The good news for Japan is that the pathway is clear and achievable. According to the International Labour Organization, Japan’s labor participation rate is already amongst the highest of the G20 countries so improving the nation’s labor productivity, which is amongst the lowest of the OECD countries is essential for sustaining the economy, especially as the workforce continues to shrink. The labor shortage is accelerating the reallocation of labor to more productive jobs that pay higher wages, promoting the virtuous cycle of wage-led demand growth.
Wages are rising in Japan because the labor force is shrinking, and employers need to raise wages to attract and retain qualified workers. Workers are now more inclined to search for higher-paying jobs as the depreciating yen is pushing up the cost of living, which is a shift from the deflationary days when workers valued job stability more. Nikkei Shimbun reported that over 40% of employees who entered the job market in 2023 would consider searching for better job opportunities.
Labor productivity will rise as qualified workers migrate to more profitable companies that generate higher profits per worker. Those profitable companies tend to spend more on technology, including artificial intelligence, which will further raise the productivity of their workers. Japan lags behind other advanced economies in digital technology utilization, so simply playing catchup will result in productivity gains. The surviving businesses will eventually be able to raise prices as less productive businesses shrink or exit.
While exporters’ gross profits grew due to the depreciating yen, the profit margins of most businesses shrunk as import prices of critical inputs such as energy, food, and raw materials increased by 64% since 2020, while consumer prices only increased by 6%. A survey conducted by the Teikoku Databank in February 2024 showed that businesses could only pass on about 40% of the cost increases to their customers.