Japan is ill prepared for coming labour shock
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Japan is ill prepared for coming labour shock

Japanese walking between pillars

Japanese government statistics, showing a ratio of 1.55 jobs (including regular and non-regular) available for every applicant, suggest the tightest conditions since the mid-1970s © Bloomberg

By Leo Lewis

Japan, you would think, must have realised by now that its labour shortage is acute. Whether it is unfinished construction in the suburbs, cafés giving up on lunchtime sittings, septuagenarians bolstering the workforce or difficulties hiring performers for Disneyland shows, the evidence is everywhere.

Government statistics, showing a ratio of 1.55 jobs (including regular and non-regular) available for every applicant, suggest the tightest conditions since the mid-1970s. The number of foreign workers in Japan surpassed one million for the first time in 2016 as restaurants, retailers and hotels quietly break with tradition and lean on outsiders for numbers.

Tokyo Shoko Research reports that the number of Japanese bankruptcies triggered by a shortage of staff doubled between 2016 and last year.

Every dot of data implies fundamental change in the way the economy operates, with optimists seeing inexorable momentum towards wage increases. A harsher reading suggests the demographic shock will mount the biggest management challenge to Japanese company leadership since the collapse of the 1980s bubble. A challenge, say some analysts, that many look primed to fail.

On the face of it, corporate Japan has indeed begun to contort itself to a new reality — unknown for more than a generation — where it simply cannot get the people it needs. Labour shortage has begun to make regular appearances as the explanation for apparently radical strategic decisions. The brewer Asahi plans to raise beer prices for the first time in a decade because of rising distribution costs; the convenience store chain Lawson will soon leave some of its Tokyo outlets unmanned in the early hours.

Even more striking, since the middle of last year, has been the steady flow of large companies — from airlines to financial services groups — saying they will convert thousands of part-time workers into regular workers. It is an effort, set to become the norm, where companies battle to attract and retain staff in an era where labour — at least in theory — has something resembling a whip hand. Many more companies will effectively be obliged to do the same from April when a revision to labour laws gives temporary workers the right to seek permanent contracts if they have served more than five years.

For many Japanese managements, the process will involve turning decades of rhetoric into action. When asked to explain their low prioritisation of shareholders, many have fallen back on the claim that they place a high value on all stakeholders, especially staff. Their survival may now depend on that being true.

But beneath the surface, across the boardrooms of Japan Inc, say analysts, academics and even a few chief executives speaking privately, there is profound unpreparedness for the slow motion blow about to fall. In a report written last year, Bank of America Merrill Lynch warned that what appeared to be Japan’s increasing “flexibility” towards foreign workers had offered an important safety valve for supply side pressures, but the current strategy of relying on foreign employment through the side door “will eventually hit a wall”. The increasing scarcity of domestic labour supply prepared to slog hours of overtime and push only limply for higher wages is a hard obligation on companies to find new business models.

The most frequent retort to this has been that Japanese managements must invest more in IT, in raising productivity and in the kind of capital expenditure that will ultimately automate and replace certain jobs forever. But this underestimates the inability of many managements to properly contemplate what that change means, let alone steer a successful course through it.

Japan’s many traditional companies, says Macquarie’s chief Japan strategist, Peter Eadon-Clarke, have no experience doing this and the general resistance to changing intra-company structures is widespread. Weak per-head IT investment in the service sector — an expression of that traditional approach and a failure to spot the problem — has resulted in low-to-zero productivity growth.

“Negative overall labour force growth has been obscured for the last four years by higher participation rates,” says Mr Eadon-Clarke. “Japan’s service sector has to invest in IT-driven productivity, embrace new organisational structures. Without experience, many traditional companies will fail, losing market share to those few companies that execute well.”

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