Labor market reforms in Japan are once again taking center stage in public discussion. With upcoming leadership elections in both the ruling Liberal Democratic Party (LDP) and the opposition Constitutional Democratic Party (CDP), potential premiers are racing to stake out positions on the issue.

Labor market reforms have long been viewed as one of the keys to unlocking greater productivity in Japan. Abenomics, the economic program of former Prime Minister Abe Shinzo, considered “work-style reform” to be one of its main structural reforms, and the National Diet passed laws aimed at limiting overtime work and ensuring paid leave. The reforms at that time aimed to promote greater work-life balance, but politicians are now debating whether to ease restrictions on companies laying off workers to boost productivity.

One of the other key changes proponents now seek is increased labor mobility – in other words, making it easier for workers to change jobs. This would enable workers to move to better-paying jobs, which would in turn contribute to Japan’s long-sought wage inflation. It would also encourage companies to work harder to keep the talent they already possess, a critical issue in a labor market with fewer workers every year.

‘Regular’ Vs. ‘Non-Regular’

Japan’s labor market is bifurcated between “regular” (seishain) employees, who have indefinite contract terms, and “non-regular” employees, who are either contracted for a certain term or work part-time. The former generally make more money and are entitled to greater protections against being laid off.

Because regular workers are difficult to dismiss, companies are cautious about hiring them, especially during economic downturns. Practically speaking, most regular workers are hired immediately after graduating from university, and they often choose to stay at the same company because of the protections and benefits they receive.

Those who favor easing the restrictions on dismissing workers – particularly in the case of redundancies or corporate downsizing – say that removing some of the legal protections afforded to regular workers would lift labor mobility and productivity. Opponents charge that stripping the protections will only put workers at risk of losing their jobs without helping the broader labor market.

To Ease or not to Ease?

The candidates vying to lead the LDP are split on the issue. Koizumi Shinjiro, the frontrunner in early public opinion polls, favors easing the restrictions on dismissals. On Sept. 6, he said he would “decisively implement regulatory reforms, including labor market reforms, with no regard to issues considered off-limits.” He added that he would rethink the main labor market reforms, including restrictions on dismissing employees, to raise wages, address the labor shortage, and resolve the gap between regular and non-regular workers.

Other LDP candidates who have expressed some degree of support for either raising labor mobility or easing restrictions on dismissing workers include Kato Katsunobu and Kono Taro. Some, such as Ishiba Shigeru, Motegi Toshimitsu, and Hayashi Yoshimasa have either avoided taking a firm position or said there are other policies to implement first. Takaichi Sanae, who is pulling ahead in more recent polls, has vocally opposed easing restrictions on dismissing workers.

The CDP, which will have a leadership race of its own, generally opposes easing the restrictions. The party’s 2022 policy platform said that the party would pass a law establishing that employment should be “permanent, direct, and full-time.” The same document says the party does not support a system of compensated dismissals, and that it wants to strengthen worker protections. All of the current CDP leadership candidates have voiced support for stable employment in one form or another.

Challenges Ahead

Any prime minister who wants to meaningfully change labor policy will require considerable savvy and a willingness to spend meaningful political capital. Japan has many vested interests, including organized labor, and change will not come easily. Keidanren, Japan’s largest business federation, has said its biggest priority is energy policy, not labor market reform. It will take a particularly determined leader to push through changes that are likely to be unpopular with workers.

Moreover, the ability of any leader from the LDP to enact change will depend on the results of the next general election. The next election must be held by October 2025, and whoever wins the LDP’s leadership election will look for the most advantageous time to dissolve the Diet and send voters to the polls. However, a lackluster performance by the ruling party would immediately hamstring any new premier and limit their ability to implement painful economic reforms. Japan’s next leader will need to significantly beat expectations if they want to drive the policy discussion.

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