University of Zagreb

Faculty of Economics and Business

Bachelor Degree in Business

Business Ethics in Japan

Final Student Work

Student: Vlatko Mance Pavii

Bachelor Degree in Business
Professor and mentor: Izv. prof. dr. sc. Mislav Ante Omazi

Contents

1. Introduction ....................................................................................................................... 3
1.1. Objective and object of the paper ............................................................................... 3
1.2. Sources of data and methods of research .................................................................... 4
1.3. Content and the structure of the paper ........................................................................ 4
2. Japanese Business Ethics ................................................................................................... 5
2.1. Working ethics of Japanese people ............................................................................. 6
2.2. Bushido codex ............................................................................................................. 7
2.3. Japanese lifestyle ........................................................................................................ 8
2.4. Short history of Japan ................................................................................................. 9
3. Japanese company outside the Japan ............................................................................... 10
3.1. Toyota company outside Japan ................................................................................. 11
3.2. Sony company outside Japan .................................................................................... 12
3.3. Other Japanese companies outside Japan ................................................................. 14
3.4. Japanese stock market ............................................................................................... 15
4. Foreigners working in Japan ........................................................................................... 18
4. 1. Foreign companies doing business in Japan ............................................................ 19
4.2. CEO salaries in Japan with comparison to other countries....................................... 21
4.3. Business climate for non-Japanese companies in Japan ........................................... 22
4.4. Competing on the Japanese market .......................................................................... 24
5. Kaizen method ................................................................................................................. 27
5.1. History of Kaizen method ......................................................................................... 29
5.2. Toyota and kaizen method ........................................................................................ 31
5.3. Implementation of kaizen ......................................................................................... 33
5. 4. Kaizen outside Japan ............................................................................................... 35
6. Conclusion ....................................................................................................................... 38

1. Introduction
Japan is one of the richest and developed countries in the world with top hand in
technology and trading. Japan is the place for many notable companies birth, and gives
engineering services worldwide; there are thousands of Companies of Information
technology, Banking, Automotive, Engineering, Retail, Communications and Electronics.
Japan has trading links with most countries on earth and exporting electronics and
automobile products, and most of the companies with huge revenue are from Automotive
and Electronics. Companies in Japan have a deep history of the 1st and 2nd World War,
Japan is faces natural disasters every year such as earthquake, tsunami, although the
development continues constantly. Business ethics has the key role to reform Japanese
business. For past 18 years, Japan Society for Business Ethics has tried to popularize
business ethics in Japan. Although the general recognition of business ethics has improved,
there is also a certain hesitation and scepticism over adopting business ethics as a
discipline and practical program.

1.1. Paper objectives

This paper has an attempt to explore the subject of Japanese business ethics and its
relevance to its competitiveness. Japans unique culture is one of the factors that affects its
business ethics. The Japanese religions - Confucianism, Shintoism and Buddhism - are
transcendental in nature. This means that each believes that every single thing, including
people, has its own soul or spirit, or numen as the Japanese call it. Each individual numen
combines with all others to form the great life force of the universe. As much as the
Japanese live in an environment in which everything and every event has a purpose as an
expression of this life force, the meaning of work for them becomes unique. Work is
understood to be a self-expression of the great life force, and Japanese people
unconsciously, and sometimes consciously, try to unify themselves with the great life force
by concentrating on their own work. Big influence on Japanese working ethics has
behaviour within the group, too. In the group environment, a group is considered to be
superior to its ordinary members mainly because, while the group is expected to be able to
connect with the numen of the universe in a direct way, the members of the group
individually are not related to the force in the same way. The only way for the members to
connect with the life force is through the activities of their group.

1.2. Sources of data and methods of research

This paper uses from the quotations token from the documents and literature review. For
the quotations technique, this research mainly applied quotations from only reasonable and
reliable documents. The sources were the academic papers, books, literature available on
the Internet and the Library of the Faculty of Economics & Business.

1.3. Content and the structure of the paper

This thesis consists of six chapters. The Chapter I outlines the purpose and methodology of
the paper. It explains the methodology that was used, the limitations of the study, and how
the data for this research was collected. Chapter II introduces the theoretical framework
behind the Japanese way of life and work. In addition, it will show the interrelations
between business ethics and Japanese work culture. Chapter III analyzes Japanese
companies

and

their

management,

focusing

on

their

internationalization

and

competitiveness. Chapter IV analyzes the business climate for non-Japanese companies in

Japan and working conditions for foreigners. Chapter V describes the theory and benefits
behind the Kaizen method and results of successful Kaizen implementation.

2. Japanese Business Ethics

Japan has a population of 127.5 million people1, an area of 377,799 square kilometres2 and
a GDP of US $5.960 trillion3. Japan is an important player in global markets, yet in many
ways, it remains an enigma to non Japanese. Those who deal with Japanese firms and
markets have to understand its hidden economic culture, work ethic, and common
sense views of business thinking. Japanese culture is the result of an integration of
historical factors including Shintoism4, Buddhism5, Confucianism6 and modern Western
science and technology. Inevitably, the Japanese business culture is different to that of the
US or Europe, but the differences do not make it any more risky to conduct business in
Japan, than elsewhere in the world. In fact, certain aspects of Japan's business culture,
especially the very stable long-term relationships resulting from the conservative Japanese
sense of loyalty to trusted partners, can be very beneficial for those foreign companies that
understand how to swim with the cultural tide as opposed to vainly struggling against it.
Japanese companys decision making is in stages along their corporate hierarchy. Their
decisions are very cautious and conservative. These stages are backed by plenty of
meetings and documentation. This minimizes error and brings consistency at all levels.
Japanese companies require individual contribution to the whole group but recognize that
the whole group must succeed otherwise the individuals contribution has no meaning.
Meetings are very common in large companies. They value the process to agree with
everyone who is related to their project, so they have many meetings and spend a lot of
time in meetings. They respect meeting each other face to face. It is important to them for
conducting business relationships.
Through a monetary reward system, the Japanese are encouraged to stay in one company.
These are rewards are company sponsored payments, independent of the persons salary.
The longer they stay, the higher the company-sponsored payout is to them.
1

Japan Statistics Bureau, Population Estimates as of 1 October 2012, as at July 2013.

World Bank, Surface Area Estimates for 2011, as at July 2013.
3
World Bank, GDP (current US$) for 2012, as at July 2013
4
Shinto means the way of the gods. Shintoism is an Ancient religion of Japan. The followers of Shintoism
believe that spiritual powers exist in the natural world. They believe that "spirits" called kami live in natural
places such as in animals, plants, stones, mountains, rivers, people and even the dead.
5
Buddhism is a path of practice and spiritual development leading to Insight into the true nature of reality.
Buddhist practices like meditation are means of changing yourself in order to develop the qualities of
awareness, kindness, and wisdom.
6
Confucianism, the way of life propagated by Confucius in the 6th5th century bce and followed by the
Chinese people for more than two millennia. Although transformed over time, it is still the substance of
learning, the source of values, and the social code of the Chinese.
2

2.1. Work ethics of Japanese people

In every part of the world, people work very hard to earn a living, to improve their living
standard and to achieve their goals. The Japanese work day and night because they think
it is their social responsibility and they will feel guilty if they do not work hard. As a result,
they have a more positive attitude towards working. The Japanese enjoy working and they
are unwilling to take holidays unless they are ordered to do so. Having received a stable
salary from their boss, Japanese people obey their boss and respect their decisions and
arrangements about work and holidays. Japanese prefer enjoying their holidays with their
colleagues to having one with their close friend. This explains why many Japanese
companies always organize activities like boat trips for their fellow workers to enjoy
during holidays. Moreover, they can bring their families together for the activities because
they want to build a close relationship between families and work. 7
In general, Japanese companies prefer a flexible-minded person who can co-operate well
with colleagues. The style of business in Japan is based on consensus decisions where the
whole management and often also the work force is consulted and agrees a common plan
of actions for important decisions. Teamwork and harmony in the workplace are very
important aspects of Japanese working culture. Conflict is highly discouraged, and
combative personalities will find themselves out of place in a Japanese company.
While most western countries consider gift giving a form of bribery, it is seen as a type of
sentiment in Japan. A gifts value is generally appropriated to the type of position the
receiver holds. The most acceptable forms of gifts are generally food or alcohol. Giving
too many gifts can be considered inappropriate. Although it is a strong tradition, gift giving
is starting to decline due to the business worlds views on the practice.
Working conditions vary from firm to firm. On average, employees worked a forty-sixhour week in 1987; employees of most large corporations worked a modified five-day
week with two Saturdays a month. In the face of mounting international criticism of
excessive working hours in Japan, in January 1989 public agencies began closing two
Saturdays a month. Labor unions made reduced working hours an important part of their
demands. In recent years, coupled with the decreasing size of the Japanese workforce, the
average hours worked in a week has been on the rise at many medium to large sized

http://www.sbc.edu.hk/BonaDigest_Chi/20112012/daily/7a_WongSandy.pdf , Retrived: 23/9/2015

companies. In Tokyo, it is common for many employees to work twelve or more hours a
day in certain industries, despite contracts claiming an 8 hour work day.8

