Neoliberal reform for greater competitiveness: labour market deregulation in Japan and Italy Hiroaki Richard Watanabe ABSTRACT According to ‘varieties of capitalism’ (VoC) perspective, coordinated market econo- mies (CMEs) attain comparative advantages by coordinating industrial relations and maintaining regulation to a greater extent than liberal market economies and mixed market economies (MMEs). Yet, Japan, a typical CME in the VoC literature, intro- duced greater labour market flexibility than Italy, an MME. This article analyses why this is the case and claims that the institutional complementarities that had functioned well previously in Japan have been unraveling since the early 1990s and neoliberal deregulation of the labour market ensued. This comparative study of Japan and Italy shows that economic stagnation and the globalisation of finance and production exerted neoliberal pressures on the state and employers to increase competitiveness by introducing market-oriented policies and business strategies. However, the power resources of labour unions and the partisan composition of the government affected the characteristics of neoliberal changes in labour market policy. 1 INTRODUCTION The seminal work of ‘varieties of capitalism’ (VoC) divides industrialised countries into liberal market economies (LMEs), such as the United States and Britain, and coordinated market economies (CMEs), such as Germany and Japan, based on their ‘institutional complementarities’, business ‘coordination’ and ‘comparative advan- tages’ (Hall and Soskice, 2001). Hall and Soskice and their VoC sympathisers claim that LMEs and CMEs possess distinctive coordination mechanisms as a result of different institutional complementarities. However, VoC was criticised in several respects, including its simplistic dichotomy between LMEs and CMEs (Martin, 2005; Pontusson, 2005). In response, VoC scholars introduced another category of mixed market economies (MMEs) for such countries as France, Italy and South Korea, which are neither as market-oriented as LMEs nor are as strategically coordinated as CMEs, but rely on state intervention for coordination (Hancké et al., 2007). Accord- ing to VoC, CMEs rely on non-market coordination mechanisms to a greater extent than LMEs and MMEs for achieving comparative advantage. In the case of labour ❒ Hiroaki Richard Watanabe is Lecturer in the School of East Asian Studies, University of Sheffield. Correspondence should be addressed to Hiroaki Richard Watanabe, School of East Asian Studies, Uni- versity of Sheffield, Shearwood Road, Sheffield S10 2TD; email: h.watanabe@sheffield.ac.uk Industrial Relations Journal 46:1, 54–76 ISSN 0019-8692 © 2015 John Wiley & Sons Ltd