In Japan, is the lifetime employment system and seniority-based wage system beneficial or detrimental to a company's stock price?

Okay, this is an interesting question, let me break it down for you. This issue can't be simply answered as "good" or "bad"; it's more like a double-edged sword. Its impact on stock prices has been completely different in different eras.

---

In Japan, Lifetime Employment and the Seniority System are a "Double-Edged Sword" for Company Stock Prices, but Now the "Blade" Hurts More Than the "Handle"

Man, you've hit the nail on the head with this question. It's like a bottle of aged liquor – it smelled great in the past, but drinking it now might give you a bit of a headache. Let's first clarify what these two terms mean.

• Lifetime Employment: Simply put, once a company hires you, as long as you don't commit some heinous crime, the company has to keep you employed until retirement. In the past, this was an "iron rice bowl."
• Seniority System: This is about promotion based on tenure. The longer you stay with the company, the higher your salary and position, regardless of your actual ability. It's like queuing up – first in, first served.

Now that we understand the concepts, let's look at their impact on stock prices.

The Benefits of the Past: Stability Above All (Positive Impact on Stock Prices)

During Japan's post-WWII high-growth "Golden Age," this system was instrumental and had a positive effect on stock prices.

1. High Employee Loyalty, Stable Workforce: Employees treated the company like family, planning to work there for life. The benefit was extremely low employee turnover, saving companies huge costs on constantly recruiting and training new hires. This was very advantageous for long-term operations and cost control.

2. Effective Experience and Skill Transfer: Senior workers mentored juniors, allowing skills and internal knowledge to be passed down through generations, ensuring product quality and production efficiency. Systems like Toyota's "Lean Production" heavily relied on this stable, experienced workforce.

3. Facilitated Long-Term Planning: Management knew the workforce was very stable, allowing them to confidently make five- or ten-year long-term investment and R&D plans without worrying about key personnel suddenly leaving.

For Stock Prices: In that era, investors (especially domestic Japanese institutional investors) saw this "rock-solid" management model as indicating low operational risk and predictable futures. This certainty was seen as a major advantage back then, providing positive support for stock prices.

The Burden Now: Rigidity and High Costs (Negative Impact on Stock Prices)

Times have changed. With the advent of global competition, the drawbacks of this system have become increasingly apparent. It's now largely seen as a negative factor for stock prices.

1. Excessively High Labor Costs, Eroding Profits: This is the most critical point. Regardless of an employee's contribution, their salary increases as they age. This leaves companies burdened with many highly paid older employees who may not be very efficient. This huge, rigid cost directly depresses the company's profit margins. Poor profits naturally drag down the stock price.

2. Lack of Vitality and Innovation: Young people have ideas and drive, but seeing a long queue of seniors ahead of them, with promotion and raises seemingly out of reach, kills motivation to innovate. Many talented young people either go to more dynamic foreign companies or start their own businesses. Losing this fresh blood weakens the company's long-term competitiveness.

3. Inability to Respond Flexibly to Market Changes: During economic downturns, Western companies can "trim the fat" through layoffs to cut costs and weather the storm. But Japanese companies, bound by this system, find it very hard to downsize. This makes them vulnerable during economic crises, unable to reduce costs effectively, potentially leading to heavier losses. Investors fear this kind of inflexibility.

4. Breeding the "Madogiwazoku" (Window-Sitters): This is a vivid term referring to older employees who no longer have real work but cannot be fired. They sit by the window reading newspapers, idling away until retirement, while the company still pays their full salary. Think about it: as a shareholder, how would you feel seeing a company you've invested in paying people like this? You'd likely feel the money is wasted and that management is flawed.

For Stock Prices: Today's investors, especially international ones, prioritize a company's profitability, growth potential, and flexibility. Lifetime employment and the seniority system hinder all three. Therefore, when investors analyze a Japanese company and find its personnel system is still very traditional, they often apply a valuation discount.

Conclusion: Times Have Changed, So Must the Rules

In summary, in today's globalized, fast-paced business environment, the negative impact of lifetime employment and the seniority system on company stock prices now far outweighs the positive impact.

An interesting phenomenon is that many major Japanese companies like Toyota, Sony, and Hitachi are now actively reforming their personnel systems, breaking the "iron rice bowl," and introducing more performance-based pay systems.

When the market hears that a traditional Japanese company is announcing deep personnel system reforms, it's often interpreted as positive news, signaling the company is becoming more flexible and efficiency-focused. This can actually stimulate a rise in its stock price.

So, you can think of it this way: This system was the "engine" of Japan's high-growth era, but now it's more like a heavy "anchor," dragging down the company ship. And investors much prefer to see the captain order the "anchor raised," allowing the ship to sail lighter and faster.