2.2. Bushido codex

The way of the Samurai Bushido has been the samurai code of conduct in Japan for
centuries. Based firmly on the teachings of Zen9, bushido was intended to help the samurai
master their nature and understand their minds and the universe through direct experience
as well as through fostering strength, self-control and wisdom.
Bushido is based on seven essential principles: the right decision and rectitude (seigi),
bravery and heroism (yuki), compassion and benevolence to all (jin), courtesy and right
action (reigi), truthfulness and utter sincerity (makoto), honor and glory (meiyo), devotion
and loyalty (chugi). Courage is an extension of morality and only useful when matched
with correct morals. Courage, or the spirit of daring and bearing, as it was first translated
was a huge element of raising children during this time. As a principle, the Samurai did not
lie and there are many tales of those who did being put to death for it. The Samurai also
didn't see the need for written contracts as that would be doubting the truthfulness of their
word. The Samurai lived and died by their honour, with haragiri

10

being the final way of

preserving lost honour. During Samurai times loyalty was thought of as being more
valuable than life itself.
Bushido teaches that men should behave according to an absolute moral standard, one that
transcends logic. Whats right is right, and whats wrong is wrong. The difference between
good and bad and between right and wrong are givens, not arguments subject to discussion
or justification, and a man should know the difference. Finally, it is a mans obligation to
teach his children moral standards through the model of his own behaviour.11
Bushido ethics enjoyed a revival during World War II as a way to build up Japanese
military fighting spirit. It was particularly reinforced among the fighting forces as a means

http://countrystudies.us/japan/104.htm, Retrived: 23/09/2015

Zen is a meditative practice that developed in India and China (where it is known as Chan) as
part of the 2,500 year old tradition established by Siddhattha Gotama. He came to be known
as the Buddha, which simply means awakened.
10
Japanese ritual suicide
11
http://www.artofmanliness.com/2008/09/14/the-bushido-code-the-eight-virtues-of-the-samurai/, Retrieved:
27/01/2014
9

of portraying the value of self-sacrifice and loyalty, and reached its apotheosis with the
self-sacrifice of the kamikaze pilots.

2.3. Japanese lifestyle

The Japanese have a rich culture that stems from their history. They are very unique and
stay true to what they are.12 Their language is a product of history and culture. The reason
that the Japanese remove their shoes while entering their homes, is to clarify the distinction
between the inside and the outside. It is considered rude to bring your shoes with you when
entering someone elses home. The traditional dress of Japan is the kimono.13
Government offices are closed on weekends and on national holidays. Department stores,
restaurants and shops are open during the holidays. If the holiday falls on a Sunday,
Monday will be a holiday too.
The tea ceremony, known in Japanese as sado or chanoyu, has been regarded as an art that
is largely preferred by women. In a developing trend, however, a growing number of men
are stopping by tea ceremony salons on their way home from work. Classes teaching other
Japanese arts, such as ikebana14 and traditional musical instruments like the shamisen15,
are also attracting more male enthusiasts.
No dish is better suited to Japan's cold winter nights than the nabe, or hotpot. Sitting with
friends and family around a simmering pot full of vegetables, fish, and meat has been a
favourite wintertime activity of the Japanese for generations.
Traditional Japanese Architecture has a distinct style deeply influenced by the religions
Buddhism and Shintoism. Houses and temples made of wood, placed on stilts to raise them
above the ground, and with sloping roofs made of thatch or tiles create a distinctive
silhouette in traditional Japanese architecture. The use of lightweight wood and bamboo to
create Fusuma (sliding doors) and straw or woven grass to create Tatami (mats) are other
unique features of Japanese architectural design. People usually sat on the floor and
12

http://www.tourism4peace.com/off-the-beat-path/typical-japanese-lifestyle-in-tokyo/ , Retrieved:
13/02/2014
13
Kimonos, which are generally made of silk have large sleeves and reach from the skoulders all the way
down to the heels. Kimonos are now usually worn only on special occasions, such as wedding and graduation
ceremonies. The price of a kimono can range from around 10,000 yen for a simple set made of cheap fabric
to millions of yen for a luxurious silk outfit with intricate embroidery or yuzen designs.
14
flower arrangement
15
Japanese guitar

furniture only came into widespread use after the late-nineteenth and early twentieth
century.16

2.4. Short history of Japan

Legend attributes the creation of Japan to the sun goddess, from whom the emperors were
descended. The first of them was Jimmu, supposed to have ascended the throne in 660 B.C
a tradition that constituted official doctrine until 1945. Recorded Japanese history begins in
approximately A.D. 400, when the Yamato clan, eventually based in Kyoto, managed to
gain control of other family groups in central and western Japan. Contact with Korea
introduced Buddhism to Japan at about this time. Through the 700s Japan was much
influenced by China, and the Yamato clan set up an imperial court similar to that of China.
In the ensuing centuries, the authority of the imperial court was undermined as powerful
gentry families vied for control. At the same time, warrior clans were rising to prominence
as a distinct class known as samurai. In 1192, the Minamoto clan set up a military
government under their leader, Yoritomo. He was designated shogun (military dictator).
For the following 700 years, shoguns from a succession of clans ruled in Japan, while the
imperial court existed in relative obscurity. First contact with the West came in about 1542,
when a Portuguese ship off course arrived in Japanese waters. Portuguese traders, Jesuit
missionaries, and Spanish, Dutch, and English traders followed. Suspicious of Christianity
and of Portuguese support of a local Japanese revolt, the shoguns of the Tokugawa period
(16031867) prohibited all trade with foreign countries; only a Dutch trading post at
Nagasaki was permitted. Western attempts to renew trading relations failed until 1853,
when Commodore Matthew Perry sailed an American fleet into Tokyo Bay. Trade with the
West was forced upon Japan under terms less than favourable to the Japanese. Strife
caused by these actions brought down the feudal world of the shoguns. In 1868, the
emperor Meiji came to the throne, and the shogun system was abolished.
Japan quickly made the transition from a medieval to a modern power. An imperial army
was established with conscription, and parliamentary government was formed in 1889. The
Japanese began to take steps to extend their empire. After a brief war with China in 1894
1895, Japan acquired Formosa (Taiwan), the Pescadores Islands, and part of southern
Manchuria. China also recognized the independence of Korea (Chosen), which Japan later
annexed (1910).In 19041905, Japan defeated Russia in the Russo-Japanese War, gaining
16

http://www.mapsofworld.com/japan/culture/traditions-in-japan.html , Retrieved: 20/01/2014

the territory of southern Sakhalin (Karafuto) and Russia's port and rail rights in Manchuria.
In World War I, Japan seized Germany's Pacific islands and leased areas in China. The
Treaty of Versailles then awarded Japan a mandate over the islands.17

3. Japanese company outside the Japan

To understand the impact of harmony on the Japanese decision-making process, we should
go back to the end of World War II. Entire cities were destroyed during the war, as was
much of the Japans industrial base. Then came the Japanese Miracle18, which catapulted
Japan into its place as the second-largest economy in the world.
It's a trend that analysts expect to continue, and possibly accelerate, as Japanese companies
diversify their operations away from Japan's stagnant economy and toward high-growth
sectors such as health care, food, industry and technology. A strong yen, while making
Japanese exports less competitive overseas, is giving Japanese companies more firepower
to buy foreign assets.
For a certain number of Japanese companies the optimal location to perform manufacturing
operations in the field of consumer electronics, textile, and apparel is China, whereas in the
most cases the optimal location for design operations and R&D is Japan.
Japanese firms, especially in the textile, apparel and consumer electronic industry, have
often configured their value chain accordingly. By doing so, the Japanese companies hope
to be able to simultaneously lower their cost structure and differentiate their products. Such
was the management behavior first for the Japanese and the United States markets, but in
the last years it has been the case for the Chinese market. This seems likely to continue in
the future.19
The success of Japanese companies depends on deciding on the right strategy or the right
strategy mix bearing in mind the particular circumstances of Chinese markets. Different
factors influence the decision-making process of the strategic Japanese management, such
as new competitors, strong suppliers, new technologies etc.
17

http://www.infoplease.com/country/japan.html, Retrived: 23/09/2015

The Japanese Miracle refers to Japans phenomenal economic recovery following the devastation of
World War II. Within a few short decades of its capitulation, Japan had joined the community of prosperous
nations. In economic terms, the nations recovery was miraculous indeed.
19
http://www.dijtokyo.org/publications/WP_01-04.pdf, Retrived:23/9/2015
18

