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Bringing foreigners into Japan Inc.

Companies must shake up Japanese-only hierarchies

Foreigners struggle to break into Japan's inward-looking labor market.

Japanese businesses realize they need young foreigners to make their management more cosmopolitan and more effective in bringing fresh ideas to the global marketplace.

But graduates from other nations often struggle when they join Japanese companies. There are many reasons, but one which stands out is that entry level professionals are often disappointed by the low pay, their menial tasks, and the glacial pace of promotion.

There are no accurate numbers concerning foreigners hired by large Japanese companies. But the overall number of foreigners working in Japan is rising rapidly -- from an estimated 486,000 in 2008 to 1.28m in 2017, according to figures published last month (Jan. 26). Foreign students are also far more numerous, reaching over 170,000 in 2016, compared with under 70,000 in 2000.

The challenge for Japan Inc. is that foreigners live in a different labor market from Japanese, as has been noted in research by Harald Conrad of the University of Sheffield and Hendrik Meyer-Ohle of the National University of Singapore.

Most students in Japan, even at its most elite institutions, are looking only for jobs in Japan. They are the product of a secluded environment, have little understanding of the world beyond the shores of the archipelago, and generally are not functional in a foreign language (and outside of Japan no country is Japanese-speaking).

Moreover, they are happy to stay in Japan. Thus, when it comes to the bulk of seniors in Japan's top colleges, almost the only competitors for the best and brightest Japanese are Japanese companies and the central government bureaucracy. Foreign multinationals, core employers in Singapore and Hong Kong, for example, are bit players.

Consequently, if students think a particular Japanese corporation is the best employer in the country, it can count on getting the pick of the crop regardless of where it stands in the international league tables.

But when seeking to bring in entry-level foreigners, Japanese conglomerates are facing potential recruits who are not limiting themselves to Japan. They have the skill set to find jobs on several continents.

But the vast majority of professionals in Japan's leading corporations are Japanese nationals. New companies led by the entrepreneur-CEO, such as Rakuten, hire some but the established big business conglomerates are, in general, solely Japanese. Nikkei HR Lab estimates foreigners make up 0.6% of full-time employees at major Japanese corporates, and not all of them are on a management track.

The entire HR system of Japan Inc. businesses still functions on the assumption that bright and hard-working young graduates will be brought in, socialized over several years into the very strong corporate culture of their employer, and stay with the company for decades. They will often first be assigned unchallenging duties for which they are overqualified, but which are part of their apprenticeship to internalize the hierarchical nature of the company. Gradually some will be selected for advancement to the highest echelons but for perhaps a decade or even more they will move in lockstep on a slow-moving escalator.

This approach is not intrinsically bad. No one would argue that Toyota is inferior to Ford or General Motors, nor does anyone who has traveled on Japan Railway trains doubt that they are first-rate. Corporate Japan has had its share of scandals, but so have many European car manufacturers over diesel emissions, and the Equifax data breach is but one of many "cyber scandals" in the U.S.

Moreover, "life-time employment" is still the idealized norm for most graduates of top colleges. Thus, the jobs market for individuals in their 30s and 40s is not very liquid. It is understandable that when leaving university Japanese prioritize reliable employers who will provide a slow but fairly certain path to promotion. Joining a firm that may pay them better but could fire them easily would leave them in a precarious situation if when they are in their 30s and perhaps already parents, they had to seek a new job. Additionally, outside of the hard sciences, Japanese colleges often do not offer a demanding curriculum. This satisfies employers who want a "blank sheet" which they can format over time. But if Japan were to move to a more fluid labor market, with a lot more turnover, corporations would demand that universities provide graduates with a more rigorous education.

The difficulty for Japan Inc.'s quest for globalizing its managerial workforce is that foreigners seeking a job in Japan are by definition adventurous personalities. They want a challenge and expect to be well rewarded if they succeed (not only financially but also in terms of responsibilities). Otherwise they would take the easy path of staying in their home countries.

I noticed during my career at Goldman Sachs that we hired many foreigners who had studied in Japan or moved to the country. They knew an American investment bank did not guarantee the almost certain life-time employment of a Japanese institution, but they chose a higher risk profile in exchange for the fast upward paths available at Wall Street firms. The Japanese who joined the firms had often lived and studied abroad as children or teenagers, and so were less concerned about risk than their Japan-educated peers.

There is no easy solution for Japanese businesses seeking to recruit foreign talent. Altering the entire HR system rapidly is not feasible, especially as it is thoroughly intertwined with the broader labor market as well as the ethos of Japanese companies and universities.

However, it is risky to offer a different employment package to foreigners -- less security but a faster track for the successful. It sets up two paths, with the danger that the majority (Japanese employees) resent younger and better paid foreigners (even if in exchange these non-Japanese agreed to be more easily laid off). Some enterprises are doing it, but it is unclear if this is a success.

But, attracting and retaining foreign talent is critical to the future of the Japanese economy. CEOs and other senior executives should see this a priority. In order to achieve this, C-suite leaders must first figure out where foreign talent would be the most useful. The answer will depend on the specific features of a company and industry.

Companies could start with information technology. Corporate Japan is, on average, behind the curve in this area. To stay up to date in IT, it is imperative to be open to the world, flexible and aggressive -- traits that are not nurtured much in Japan. In many cases, it may be best to create a somewhat separate IT unit, which is sufficiently tied to the rest of the corporation to be effective but has enough autonomy, especially in its HR procedures, to attract both ambitious foreigners and the type of Japanese who want something different from the secure but slow moving Japan Inc. In some sectors, rather than IT, it might perhaps be project finance or R&D, that can take the lead. These departments can then gradually serve as a change agent for the entire corporation. It will be slow but that is better than standing still.

Nagisa Inoue is a former Goldman Sachs managing director. She graduated from Hitotsubashi University in 1993. After joining Goldman Sachs Japan, she was promoted to managing director in 2010 and retired from the firm in 2016. She lives inTokyo.

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