TOKYO—Japan’s Parliament tightened limits on overtime hours, responding to concerns about karoshi, or death by overwork, and seeking to improve productivity in a country where long hours are often more a custom than business necessity.

The legislation, a priority of Prime Minister Shinzo Abe, won final approval Friday in Parliament. It limits overtime work to less than 100 hours a month and less than 720 hours a year, and it sets penalties for companies that violate the limits.

Until...