German And Japanese Economic Institutions

Keywords: german economic institutions, japan economy institutions

Germany and Japan are widely considered as the same family of economies in comparative capitalism literature. In the theory of varieties of capitalism, Hall and Soskice (2001) categorised the national capitalist economies into two main streams: liberal market economies (LMEs) and coordinated market economies (CMEs). In contrast to market-driven economies in the US and the UK, German and Japanese economies are more similar in their non-market coordination in industrial relations, vocational training and education, corporate governance, inter-firm relations, and relations with employees, as Hall and Soskice (2001, p.8) suggested:

“In coordinated market economies, firms depend more heavily on non-market relationships to coordinate their endeavours with other actors and to construct their core competencies.”

More specifically, German and Japanese economies are both commonly viewed as ‘bank-based’ and ‘stakeholder-oriented’ economies. For instance, in both the universal-bank system of Germany and the main-bank system of Japan, banks play an essential role in firms’ external governance by virtue of share-holding and bank credit, and maintain long-term relationship with firms (Vitols 2001, Jackson 2005). With respect of employment relations, Germany and Japan both have the tradition of keeping high cooperation level with employees, long employment tenures and high investment in employee development (Jackson 2005).

However, while Germany and Japan appear to be in the same family of economies in light of their economies’ functional similarities, a closer examine of the matrix where these institutions are derived from and the mechanisms that work behind these functions indicate otherwise. Institutionally, German and Japanese economies contain intrinsic differences that invalidate the claim that they are part of the same family.

In the following sections, I will analyse economic institutions of Germany and Japan from comparative perspectives in three aspects: corporate governance, industrial relations and labour management.

Corporate Governance

As firms are placed in the central position in the variety of capitalism approach, it is important to clarify the internal relationships within firms. For firms in capitalist economies, the board system sits on the highest level of corporate internal hierarchies and serves as a key element of corporate governance. Consequently my analysis would first focus on the differences of the board systems between Germany and Japan.

German corporate law requires all German stock corporations (Aktiengesellschaft) to establish a ‘two-tier’ board structure: the management board (Vorstand) and the supervisory board (Aufsichtsrat) (Jungmann 2006). The management board is composed of executive directors and responsible for running daily operations of the business. And the supervisory board constitutes share-holder representatives and labour representatives, each with half the seats on the supervisory board respectively in large firms with more than 2000 employees (in small companies with more than 500 but less than 2000 employees, the ratio is 2:1). The supervisory board provides monitoring functions and approves major business decisions (Goergen et al. 2005).

Through this ‘two-tier’ system, Germany “developed strong legal distinctions between the roles of the management board and the supervisory board, as well as having a long tradition of outside members that represent various stakeholder groups.” (Jackson and Moerke 2005, p.354)

In Japan, under the Companies Act of 2005, it has been mandatory for large joint-stock companies to set up the board of auditors (Kansayaku-kai) (Takashi 2007). Consequently the board system in Japanese companies also has a dual-board structure. However, unlike Germany, the board of auditors only performs ‘compliance audit’ and ‘financial audit’, which are more like an ex post facto auditing (Takashi 2007). It tends to have quite limited power and be remote from the decision-making process. On the other hand, the board of directors (Torishimariyaku-kai) is entitled to govern and supervise the company’s management and operation. And since the board members are chosen from the top ranks of management, it has in fact combined the decision-making function with the executive function (Dietl 1998). For instance, the Chief Executive Officer (CEO) of a Japanese company (Shacho) is normally also the chairperson of the director board, and the nominations of director board members are essentially controlled by the company’s CEO (Dore 2000). Therefore, the authority of the board in Japanese companies is considerably centralized.

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Moreover, dissimilar to their peers in Germany, average employees in Japanese companies have no direct or legal right to participate in the Japanese companies’ decision-making or corporate monitoring processes. Although Japanese companies have introduced the ‘bonus system’ and ‘stock-holding plans’ which partially share profits with employees, its starting point is still based on the shareholders’ value. It aims to achieve smoother and more effective cooperation between employees and management, to ensure that shareholders’ value will be maximized (Kang and Shivdasani 1997).

Another difference worth attention is the role of banks in internal corporate governance. German banks have the right to hold equity stakes in non-banks, and therefore are legally entitled to sit on the supervisory boards and execute proxy voting rights (Dietl, 1998). In Japan, however, although banks and non-banks are often inter-dependent through cross share-holding and also tend to keep a long-term stable relationship, banks commonly do not intervene into corporate internal management and decision-making. Only when a company is distressed does its ‘main bank’ intervene as a rescuer (Osi 2009). Thus, unlike Germany, the board of Japanese companies basically has a high level of autonomy.

The differences in the board systems of Germany and Japan are naturally a result of the different levels of state intervention between German corporate governance and their Japanese counterparts. German companies are largely influenced by the state by means of legal regulation (Jackson 2005). The institutions place importance on the checks and balances between different interest groups (management, employees and shareholders) and between outside and inside stakeholders in an attempt to establish fair competition and social welfare (Jackson and Moerke 2005). It reflects the characteristics of so-called ‘social market economy’ and ‘welfare state’. In contrast, Japanese model places special emphasis on the shareholders and the board of directors, which implicates the centralisation of power in corporate governance as well as the lack of legal authority of other stakeholders’ involvement (Jackson and Moerke 2005).

Industrial Relations

Industrial relations are another essential aspect of the intrinsic differences of economic institutions between Germany and Japan, marked by the different levels and mechanisms of trade unions and collective bargaining between Germany and Japan.