10

3.1. Toyota corporation, outside Japan

The Toyota Way can be briefly summarized through the two pillars that support it:
Continuous Improvement and Respect for People. Continuous improvement, often
called kaizen, defines Toyotas basic approach to doing business.
Though Toyota had disastrous experience when setting up an independent production
subsidiary in California with ambition to seize the small car market in USA, Toyota
learned and improved a lot in quality to suit the local conditions, in result made a triumphal
turnaround in US market in late 1960s. Moreover, the following oil price rise unexpectedly
boosted the demand for Toyotas cars which are light and fuel saving. Since then,
worldwide exporting business of Toyota had been a steady growth. In order to get around
import barriers such as local content regulations and import quotas, Toyota established a
50/50 joint venture named New United Motor Manufacturing, Inc. (NUMMI) with General
Motor in USA in 1983, and a wholly owned manufacturing facility in UK in 1989 and
another in France in 1997, and a 50/50 joint venture with French automaker Peugeot in
Czech Republic in 2002. Brave strides also have been happening in China, now the worlds
fastest growing car market. Now Toyota has become the largest car manufacturer in the
world.
As of the end of March 2012, Toyota conducts its business worldwide with 50 overseas
manufacturing companies in 27 countries and regions. Toyota's vehicles are sold in more
than 160 countries and regions20. Toyota has manufacturing or assembly plants in Japan,
Australia, India, Sri Lanka, Canada, Indonesia, Poland, South Africa, Turkey, Colombia,
the United Kingdom, the United States, France, Brazil, Portugal, and more recently,
Argentina, Czech Republic, Mexico, Malaysia, Thailand, Pakistan, Egypt, China, Vietnam,
Venezuela, the Philippines, and Russia.
Toyota sold 9.98 million vehicles during 2013, which was 270,000 more than its closest
rival - US car giant General Motors. Sales were up 2% from the year before and Toyota
also announced plans to sell 10.32 million vehicles in 2014.21

20

http://www.toyota-global.com/company/profile/facilities/worldwide_operations.html , Retrieved:
05/01/2014
21
http://www.bbc.com/news/business-25860234 ,Retrieved: 08/01/2014

11

3.2. Sony Company outside Japan

Sony is a leading manufacturer of audio, video, communications, and information
technology products for the consumer and professional markets. Its motion picture,
television, computer entertainment, music and online businesses make Sony one of the
most comprehensive entertainment and technology companies in the world.22
Akio Morita, Masaru Ibuka, and Tamon Maeda started Tokyo telecommunications
Engineering in 1946 with funding from Morita's father's sake business. The company
produced the first Japanese tape recorder in 1950. Three years late, Morita paid Western
Electric ($25,000) for transistor technology licenses, which sparked a consumer electronics
revolution in Japan. His firm launched one of the first transistor radios in 1955, followed
by the first Sony-trademarked product, a pocked-sized radio, in 1957. The next year the
company changed its name to Sony23. It beat the competition to newly emerging markets
for transistor TVs (1959) and solid-state videotape recorders (1961).
Over the years Sony has become a worldwide industry leader in technology, releasing
many iconic products along the way. Throughout their history Sony tends to create their
own in-house standards for technology rather than copying the standards of other
manufacturers.
Sony as a corporation has grown dramatically over the years. Not all this growth has been
organic; they have undertaken a variety of joint ventures and acquisitions and have
accumulated a number of subsidiaries around the globe over the years. In 1968 CBS/Sony
Records Inc., a 50-50 joint venture with CBS Inc. of the U.S., was established. It became a
wholly owned Sony subsidiary in 1988 and was renamed Sony Music Entertainment Inc.
in 1991. Sony acquired Columbia Pictures Entertainment, Inc. in 1989, later renamed Sony
Pictures Entertainment Inc. They created Sony Computer Entertainment Inc. and Sony
Communication Network Corporation in 1993 and 1995 respectively. In 2004, Sony
Financial Holdings Inc. and Sony BMG Music Entertainment were established. Sony was
part of a consortium that acquired Metro-Goldwyn Mayer (MGM) of the United States in
2005. Sony and Samsung entered a joint venture on manufacturing TFT LCD panels at SLCD Corporation in 2006 and they entered another joint venture with Sharp in 2009 to sell

22
23

http://www.sony.com/ , Retrieved: 09/03/2014

Sony from sonus, Latin for sound and sonny meaning little man.

12

these LCD panels. These major corporate movements have allowed Sony to become the
major player they are today in the global technology sector.
Sony Europe is the regional consumer electronics and professional equipment and services
organisation for Sony Corporation of Japan. Sony has operated in Europe since 1960 when
it set up a satellite office in Switzerland to service to whole of the European marketplace.
In the 1970s, individual sales companies were set up in Europe either by acquiring an
existing independent distributor, or by setting up a new operation, hiring European staff to
run it. This was followed by the establishment of Sony manufacturing operations in various
European countries starting from the mid-1970s. the country managers were often the
former heads of Sonys distribution companies in those countries and they were granted
considerable autonomy in launching innovative products developed in Japan Sony Europe
is the Sony Corporations marketing, sales and distribution organization for the whole of
Europe and Russia. It operates across 38 countries and 13 time zones, employs 6,000
employees, and generates annual revenues of 8 billion. Originally, Sonys European
operations operated independently in each country, and each national subsidiary was
responsible for its own IT systems24.
In the global Smartphone market, Sony takes a third place behind Samsung and Apple,
which account for more than a half of all Smartphone shipments. According to the latest
numbers from research firm IDC, they placed Sony in fourth place with a 4.5% share of the
market.

24

http://www.sony-europe.com/ Retrieved: 10/03/2014

13

3.3. Other Japanese companies outside Japan

Four themes illustrate the current state of Japans efforts to enhance its competitiveness
and advance its economy: (1) Japan is engaged in a cohesive innovation program at all
levelsacademia, government, and industry.(2) Japans science and technology and its
manufacturing competitiveness strategic roadmaps are inextricably linked and well funded.
(3) Japans key to global competitiveness will be to develop its human resources. (4)
Japanese industry is moving forward with an aggressive competitiveness strategy without
direct government support or intervention.25
Japan sees innovation as playing an important role in improving productivity, which will
drive its economic growth and global competitiveness, while empowering the nation to
contribute to world growth.
Largest

Japanese

Companies

in

the

World

are:

Nippon

Telegraph

&

Tel

(telecommunications services), Mitsubishi Corp (trading companies), Honda Motor

(consumer durables), Mitsui & Co (trading companies), East Japan Railway
(transportation), Canon (business services & supplies), Nippon Steel (materials), JFE
Holdings

(materials),

KDDI

(telecommunications

services),

Sumitomo

(trading

companies). Canon has three big business units focused on Office, Consumer and
Industrial products. Most of the operating revenue comes from the consumer side of the
business at over 40%. Honda operates from four business units- Motorcycles,
Automobiles, Power products and Finance. Their biggest by far is the Automobile business
bring in about 75% of their total operating revenue. Mitsubishi established itself over 100
years ago as a shipping company and today is the largest in Japan. Its profits come from
six major industries where 50% of their net income is from their Metals. Mitsui has
transformed themselves from an intermediary to a total solutions provider from raw
materials to retailing. Most of their gross profit comes from their energy businesses.26

25

http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1651&context=key_workplace,Retrived:
23/09/2015
26
http://asdfhjk98656.blogspot.hr/2015/02/top-10-largest-japanese-companies-in.html,Retrived:23/09/2015

