicately balanced equilibrium in the economy. Prices stay low at the expense of pay hikes.
This is how Japan’s per capita income keeps falling in the rankings among OECD countries. In the early 1990s, Japan was the richest country in the world, among those whose population was larger than 10 million. With the size of the economy having hardly grown over the last 30 years, it keeps sinking in the global rankings. In 2018, with $42,000 Japan ranked 18th out of 34 OCED countries. South Korea was only a few notches behind Japan with $40,000. It is a matter of time the neighbor overtakes Japan in this statistics. For some, it is a shocker to be overtaken by a former colony and what many look down as a junior partner. While it could be a shocker to some, this still does not create a sense of crisis as a catalyst for change, as nothing has done since the early 1990s. As the population ages, the country may be losing a desire to do better. Going down in the rankings still has not hit people’s life in general too hard, at least not yet. Of course, there are no shortage of complaints and there are people who are struggling to make both ends meet. That said life is still good relative to other countries, especially for the middle class and people lower than that, compared to people in the same income bracket. Prices are low. Healthcare is affordable. Cities are clean. Food is good. In addition, Japan is not hit by the pandemic as hard as those in the rest of the world, except a handful of countries in East Asia. Slow and steady decline does not press people to change.
In order to revitalize the economy, job market reform has been considered essential. It was supposed to be a key component of Abenomics, the former prime minister’s economic reform program. What needs to be done has been clear, but lawmakers face fierce opposition to changes that create ‘losers’, such as those who are unfortunate enough to lose jobs. So far, any changes that have been made in the labor market have been spineless, like many other forms of deregulations in the country. People in general are still living too nicely, perhaps, after three decades of stagnation, and nothing could abruptly squander their adherence to the status-quo that gives them cozy life, until one day the markets tells them “No, you no longer have it.”
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.