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With a shrinking labour force and a rapidly ageing population, Japan is facing one of the worst demographic complexities. Due to Japan’s labour shortage, the country is constantly struggling to meet the demand for more workers for the past couple of years. A low fertility rate coupled with a declining working-age population has only added to the woes.
Such a workforce imbalance not just impacts Japan’s growth potential but also negatively affects the nation’s economic condition due to high social and healthcare expenditure.
How big is Japan’s labour shortage issue?
According to a survey of over 11,000 firms by Teikoku Databank in 2022, a total 30.4% of businesses said there was a shortage of nonregular workers. The sectors with a high ratio of nonregular workers like eateries and the hospitality sector has a shortage of 77.3% and 62.3%, respectively. The information services sector felt the crunch for full-time employees, the crunch at 71.3%, followed by the recruitment sector at 65%, as well as maintenance and security industries at 64.6%.
Another study by independent think tank Recruit Works Institute stated that Japan could face a shortage of more than 11 million workers by 2040. The study also highlighted that the working age population is expected to rapidly decline from 2027. The worker supply is also likely to shrink by about 12% in 2040 from 2022, even against a steady labour demand. Recruit Works Institute further cautions of severe shortfall in the transportation and construction sectors.
Hiromichi Shirakawa, chief economist at Credit Suisse Securities in Japan, warns that the nation’s chronic labour shortage will grow deeper. At the same time, Nomura Research Institute estimates Japan will face a shortfall of 10.47 million workers, or 15% of the overall workforce, in 2030.
Causes of Japan labour shortage
1) Ageing population: As a result of high life expectancy, 28.7% of the Japanese population are 65 years or older, with a majority being women. The country also houses 80 000 centenarians, the highest in the world. By 2036, people over the age of 65 would comprise one-third of Japan’s population. According to Japan’s Cabinet Office’s Annual Report on the Ageing Society FY2021, the proportions of older persons is projected to rise to 31.2% in 2030, 35.3% in 2040, and 37.7% in 2050.
2) Low Birth rate: According to Japan’s health ministry, the country recorded 799,728 births in 2022, a record low, and the first dip below 800,000. Deaths have surpassed birth rate in Japan for more than a decade. Due to high cost of living, lack of space and reliable childcare support in urban centres, fewer couples are choosing to have kids.
3) Underutilisation of female workforce: Japan is known to underutilise its female workforce. Under-utilisation of highly skilled mothers and women in part-time roles continues to be a problem. According to the Gender Gap report by the World Economic Forum in 2022, Japan was ranked 116 out of 146 countries, one of the lowest among the advanced economies.
4) Exploitative foreign trainee hiring system: Under the Technical Trainee program that began in 1993, people from developing countries were invited to participate in on-the-job training in agriculture and manufacturing sectors for a maximum of five years. However, the interns were exploited as cheap sources of labour. Japan has drawn severe criticism from other countries and experts for such an ill-designed programme.
Initiatives taken by the government of Japan
The Japanese government is aware about the gravity of the issue and has been taking periodic measures to address it.
Prime Minister Fumio Kishida has pledged about 1 tn yen ($7.6 bn) to train workers for more high-skilled jobs in the next five years. Kishida is also aiming to find ways to solve a severe truck driver shortage problem by the end of next year.
In December 2018, Japan took an unprecedented step as the Diet passed a bill to allow more foreign workers under a new residency status policy. It created two new visa categories for industrial sector skilled workers effective April 2019.
Similarly, in 2015, Japan incorporated the Act on Promotion of Women’s Participation and Advancement in the Workplace, to promote female workforce engagement. However, the act hasn’t proven to be too effective.
Recently, top government officials have proposed to scrap the existing Technical Trainee programme and called for a new system focussing on securing and developing human resources.
The Japanese Ministry of Economy, Trade and Industry is involving teenagers to make batteries for electric vehicles to address labour shortage. They plan to train 30,000 battery-workers by 2030.
What is the way ahead?
Japan’s demographic issue is too deeply ingrained in its system, hence visible results would take some time. Experts predict firms to raise the compensation to attract more workers. According to Shirakawa from Credit Suisse, “After mid-2023, we will likely see a steep rise in wages.” He also added that a rise in service industry wages would lead to higher compensation across all industries.
Another natural impact of labour shortage in Japan is a massive digital transformation, which means a heavy involvement of AI and robotics. Economic analyst Kohei Morinaga told Japanese magazine Shukan Gendai, “The shortage of carpenters, for instance, will spur more widespread use of 3D printers,” He added “And the only way to avoid the transport crisis will be to expedite the adoption of automatically driven vehicles and robots equipped with AI.” The country has already launched self-driving delivery robots in some areas, while the Japanese government is considering widespread mechanisation in the agriculture sector to tackle labour shortages.
