When Prime Minister Shinzo Abe vowed at the World Economic Forum in Davos to take a "drill bit" to the "solid rock" of vested interests in reforming Japan's economy, executives at companies such as General Electric and IBM paid attention.
In the months that followed the January appearance at Davos, blue-ribbon panels sought out GE and IBM for advice on how to give companies more flexibility in hiring and pay.
But the labour market deregulation to be announced on Tuesday, as part of an economic package aimed at boosting investment in Japan and lifting growth, stops far short of the sweeping change foreign business leaders had sought.
That marks a setback at a time when investor optimism about the pace of "Abenomics" reforms has ebbed. The Nikkei 225 stock index -- a closely watched indicator for Abe's closest advisors which rose more then 50% in 2013 as investors cheered the first blast of Abenomics -- is down 5% this year.
The story of how Abe's promised deregulation faltered on job market reforms when confronted by resistance from Japan's bureaucracy and political controversy illustrates the challenge for Abe's "Third Arrow", a growth strategy intended to boost private investment and compliment earlier programs of fiscal stimulus and monetary expansion by the Bank of Japan.
Although Abe's reform panel sought ideas from companies such as Ikea and Danone in recent months, the crucial decisions were made behind closed doors by about half a dozen Tokyo bureaucrats over a few days in June, according to interviews with 11 people who participated in the process.
The result: a pledge to end compulsory overtime allowance for workers earning more than the equivalent of $100,000 U.S. per year, a change affecting less than 4% of Japan's workers.
The more contentious question of how and whether to make it easier for companies to fire workers was left unanswered with the government pledging to find a "place for debate" on the issue next year. Both rules on overtime and firing will be further discussed in a council at Japan's Ministry of Health, Labour and Welfare, where unions have a strong voice and have made it clear they will fight to prevent change.