14

3.4. Japanese stock market

In the 1870's, a securities system was introduced in Japan and public bond negotiation
began. This resulted in the request for a public trading institution; and, the "Stock
Exchange Ordinance" was enacted in May 1878. Based on this ordinance, the "Tokyo
Stock Exchange Co., Ltd." was established on May 15, 1878; and trading began on June
1st. In March 1943, the "Japan Securities Exchange Law" was enacted to reorganize the
Stock Exchange as a wartime controlled institution. On June 30, 1943, 11 stock exchanges
throughout Japan were unified and a quasi-public corporation, the "Japan Securities
Exchange", was established (dissolved in April, 1947). With worsening war conditions and
air-raids on the main island of Japan, the securities market was forced to suspend trading
sessions on all securities markets from August 10, 1945. It was difficult to re-open the
Stock Exchange by a Memorandum of Supreme Commander of Allied Powers (SCAP) in
September 1945; however, trading was restarted by unofficial group transactions in
December of 1945. The Securities and Exchange Law was enacted in March of 1947, and
entirely revised in April of 1948. On April 1, 1949, three stock exchanges were established
in Tokyo, Osaka and Nagoya. Trading on these exchanges began on May 16. In July of
that same year, five additional stock exchanges were established in Kyoto (merged into
Osaka Securities Exchange in March 2001), Kobe (dissolved in October 1967), Hiroshima
(merged into Tokyo Stock Exchange in March 2000), Fukuoka, and Niigata (merged with
Tokyo Stock Exchange in March 2000). In addition, the Sapporo Securities Exchange was
established in April 1950. Consequently, Japan now has five stock exchanges.27
The Tokyo Stock Exchange (TSE) is the third largest stock exchange in the world. TSE
had 2,308 listed companies with a combined market capitalisation of USD 3.4 trillion as of
February 2013. TSE is broken into three separate parts: large companies, mid-sized
companies and the market of the high-growth and emerging stocks (mothers) for venture
companies. The Osaka Securities Exchange (OSE) and Nagoya Stock Exchange (NSE) are
also important stock exchanges in Japan. In general, listing on a stock exchange provides
the following benefits: (1) enhanced corporate profile and credibility, (2) various options
for fundraising and superior financial strength, (3) stricter internal management system, (4)
increased motivation for employees and management, and (5) shareholder diversification.
The above features of the TSE market represent strong advantages from which listed
27

http://www.privatebanking.com/user/extra_info.jsp?location_id=9766&category_id=63&account_id=7890
6&published=1&page_id=0&.rnd=4b05eb502a074e068feca8c74b225fca,Retrived:23/09/2015

15

companies can benefit, directly or indirectly. In this context, TSE continues to design and
implement sufficient functions as a market where companies gain access to sufficient
funds.28
TSE operates four basic markets: the First and Second Sections, Mothers, and JASDAQ.
The First Section represents a main board of TSE for a number of globally operated
companies whose shares are traded with high liquidity. The Second Section is an equity
market for second tier and medium-sized companies with established profiles and business
bases. The third market, Mothers (Market of the high-growth and emerging stocks), lists
emerging companies with high growth potential. The fourth is JASDAQ (Japan
Association of Securities Dealers Automated Quotations), which initially launched as an
OTC market. While new listings on the main board are generally assigned to the Second
Section, some companies with outstanding liquidity prospects may be directly assigned to
the First Section. Mothers companies may apply for the reassignment to the First Section
or Second Section as they grow and develop. Fifty-four companies listed on Mothers, or
19% of all companies that have gone public in that market, have been successfully
reassigned to the First Section or Second Section at the end of 2012. The TSE markets
offer multiple and flexible options suitable for different company strategies and for
companies at different stages of growth. TSE offers a so-called One-Stop Listing
Solution and satisfies the various financing needs of TSE-listed companies on a global
basis.

In June 2009, the TOKYO AIM Market was established as a joint venture between TSE
and the London Stock Exchange in conjunction with the professional-oriented market
scheme contemplated in the amended Financial Instruments and Exchange Act in 2008.
The Tokyo AIM Market was subsequently incorporated into TSE, which restarted the
market as the newly branded TOKYO PRO Market, effective from July 1, 2012. The
TOKYO PRO Market limits its participation to professionals (special investors). This
allows it to apply less restrictive standards in terms of disclosure language, disclosure
documents, accounting standards, and so on, compared to traditional markets. TOKYO
PRO Market has adopted The J-Advisers system. J-Advisers are designated by TSE and
comprise of legal advisers and professional accountants. J-Advisers will perform the

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16

examination of eligibility for listing on TOKYO PRO Market, as no listing examination

will be performed by TSE Regulation. TOKYO PRO Market has adopted some practical
expedient whereby TOKYO PRO Market companies can disclose their quarterly reports
and internal control reports at their discretion. This certainly results in the reduction of
costs and efforts of companies in the growth stage.
TSE is home to a long list of world-renowned corporations. The market capitalization and
trading value represented by a few of specific large TSE-listed companies weigh relatively
little against the totals on the exchange. This weighting demonstrates the vast size of TSE
and the tremendous liquidity made available to TSE-listed companies in a broad market.
Relevant laws and regulations in Japan grant stock exchanges the right to authorize their
own listings. The listing examinations for TSE are performed by a TSE-designated
organization called TSE Regulation. TSE Regulation has designed and implemented a
prescribed listing examination to assess whether a listing applicant meets all of the
necessary quantitative thresholds and has the necessary internal system and capabilities to
appropriately disclose corporate information. The listing examination takes about three
months to complete, from listing application to listing approval. A successful examination
sets the foundation for investor confidence, a key component of corporate value, after
listing. TSE has developed a unique step to help applicants prepare for listing. To ensure
that the listing process runs as smoothly as possible, applicant companies may perform
preliminary consultation with TSE Regulation by engaging securities companies
qualified as underwriters. By consulting beforehand, applicant companies can identify and
resolve potential requirements or roadblocks before filing the formal listing application
while achieving smooth communication with TSE.

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4. Foreigners working in Japan

It is believed that about 600,000 newcomers (new foreign workers) have arrived since
1985. Foreign employees are protected by the Labour Standards Law and other related
laws which protect Japanese employees. Employers are only able to employ individuals
who have permission to live and work in Japan. Generally, foreigners who have one of the
following residential statuses have the right to work in Japan: Permanent resident, Spouse
or child of Japanese national, Spouse or child of permanent resident, Long-term resident.
Foreigners are permitted to work as the following or in the following professions/services:
Professor, artist, religious activities, journalist, investor/business manager, legal/accounting
services, medical services, researcher, instructor, and engineer, specialist in humanities and
international services, intra-company transferee, entertainment, skilled labour, designated
activities.30
Foreign employees have the right to organize a labour union, bargain and act collectively,
in order to keep and improve their working conditions. The organization of a labour union
and its activities are guaranteed as basic labour rights by the Constitution of Japan and the
Labour Union Law stipulates these rights in detail. The Labour Union Law stipulates that
the requirements of a labour union that can be protected by the law (Article 2, Labour
Union Law). are as follows: a labour union shall be; (1) composed mainly of employees,
(2) formed autonomously, (3) for the main purposes of maintaining and improving
working conditions and raising the economic status of the employees. As a labour union is
a kind of group, any employee can organize one freely at any time with the minimum of
two members. There is no need to gain consent from the company. It is fine as long as a
labour union is organized independently and operated democratically by the employees.
However it is desirable that a labour union, be formed by as many employees as possible in
order to carry out its functions.

30

http://www.ip.kyusan-u.ac.jp/keizai-kiyo/dp6.pdf,Retrived:23/09/2015

18

4. 1. Foreign companies doing business in Japan

Foreign Enterprises ordinarily enter the Japanese market using one of the following three
corporate

structures

(Representative

Office,

Branch

office,

Corporation).

