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Japan may ban manufacturers from hiring temporary workers, Health and Labor Minister Akira Nagatsuma said, as Prime Minister Yukio Hatoyama seeks to fulfill a campaign pledge to shift more employment to full time.

The government is preparing legislation “that will stop manufacturing firms from employing temps and encourage them to hire full-timers,” Nagatsuma said yesterday on a business program broadcast by public network NHK.

Japanese companies have cut jobs to remain profitable in an economy struggling with deflation and as a strengthening currency erodes export earnings. Unemployment rose to a postwar high 5.7 percent in July, while the yen has gained 2.8 percent against the dollar in the past three months.

“Manufacturers have drastically slashed labor costs, but those expenditures are still dragging down profits,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “We’ve seen some improvement in the jobless rate the past three months, but it’s too early to expect any shift in the trend.”

Companies started replacing retirees with temporary workers after deregulation in 2004, creating a two-tiered labor market in which mostly younger workers enjoy less security and fewer benefits. The jobless rate, which unexpectedly fell to 5.1 percent in October, has stayed at 5 percent or more since April.

Hatoyama Unconvinced

That improvement in the labor market hasn’t convinced Hatoyama that jobs are secure. Deputy Prime Minister Naoto Kan said last month the government will ease conditions under which employers can receive subsidies to keep people on their payrolls. The government has also pledged to create 100,000 jobs by March.

Boosting employment is a priority of the stimulus package Hatoyama is to unveil this week to protect the economy’s rebound from its worst post war recession. Third-quarter profits at manufacturers including auto and electronics makers decreased 69.3 percent from a year earlier while sales fell 21.2 percent, a Finance Ministry survey showed last week.

Younger people aren’t reaping the benefits of the improved labor market. The proportion of college students with job offers tumbled 7.4 percentage points from a year earlier to 62.4 percent, an Education Ministry report showed last month, the steepest drop since the survey started in 1996.

The ruling Democratic Party, which took power in September, criticized the former government’s policy of letting companies hire temporary workers to adjust payroll size in line with production, and during the election campaign pledged to ban it.

Nagatsuma said yesterday a bill to end the practice may be submitted to a regular parliament session that starts in January.

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