German industrial relations are based on a ‘dual system’: one is the bargaining system between employer associations and trade unions, and the other is ‘co-determination system’ on supervisory boards and works councils (Dore 2000).

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The collective bargaining and general agreements are organised at the national level. Both employers’ associations (e.g. Gesamtmetall) and trade unions (e.g. IG Metall) encompass whole industrial sectors, and commonly led by the metalworking industry (Dore 2000).

The co-determination system involves two forms: one is the board representation. This gives employees rights to participate in corporate decisions and monitor companies’ operation activities (Jackson and Moerke 2005). The other one is the works council system. This ‘shop-floor’ organisation functions as local/firm-level complement to national labour negotiations which adjust those national agreements to local circumstances and “supervise(s) the enforcement of applicable collective agreements” (Streeck and Yamamura 2001, p.247).

Among two important differences between Germany and Japan in terms of industrial relations, the first is the different levels of centralisation of trade unions and collective bargaining. Unlike Germany, the capital-labour coordination in Japan takes place at the company level and therefore has a higher degree of segmentation. Although Japan does have the national labour federations such as RENGO, the collective bargaining is normally conducted by work unit unions (Benson 1997). The large enterprise groups (the so-called ‘Keiretsu’) are important driving forces in the formation of unique enterprise-based unions and bargaining groups. The tremendous power of Keiretsu extends over a great range of industries on a national basis, and therefore forms comparatively internalised labour market. The internalisation of labour market makes it far more efficient to establish in-house trade unions and negotiate within companies (Lonien 2003). Moreover, under the paternalistic spirit of Japanese companies, employers provide welfare facilities, emphasise job security and foster worker loyalty which also reduce incentives to carry out cross-sector bargaining (Tsutsui 1997).

Another significant distinction is “the degree of legalism or legal entrenchment” (Dore 2000, p.182). A strong legal base in the process of coordination is present in Germany, either in its co-determination system or collective bargaining system. On the contrary, Japanese trade unions are lack of legal rights for participation. Its labour-management joint consultation system more depends on informal social norms and customary practices (Jackson 2005). “One small indicator is that new cases reaching Japanese labour tribunals number somewhat over 3,000 a year, in Germany 470,000” (Dore 2000, p.186). This difference also traces its roots to the culture of Germany and Japan. Under the great and long-term influence of Confucianism as a part of Asian culture, it is an intrinsic need for Japanese society to enforce harmony between classes and hierarchies (Jacoby 1995). On the other side, western society place more emphasis on ‘legal right’. The states are accustomed to utilise the tool of legislation to coordinate relationships and conflicts between different interest groups.

Labour Management

Lifetime-employment has been a distinctive characteristic of Japanese labour market. Although in recent years, due to the increased number of female workforce, who are more engaged in an unstable form of employment, i.e., temporary/part-time or contract jobs, the labour market has emerged a polarization tendency (extremely stable employment relationship of core employees versus extremely unstable employment relationship of fringe employees), the inherent nature of labour market as life-time employment has not changed. Based on the view of “institutional complementarities” in Varieties of Capitalism (Hall and Soskice 2001), lifetime-employment system has shaped and been endorsed by institutions such as ‘seniority pay’ and ‘stable internal career patterns’, which reduce employees’ incentives to leave (Jackson 2005, Streeck and Yamamura 2001).

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German employment relationship seems also stable comparing to liberal market economies like US and UK. But it is to a large part due to the “strong employment protection law and participation rights of works councils” in Germany (Jackson 2005, p.424). In addition, research conducted by Jackson (2005, p.424) also suggested that “German firms do not avoid employment adjustment, but actually adjust gradually and steadily over a long period of time”.

In Germany, wages are set by industry-level collective bargaining that considerably restrains wage differentials between companies (Jackson 2005). Similarly, in Japan, wage levels between firms of the same industry are quite close. However, unlike Germany, the agreement of salary levels are reached mainly through the informal inter-firm information sharing based on convention rather than being formally organised or legally recognised activities like Germany (Sadahiko 2002).

Abundant investment in employees’ development is considered as another feature of co-ordinated market economies. In Japan, trainings are more concentrated on firm-specific skills. This is linked to its lifetime-employment system and associated with internalised labour market as mentioned above. German training system is based on corporatist arrangements among employer associations, industrial unions, and the state. The vocational trainings provided are publicly certified and normally portable across firms (Thelen and Kume 2001).


The roots of the radical differences between the German and Japanese economic institutions have been explained from the roles of actors in economic activities and different degrees of their participation, and the inherent ideologies behind such economic activities.

First, the coordination achieved in German companies largely relies on legal regulation by high degree of state intervention, where public authority is used to constitutionalise the rights and obligations of internal and external actors. (Streeck and Yamamura 2001) While in Japanese model, the coordination relies on long-term relationships and high level of mutual dependence among stakeholders, which is mainly based on convention and cultural heritage.

Second, the considerable influence of large companies and the paternalistic tradition of labour management in Japan lead to higher degree of segmentation. Both the industrial relations and labour management are identified as a ‘household’ characteristic, i.e. company-based association and firm-specific skills. In Germany, the coordination between labour and employers is based more on sector-level.

Therefore we can conclude that the differences between the German and Japanese economic institutions are so great that they cannot be viewed as being part of the same family of economies. Our previous examine of the three aspects of economic institutions in each country, namely corporate governance, industrial relations and labour management, also revealed the intrinsic differences between the two economies and suggested that German model and Japanese model may functionally appear similar but institutionally they are intrinsically different in the social intervention and regulation of their economic spheres.

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