The

establishment of a company must be registered with the appropriate registration office. At

least one representative director must be a Japanese resident for registration purposes. The
name under which the company intends to register should be in Japanese and must
represent its legal structure, e.g. Kabushiki Kaisha. The legal fees associated with, and time
required for, the formation and registration of a company is dependent upon the level of
interaction between the company and its attorney.31
Foreign owned companies generally prefer to open bank accounts with the Japanese branch
of foreign banks with whom the company banks in their home country. Japanese branches
of foreign banks are usually helpful, responsive to customer needs and can communicate in
English, reducing the time needed to establish a working business relationship. However, it
is advisable to have at least one bank account with a Japanese bank for the following
reasons: (1) Foreign banks do not have many local branches in Japan, even in Tokyo, and
where they do, it is unusual for the local branches to be conveniently located. (2) Most
Japanese customers prefer to appoint their local business associated bank to carry out
payment or remittance transactions. (3) Payment of various taxes, and social insurance
premiums are also handled by such Japanese banks.
Generally, it is not easy to find an office location without experienced assistance. It is quite
difficult to understand the terms and conditions of lease agreements and, although office
rents have dropped as a result of the slowdown of the Japanese economy, office owners
are, in some cases, still reluctant to lease their offices to foreign owned companies.
Consequently, bi-lingual estate agencies which deal specifically with foreign tenants to
overcome these problems have appeared in Tokyo. Geographical convenience is a very
critical factor for determining office location.
Foreign companies have to be flexible while deciding which channels to use for
penetrating the Japanese market. They have to adapt to the conditions prevailing in the
Japanese market and invest heavily in the distribution channels.

31

http://japan.mfa.gov.ge/files/japan/gzamkvlevi/theestablishmentofenterprisesinjapanenglish.pdf,Retrived:23
/09/2015

19

European investors have discovered that the best vehicle for integrating the Japanese
market is in the form of joint ventures and non-direct manufacturing. Since the mid 1980s
as these joint ventures became more accepted as insiders by the local market and
businesses, they increased the European shareholdings to over fifty percent and often to
one hundred percent. They are in an excellent position to increase their business presence
in Japan.
In 1992 a special law was passed to promote foreign direct investment in Japan and to set
up a "Foreign Affiliate Business Support Company" reducing the need to depend on the
local company. Mergers and Acquisitions were accepted three times more in 1992 than in
1989. Since 1984 two recessions have occurred in Japan. Foreign technology is important
for the economy's reorganization and overseas firms are invaluable for job opportunities.
Many EU companies have been doing business in Japan for several decades. European
companies appreciate the strong work ethic in Japan as well as the Japanese enthusiasm to
reach out and work with other cultures. Most European companies employ at least one
hundred Japanese employees.
An organization called Vulcanus in Europe was created years ago where a EU country
offers a Japanese student the opportunity to train within their company for eight months.
Both sides win where the student will gain an invaluable work and cultural experience and
the company will also receive a skilled employee-trainee bringing to the table the Japanese
perspective and know-how of how to do business in Japan. Future Japanese executives
become familiar with the European business culture.

20

4.2. CEO salaries in Japan with comparison to other countries

Most CEO compensation packages contain five basic components: salary, annual bonus,
payouts from longtermincentive plans, restricted option grants, and restricted stock grants.
The evidence on the size of perquisites is limited, and empirical work on their
effects

and determinants has found mixed results. In the past several decades, the

difference between the compensation of corporate chief executives and the pay earned by
the average employee has increased dramatically. In 1960, the average chief executive
earned 40 times as much as the average worker. By 1990, the average CEO earned 107
times as much. Various sources give slightly different ratios, but all are in general
agreement that the ratio of executive compensation to the pay of ordinary workers has
grown dramatically over the past four decades.32
On average, chief executives at Japanese companies with more than $10 billion in annual
revenues are paid about $1.3 million a year, including bonuses and stock-option grants
(based on data gathered between 2007 and 2009). But chiefs in the U.S. are paid about $12
million, and chiefs in Europe are paid $6 million.
Japanese executives earn far less than their U.S. executives. Compensation clearly
increases with firms size as measured by assets, but at a close to linear rate for American
firms compared to a much slower rate for Japanese firms. Accounting profitabilitys
coefficient is exactly the same for the both countries, with pay increasing significantly with
profits. Growth of the stock price, however, which had a small effect in Japan, has a large
effect in the United States. In Japan, older executive earned higher pay, but not in America.

32

http://connection.ebscohost.com/businessfinances/executive-pay/history-corporate-executivewages,Retrived:23/09/2015

21

4. 3. Business climate for non-Japanese companies in Japan

Japan is one of the worlds economic superpowers and its prosperity is based on its
efficient industries (automobile, information and communication technology and consumer
electronics). Japan suffered a long-term economic recession during the 1990s after its
assets price bubble in the late 1980s broke. The government adopted policies to promote
exports and Japan's economy experienced a gradual recovery trend from 20032007, with
steady economic growth. However, the global financial crisis dried up global demand for
Japans exports and Japan went into recession in 2008. Government stimulus spending
helped to bring the Japanese economy back on track in late 2009 and 2010. Subsequently,
the massive earthquake in March 2011 caused enormous damage in the north-eastern
coastal region and Japan is facing rebuilding struggles.

There are a number of reasons for investing in Japan. Key reasons why foreign investors
are attracted to Japan are because the country offers: (1) A large consumer market with a
population over 127 million, (2) a financial centre, (3) a key trading hub in Asia, (4) a high
degree of control over the Asian market, (5) Highly advanced technology, (6) a leading
centre for innovation, research and development in Asia. JETRO is a governmental
organisation with more than 70 overseas offices in over 50 countries across the world. For
foreign companies planning to start a business in Japan, JETROs Invest Japan Business
Support Centre (IBSC) will provide consultation advice and facilities for establishing a
business base. JETRO IBSC staff and advisors provide information and consultation
advice, including on: market and industry information, relevant legal systems, taxation,
labour and legal issues, networking with potential business partners, finding human
resources and an office location, information on the regulations and incentives from
national and local governments. The Office of Trade and Investment Ombudsman (OTO)
is a government body for the promotion of investment from abroad. OTO is the contact
point when problems arise due to government regulations for export to or investment in
Japan. OTO can contact relevant government ministries and agencies including customs
houses, counsellor offices, regional economic trade and industry bureaus, general
quarantine offices, animal quarantine stations, plant epidemic prevention stations, regional
transport bureaus, embassies and consulates, as well as JETRO offices.33

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22

The most common legal entities in Japan are: (1) Representative offices, (2) Branch
offices, (3) Companies (private). Before officially starting business in Japan, foreign
investors can use representative offices as a temporary basis for preparation of their
activities. A branch office can start business operations after deciding a base of operation,
appointing the branch representative and registering all the necessary information. A
Japanese branch office can open bank accounts and lease real estate in its own name. When
foreign companies intend to establish a subsidiary of their existing business in Japan, they
must choose a corporation type. Japanese Corporation Law recognises four types of
company entity:

Joint-stock corporation (Kabushiki-Kaisha K.K.), Limited liability

company (Godo-Kaisha GK), Unlimited partnership (Gomei-Kaisha), Limited

partnership (Goshi-Kaisha). A foreign company may invest in Japan using a method other
than those described above, for example, by establishing a joint venture with a Japanese
company or equity participation in a Japanese company.
A domestic company is liable to pay corporation tax on its worldwide income. A foreign
company is liable to pay corporation tax on its domestic source income34.
A foreign company conducting regulated business (ie banking or insurance) must prepare
financial statements for the government in compliance with the relevant laws governing
such regulated business. There are no extra accounting and reporting requirements
applicable to a branch that conducts non-regulated businesses.

34

Domestic income is income from business conducted in Japan or from using, holding or
transferring assets located in Japan. Domestic income includes income from conducting a
business providing personal services in Japan, for the lending of real estate or any right on
real estate located in Japan, interest from Japanese government bonds, dividends from
domestic companies and other income as prescribed by the corporation tax law.

