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Japan's labour shortage

The number of job postings for every job seeker in Japan was 1.6 in FY2018 prior to Covid, meaning there were 60% more job postings than job seekers. For the economy as a whole, this ratio eased to 1.18 in FY20 and 1.13 in FY21, but with the continued decline in the population and reopening post-Covid, we expect the labour shortage to worsen to FY18 levels and beyond. Using the last comprehensive population forecast from 2023, the population is expected to decline by around 0.5% every year until 2030. These forecasts do not account for the lower birth rates during Covid (1.30 and 1.26 children per woman in 2021 and 2022), and assume a higher birth rate of 1.36, so the actual population decline is likely to be sharper. Increasing workforce participation by women and foreign workers could ease the labour shortage but will take time, while inbound tourism has been quick to recover.

Why look at the labour shortage now?

The labour shortage in Japan is not news, but three factors make this topic important to revisit now.

1. Policymakers are calling for wage increases, and expanding the corporate tax credit for wage increases, but real wages have continued to decline for 18 months. We think this puts additional pressure on government to strengthen policy support in this area.
2. An even lower birth rate than expected during Covid, the post-Covid recovery and increase in labour mobility have made the labour shortage more salient, and.
3. new disclosure requirements on Human Capital since March 2023 have increased the visibility of human capital strategies and related data.

The benefits of a “decent” work environment?

Mitigating the impact of the labour shortage at a company level will depend on multiple factors. One of the most important, in our view, is the company’s level of success in providing “decent work environments.” There is no specific definition, but we think this includes successful implementation of work style reforms that started in 2016 (such as limits to overtime work, requirements to take five days of annual leave, and raising overtime pay) and more recent efforts such as reskilling and diversity & inclusion.

We argue that “decent work environments” reduce excess pressure on workers, create a more attractive workplace (lower hiring costs), increase output quality (higher revenue), and make firms better positioned to weather the deepening labour shortage. We note the Death from Overwork report from the Japanese Ministry of Health, Labour and Welfare in Oct 2023 concurs on these conclusions and is further evidence of the rising prominence of this issue.

Testing and quantifying the impact?

In this report we look in more detail at the issue of work environments in Japan for women. A "decent work environment" for many women would likely have transparent career paths, female role models, and proper policies in place for flexible work arrangements and harassment. We examined how gender diversity at the board level affects a firm's ability to increase the percentage of women among new hires. Our difference in differences analysis of 82 companies over a 10-year period found that firms with a 10 percentage point increase in board gender diversity also saw an increase in the percentage of women among new hires in the following years.

Companies that did not see a significant increase in women on the board saw a slight decline in the percentage of women among new hires on average. Of course, gender diversity at the board level is just one signal of better future workplace policies. In the longer term, companies have the potential to improve their corporate culture, reform HR policies, and reskill their workforce to meet their businesses' needs and no longer be as constrained by the labour shortage. We expect the Financial Services Agency's Human Capital disclosure requirements to bring these efforts to the fore, giving investors an opportunity to distinguish better between future winners and losers.