23

4.4. Competing on the Japanese market

Japans industrial history is marked by the concentration of economic power, central
coordination of economic activity and by collusion. One of the most pronounced
characteristics of Japanese industrial organization has been the presence of business groups
today known as keiretsu. The term keiretsu has been applied to a variety of Japanese
intercorporate networks. In general, keiretsu groups are defined as clusters of
independently managed firms maintaining close and stable economic ties, cemented by a
governance mechanism such as presidents clubs, partial cross-ownership, and interlocking
directorates. Within the broad definition lie two distinctive variations. The horizontal
keiretsu are conglomerates covering several industries linked by cross-shareholding, intragroup financing and high level management by a central body of directors. Then vertical
keiretsu are groups around one big manufacturer and consist of a multi-layered system of
suppliers focused on the core company. Keiretsu groups have been a key element in
Japans rapid industrial development and transformation since the 1950s. The keiretsu
groups substantially shape the character of economic competition.
Japan has become the United States principal competitor in many different industries. Its
remarkable record of labour productivity growth is often attributed in large part to the high
quality of its labour and also to the effects of stock of capital and R&D on labour
productivity. The average annual growth rate of output per man-hour in manufacturing
during the period of 1950-1973 was about ten percent in Japan, while the rate was about
three percent or less in the United States. In the years after the first oil crisis to 1987,
growth rates were about 5,5 percent in Japan and 3 percent or less in the U.S. Japanese
productivity in the 1980s did not recover to the level attained in pre-oil crisis. Yet the
productivity in Japan was nearly two times higher than that in U.S.35
A closer look at competition in the Japanese economy reveals two starkly different groups
of industries. One group of industries, including automobiles, consumer electronics and
robotics, is highly competitive and internationally successful. The other group, including
traded industries (such as chemicals, civil aircraft, consumer packaged goods and software)
and virtually all nontraded domestic industries (such as construction, retailing and
transportation), has much lower levels of productivity. The traded industries in the latter
group have never been internationally successful. The large, unsuccessful portion of the
35

http://www.nber.org/papers/w3800 , Retrieved: 03/03/2014

24

Japanese economy has been a chronic drag on overall productivity, elevating the cost of
living and the cost of doing business in Japan.
For most of the last two decades the Japanese automotive industry has rated first among
buyers in terms of reliability, build quality and durability. Clearly, the industry boasts a
number of sources of competitive advantage, highlighted by lean production,
organisational philosophies and the way it is starting to dominate markets from luxury
vehicles through to entry-level products for emerging markets. But can the culture of
continuous improvement perfected over the 50 years in Nagasaki, Toyoda City and
Nissans home town, also be used by high technology SME manufacturers in Australia?
The short answer is yes, but, the key is to take key points from the plethora of information
that exists, and to apply it selectively and judiciously in order to facilitate the benefit. How
the Japanese auto industry maintains its competitive advantage and defends its market
dominance shows valuable insights for all. It could be argued that the key to the industrys
long-term success has been the evolution of a set of core competencies that have
underpinned Japanese auto makers global dominance. More than that, these core
competencies are constantly being questioned in light of increasing global economic
uncertainty and whether or not the various industry players need to develop a new suite of
attributes to ensure long-term survival in the face of increasing competition. There have
been various theories proposed which describe the relationship between core competencies
and competitive advantage. It has been suggested that competitive advantage results from
the way individual businesses leverage, develop and deploy their resources and
competencies. Three methods of creating sustainable competitive advantage are: (1) cost
leadership, (2) product differentiation and (3) focus, where a business chooses to compete
in only certain segments of a target market. By and large the industry secured its dominant
market position by actively building international production systems while increasing the
localisation of activities, including vehicle development, procurement, production and
marketing. Whilst this model often characterised the managerial norms and process of
Japanese companies throughout the 1970s and 1980s, since that time most have
progressively moved to include elements of a transnational business strategy. That is, using
what is essentially a globally proven platform to make product in and to suit local markets.
Today, Japanese auto makers market dominance is being delivered on the back of more
flexible configuration of resources and capabilities, greater utilisation of diverse overseas
operations and heightened emphasis on the development, use and diffusion of knowledge
25

throughout the company. Key amongst them is manufacturing, where geographically

spread, but interdependent facilities, including a number of link plants, are utilised to
account for fluctuating demand. Whilst going global may not be on everyones horizon (at
least in the short term), the messages about flexibility, utilisation of resources and creating
and encouraging a learning environment are key for any organisation wanting to develop
competitive advantage.36
Human resources are precisely the greatest resource that Japan boasts to the world. One of
the biggest factors contributing to the grim outlook of the Japanese economy and society
and to the economic slowdown is the insufficient exploitation of the potential of human
resource capabilities amid the declining birth-rate and aging population.
In Japanese manufacturing industries capital is highly efficient. The efficiency stems
mainly form the quality of capital rather than the quality.

36

http://www.uhy.com/wp-content/uploads/Doing-Business-in-Japan.pdf,Retrived:23/09/2015

26

5. Kaizen method
Kaizen is one of the most commonly used words in Japan. It is in the newspapers, on the
radio and TV. Japanese society is bombarded daily with statements regarding the Kaizen of
almost anything. In business, the concept of Kaizen is so deeply ingrained in the minds of
both managers and workers that they often do not even realize that they are thinking
Kaizen. It is the key to Japanese competitive success.
The Japanese word kaizen derives from the root words kaitranslated in English as change,
and zen translated as good or better. Kaizen is a Japanese word meaning continuous
improvement. It means creating an atmosphere of continuous improvement by changing
your view, changing your method, and your way of thinking to make something better or
for something to become better The concept that Japanese management created was
continuous improvement and major companies such as Toyota Motors developed a
management philosophy that enabled them to become highly successful worldwide leaders
in their business area. Such Japanese companies believe in steady and continuous
improvement over time rather than big, flashy innovations. It is used to effect changes of
anything that can be improved: process, design, movement, material etc. The effectiveness
of a kaizen system lies in the fact that it motivates by rewarding a much larger percentage
of the work force on a much more frequent basis. This had a cumulative behavioural effect
of improving attitudes, building trust, and boosting morale, which together become the
foundation of an increasingly productive work force. The first motto of kaizen is to utilize
the creativity, experience, skills, knowledge and innovation in people first before looking
for solutions based on capital expense, high technology or expensive machinery.
Kaizen is based on the belief that the people doing a particular job will often know better
than everyone else, including their superiors, how that job can be improved; and that they
should be given the responsibility for making those improvements. The production area is
by no means the only area within a company where kaizen can be implemented. Every
department within a company can make continuous improvements in its operations by
making small changes on a daily basis. The first step in the process is to break down all
communication barriers between the various units within the company. The master budget
is one such tool that can be used to improve coordination and communication between all
of the departments or other subunits within a company.

27

There are three levels of kaizen: (1) Work operation kaizen involves changes done by the
operator to his or her own machine on process, simply, cheaply, immediately, and with
little impact on surrounding people or processes. It is the first choice to implement. (2)
Kaizen equipment involves improvements made to machine or piece of equipment, which
requires more time, cost and resources that a work operation kaizen, and it may affect other
people and processes. (3) Process kaizen affects the complete manufacturing process and
may even affect all the equipment in a process. It may be done to greatly increase
production capacity, incorporate engineering changes or eliminate cost and time. Usually
this type of kaizen is conducted when the plan is to develop cells and transform from batch
to one-piece flow production.
Three definitions of Kaizen are: (1) Improvement trough changes in the method, (2) small
changes, not big changes, (3) changes within realistic constraints.
Real kaizen is made up of three essential components: (1) discovering problems and
pointing out what type of kaizen is required to fix them. Teaching new employees to solve
assigned problems is very important in kaizen activity. At the initial stages, supervisors
should make employees aware to areas where there are problems, give them hints about
how to do kaizen, and assign tasks. (2) Devising creative solutions to problems. Creative
thinking methods and idea generation techniques are useful. They help to study the
problem from different angles. (3) Decision making, implementation, and effect deciding
which kaizen proposals are the best and which can be implemented, planning how to
implement them and then actually implementing them. The effect will follow. Kaizen in
valuable only when it is implemented. This aspect of kaizen activity distinguishes it from
idea contests and competitions. Such contests designed to attract and reward unique ideas,
have little to do with kaizen activity. Kaizen activity that does not include implementation
and affect is no more than an interesting game.
Kaizen is a philosophy, mind-set and, for breakthrough performance, a most critical
vehicle to achieve strategic imperatives and execute value steam/process improvement
plans. The kaizen program is designed to help companies create a solid foundation for
change, allowing acceptance and effective integration, and thereby enabling a company to
sustain the process improvements and realize the positive financial and cultural outcomes.

28

5.1. History of Kaizen method

Since the definition of Kaizen is quite broad, there are several different thoughts about the
history of Kaizen. The most common version is that it resulted from the competition
between Nissan and Toyota. The fact that Nissan won the Deming Price for quality in 1961
drove Toyota even more aggressive in its approach to lean manufacturing. Toyota
therefore vowed that it, too, would win the Deming price. In order to overcome certain
quality issues Shigeo Shingo elaborated a poke-yoke system. Based on the experience
gathered during the elaboration Tetsuichi Asaka and Kaomi Ishakawa developed the
Toyota Quality Circles in 1962. These Quality Circles were later called the first real
Kaizen event. In the same year Masaaki Imai founded the Kaizen Institute, which
promoted the Kaizen approach through the world.37
Kaizen activities have developed and spread in Japan and later to the rest of the world in
four phases. The first phase was the absorption of foreign technique by Japan in the early
postwar period. In the 1950s, the world market perceived Made-in-Japan products to be as
low price, low quality. Driven by a sense of urgency for industrial catch-up, Japan
learned American style quality management from Drs. W. E. Deming and J. M. Juran, and
adapted this to Japanese context. A national movement for quality and productivity
improvement emerged, supported by the Union of Japanese Scientists and Engineers
(JUSE), established in 1946, and the Japan Productivity Center (JPC), established in 1955.
Many companies developed their own systems of kaizen, including the globally known
TPS developed by the Toyota Motor Corporation. These efforts laid a solid foundation for
establishing the so-called Japanese production management system. Thus, kaizen was
originally a foreign technique which was adopted and adjusted to become a Japanese
technique.
The second phase was diffusion throughout Japanese companies, including small and
medium-sized ones. The two oil crises in the 1970s drove Japanese companies to integrate
energy saving into their quality and productivity improvement efforts. The Japanese
government did not have a direct policy to promote Continuous Improvement during this
Oil Crisis period; however it helped the industries significantly by initiating the policy to
upgrade skills of the Japanese workers. Those upgraded skills could help the industries to
launch the concept of Kaizen later. In this period, the industrial associations efficiently
37

http://www.schifferm.de/Kaizen%20MR%20_Final.pdf,Retrived:23/09/2015

29

acted as the center of knowledge to promote the best practices of Kaizen implementation.
The case of Toyota was presented and many Japanese companies agreed to imitate it to
faster their Continuous Improvement.

The third phase was the regional spreading of kaizen beginning in the mid 1980s, which
coincided with the globalization of Japanese business activities. The sharp appreciation of
the Japanese yen after the Plaza Agreement38in 1985 prompted Japanese manufacturing
companies to shift their production based to East Asia where production costs were lower.
Japanese firms tried to duplicate the quality management system in their factories abroad.
Moreover, as they endeavoured to increase local procurement of intermediate inputs, local
suppliers were requested to conform to Japans quality standards. Japanese companies
often assisted their local partners to learn kaizen philosophy and practices.
The fourth phase, which is now beginning, has witnessed growing interest in East Asias
industrial experience in other developing regions (including Africa). However, outside,
interest in and knowledge of the East Asian approach often remains general and
insufficient, and has not been operationalized with practical details. Also, the Japanese
governments TICAD IV initiative for promoting trade and investment in Africa provides
an opportunity for Japan to more actively publicize and introduce kaizen in developing
regions including Africa.

38

The governments of the US, Japan, France, Germany and the United Kingdom agreed to depreciate the US
dollar against the yen and the mark. It was signed on September 22, 1985 at the Plaza Hotel in New York
City. The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987.

30

5.2. Toyota and kaizen method

Japan was in the throes of a depression. The occupying Americans had decided to attack
inflation by restricting credit, but they overdid it. As car sales collapsed and its bank loans
became exhausted, Toyota faced bankruptcy. Toyota president Kiichiro Toyota proposed
firing a quarter of the workforce. In 1946 the Japanese government, under American
prompting, had strengthened the right of unions and imposed severe restrictions on the
ability of company owners to fire employees. After extended negotiations, the company
and the union worked out a compromise.
The remaining employees received two guarantees: (1) Lifetime employment and (2) pay
steeply graded to seniority and tied to company profitability through bonuses. The
employees also agreed to be flexible in work assignments and active in supporting the
interests of the company by initiating improvement efforts. Workers became part of the
Toyota community. In 1950, Toyota sold fewer than 3000 vehicles, which was hardly
indicative of what was to come for eventually the world's largest automobile manufacturer.
The company was at a crossroads.
In the early 1960s, Shiguo Shingo introduced the concept of zero quality control.39 From
his ideas, in 1962, Tetsuichi Asaka and Kaoru Ishikawa developed quality circles.40
These resulted in the first real kaizen events. The term Kaizen started to proliferate inside
the company in the 1960s as an outgoing part of the Toyota Production System
development.41
Kaizen is a system that involves every employee - from upper management to the cleaning
crew. Everyone is encouraged to come up with small improvement suggestions on a
regular basis. This is not a once a month or once a year activity. It is continuous. Toyota a
total of 60 to 70 suggestions per employee per year are written down, shared and
implemented. In most cases these are not ideas for major changes. Kaizen is based on
making little changes on a regular basis: always improving productivity, safety and

39

Zero Quality Control (ZQC) is a quality control approach for achieving zero defects. ZQC is
based on the principle that defects are prevented by controlling the performance of a process so
that it cannot produce defects, even when a mistake is made by the machine or a human operator.
40
Voluntary groups of employees who work similar tasks or share an area of responsibility. They agree to
meet on a regular basis to discuss and solve problems relaed to work.
41
A production system which is steeped in the philosophy of "the complete elimination of all waste" imbuing
all aspects of production in pursuit of the most efficient methods

31

effectiveness while reducing waste. Suggestions are not limited to a specific area such as
production or marketing.
Toyota organized their workers by forming teams and gave them the responsibility and
training to do many specialized tasks. Teams are also given responsibility for
housekeeping and minor equipment repair. Each team has a leader who also works as one
of them on the line. The internal kaizen skills course at Toyota consisted of a combination
of lecture, shop floor observation practice and implementation. There are multiple key
concepts involved in Kaizen at Toyota. The first introductory concept pertaining to Kaizen
in Toyota involves the expectations placed on any person in a leader ship position in the
company. Five requirements of a leader are: (1) Knowledge of work, (2) knowledge of
responsibilities, (3) skill in instructing, (4) skill in improving and (5) skill in working with
people.
In Kaizen, Toyota wanted leaders to be able to separate work quantity input-based
improvements (more machines, more time, more people) from work quality or method
related improvements (change the nature of the work to be easier and better). In other
words, leaders driving kaizen need to eliminate waste or unnecessary details in the existing
process.
Kaizen is not just based on improvements only being developed and implemented by
experts or management. Instead, it involves everybody, relying on the extensive
knowledge, skills and experience of the people working directly in the process. For
example, at Toyota Material Handling Europes production sites about 3,000 proposals for
improvements are made in a typical year.42

42

http://www.toyotaforklifts.eu/SiteCollectionDocuments/PDF%20files/Toyota%20Production%20System%
20Brochure.pdf , Retrieved: 27/02/2014

32

5.3. Implementation of kaizen

Kaizen philosophy assumes that our everyday life should focus on constant improvement
efforts. Kaizen is intended to be integrated into the normal day-to-day activities with the
focus on eliminating waste, creating standards and having a clean, organized workplace.
Improvements made through kaizen are generally small and subtle. However, their results
over time can be large and long lasting. The success of kaizen comes from its people and
their actions, not from new pieces of equipment and machinery.
Principles in kaizen implementation are: (1) human resources are the most important
company asset, (2) processes must evolve by gradual improvement rather than radical
changes, (3) improvement must be based on statistical/quantitative evaluation of process
performance.43
A successful kaizen program should have a person who is hundred percent dedicated to the
planning and execution of the kaizen events. Employee should possess the proper project
management and supervision skills that will be needed during kaizen events. Kaizen events
involve small groups of individuals in the company that are brought together to address a
particular area of the company. A kaizen champion is essentially a continuous
improvement manager driving the lean initiatives in the company. One of the critical
attributes of a good team leader is the ability to evaluate progress and make sure the team
members are working on the right items at the right time.
Another vital element of the kaizen program is establishing a committee of employees to
help schedule. This kaizen governing committee is responsible for ensuring the success of
the kaizen teams. If there are any issues that need to be resolved from a management
perspective, then the kaizen governing committee must resolve them.
Kaizen teams (process improvement teams) come together for a set purpose and disband
after the kaizen event is over. Kaizen teams tend to be multiskilled and cross-functional.
Each member receives training in kaizen and teamwork, including basic consensus
building and conflict resolution. A kaizen team will typically have up to ten participants.
Team discussion and decisions involve all members and should be based on facts and data
to the extent possible. The team is brought together prior to, or at the beginning of, the
project period and given basic education in the principles of lean manufacturing and
43

Padhi, N., Palo, S. (2005) Human dimension of total quality management, The TQM Magazine 17(5),
pp.467-485

33

training by experienced experts in the kaizen tools required to do the work. The team then
spends three to five days defining and carrying out the actions necessary to change the
process and bring about the needed improvement. Several 12- to 16-hour days are spent
developing, testing, and implementing their ideas.
One of the fundamental aspects of kaizen is the participation of employees from all levels
of the organization. The main goal of team is to implement 5s, standard work, reduce
waste, and create visual management.
Visual management system adds visible and visual depth and consistency to an
organizations messages about its mission and goals; it keeps information about the goals
and performance in front of employees at all times. At ist most basic, visual management
establishes and reinforces a direct link between people and performance in organizations.44
5s is a system for workplace organization and standardization. The five steps all start with
the letters in Japanese (seiri, seiton, seison, seiketsu and shitsuke). These five terms are
translated as sorting, simplifying access, sweeping, standardization and self-discipline.
Sorting involves activities such as marking the items that are not used or eliminating
sources of clutter and unwanted items. Simplifying access involved arranging items in the
work area and establishing guidelines. Sweeping includes visually and physically sweeping
the work area to ensure that everything is in its proper location. Standardization makes
information about locations more recognizable. Self-discipline is the routine practice of all
the steps that precede it.
The kaizen process must begin with the process owner, the individual with real ownership
and responsibility who has the authority to change the process and be answerable for the
consequences. He or she may be the general manager, president, or in some cases plant
manager, but always the person in charge. Kaizen cannot be successful without strong
support and direction from the top.

44

Liff, S., Posey, P. (2004) Seeing is believing, pp. 4, New York: Amcom

34

5. 4. Kaizen outside Japan

Kaizen has been regarded as a key element in Japanese management and has been
presented as one of the sources of the competitiveness of Japanese manufacturers. Since
late of the 1980s, a larger number of studies, which have focused on different Kaizen
systems, approaches and practices such as Japanese manufacturing techniques, the Toyota
production system, and lean production, have illustrated the effectiveness of Kaizen.
Furthermore, studies of kaizen activities in the countries outside Japan, such as US, China,
Australia, Sweden and the UK suggest that the concept, approaches, and practices of
Kaizen have become routinely accepted throughout the world. Kaizen is a familiar word
for the Japanese. In its direct translation, kaizen simply means improvement, without any
concept of time frames. On the other hand, the term kaizen use in management means the
creation of a system, which enables continuous and sustainable improvement for an
organization. Since global competition calls for never ending improvement, the goal of
kaizen activities is not static and always has to be shifted to a higher level.
Kaizen practices can deliver breakthrough improvements in the range of 40-60 %. But
what about Kaizen application elsewhere than in Japan? In U.S. some managers even now
do not recognize the tremendous value that Kaizen can bring. Kaizen became a buzzword
in U.S. industry in the 1980s when American companies tried to copy the quality assurance
programs used by Toyota Motor Corp. and other Japanese manufacturing companies.
However, to adapt its dramatic potential to the more creative and self-directed American
and also European culture, it was developed a participative approach customized for the
circumstances, allows the team itself, and not the Sensai45 to problem-solve and decide
on the solution that are appropriate for the process. This puts more pressure on the
facilitator to teach, coach and guide, rather than the team. The results of the participative
Kaizen American Style approach are that the results are better sustained because the people
themselves make the key decisions, and the learning process is thus better reinforced,
because it is active rather than passive. Some leading manufacturers in USA are now
utilizing the process known as Kaizen American Style46 which results that companies are

45

Kaizen expert
American Style is the umbrella methodology that successfully embraces JIT, TQM, self-directed work
teams, and modern industrial engineering approaches into a working system that achieves dramatic and
sustainable breakthrough process improvements. Kaizen American Styles major tools are: Standard work,
5s, Visual System, 8 Wastes and Set-Up Reduction.
46

35

expanding its use to transform their businesses from end to end, becoming lean
manufacturers.
The Kaizen Institute is an international private consultant group that specializes in the
kaizen method. It has licensed networks throughout 25 countries from which consultants
provide services globally. Their performance has proved that the kaizen method is much
needed and commercially viable. There are also other unlicensed consultancy firms, which
can provide training of kaizen. 47
Kaizen practices should be adapted to the local culture in order to have the highest
probability of success. Given that kaizen is a vital approach to problem solving, its
application requires restructuring the organizational culture and then use formal root cause
analysis to identify and correct the problem at the source. Thus, kaizen practices could be
implemented by the manufacturing companies of host countries provided that the host
companies have a low level of centralization of authority, and practice cross-functional
team cooperation of eight to 12 people with a skilled facilitator to identify, measure, and
correct the problem associated with the process. Manufacturing companies in the kaizen
host countries may be in a position to generate significant value-added products that could
effectively compete in the global market provided there is a synergy between the work
ethics of the Japanese kaizen system and a host companys organizational culture. In
addition, the kaizen host companies need to be fully committed to boosting the morale of
their workers to develop members capabilities, to achieve self-actualization, and to work
cooperatively. These commitments are vital to the process for improving the quality of the
companys output.
Despite the substantial economic slowdown that Japan is manifesting today, policy makers
in Ethiopia seem to view the kaizen system in a positive way because of its earlier success
in Japanese firms. Fully convinced that the Japanese kaizen management model could be
used as an effective strategy for latecomers like Ethiopia to industrialization, they seem to
view the Japanese management system as an exemplary method for achieving the Growth
and a number of Ethiopian firms have been instructed to launch a pilot project using the
kaizen management system in order to accomplish the following three objectives: first, to
formulate a national plan to enhance both quality and productivity in the industrial sector;
second, to produce a manual for explaining and guiding these activities; third, to transfer
47

http://www.grips.ac.jp/forum/pdf09/Introducing_KAIZEN_in_Africa.pdf ,Retrived: 23/09/2015

36

relevant skills and techniques to the staff members of the kaizen Unit in the Ministry of
Trade and Industry (MoTI).
On the other hand, the Healthcare industry is facing mounting challenges: increasing
demand on services, increasing cost of materials, staff shortages, increased stress on staff,
the potential for mistakes has increased as procedures have become ever more complex
increased dissatisfaction from patients because of long waiting times and poor perceptions
of the care received. Traditional solutions to these problems might include the addition of
more staff, more money, more space or a combination of all of these and sometimes the
answer is simply that the patient must wait long periods of time before being treated. But
most healthcare organisations contain significant amounts of muda48 in their processes. If
staff can be engaged in a process of identifying and eliminating this muda, then this
liberates time and resources for increasing throughput and improving the patient
experience with no additional cost. An effective approach being applied by a growing
number of healthcare organizations is to apply Kaizen. The entire staff (doctors, nurses,
technicians, support staff) and the patients, all see and feel the impact of implementing
Kaizen when it is done properly. The stresses are removed and the professionals are now
able to focus on applying their skills instead of wasting their talents on non-value
activities. The Kaizen Institute has worked globally with hospitals, family practice units,
laboratories and medical supply facilities large and small. These improvements have been
gained by eliminating wasteful activities that over time have become part of the system
freeing up time for staff to do real value added work. These improvements are good for
everyone; patients, doctors, nurses and administrators, everyone benefits. Healthcare is the
perfect environment to implement Kaizen and streamline complex processes.

48

Muda is a Japanese word meaning futility; uselessness; idleness; superfluity; waste; wastage; wastefulness.

37

6. Conclusion
In the years following the World War II, government-industry cooperation, a strong work
ethic, high technology, and a comparatively small defence allocation (1% of GDP) helped
Japan advance with extraordinary speed to the rank of second most technologically
powerful economy in the world after the United States. Today, measured on purchasing
power parity (PPP) basis, Japan became a regional power that was able to defeat the forces
of both China and Russia. In the case of Japan, during the 1973 oil crisis, Kaizen helped
electronic and machinery companies to lower their costs and keep their end- user prices
stable even the food and other items had already stepped up their prices. Kaizen basically
helps a company to maintain the profit margin when the price of material costs and labor
costs keep increasing following inflation.
No doubt exists that the development of codes of professional conduct concerning
information behaviour based on relevant technical knowledge and practical experiences is
important in Japan. However, codes developed where individuals ethics of responsibility
are lacking would become just a polite fiction. To compensate for the lack of individuals
ethics of responsibility by restoring and maintaining Japanese core ethics, it is important to
reflect upon the historical circumstances that led to the formation of Japanese core ethical
values. Although this task is difficult, it is critical for Japanese people living in the modern
information society.

38

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