What’s so good about Japan’s demography?

First published by The Japan Times.

Pessimists obsess about Japan’s debt, deflation and demographics. The last on the list, they argue, acts as a drag on growth. Labor scarcity, aggravated by rapid technological change, makes it difficult for firms to fill available jobs—especially in new knowledge-based industries. Nicholas Smith, Japan strategist at investment bank CLSA, is an optimist. “I think demographics are the best thing that ever happened to Japan,” he says.

Even as manufactures hum along, honed by decades of competition in foreign markets, Japan’s unprofitable and inefficient (mostly) labor-intensive service-based companies—zombies—remain in business. The zombies are now slowly disappearing. Firms which were previously operating unprofitable business divisions and are now unable to recruit workers on desired terms are telling themselves, “Actually, we can’t afford to do this. We’ve actually got a labor shortage,” reports Smith.

The bursting of Japan’s 1980s bubble economy turned many profit-making companies into zombies that drew nourishment from lenders unwilling to recognize their souring loans. Rather than lay off workers, indebted big firms transferred employees they could not fire into purpose-built new business divisions. Nippon Steel, for example, started a business producing orchids. “Big burly steelmakers were taking care of their little orchids. It was just pitiful,” remarks Smith.

Now a zombie cull, hastened by Japan’s shrinking workforce, allows companies to close unprofitable divisions that were only opened, post-bubble, to accommodate Japan’s strict labor laws. Workers aged 15-64 fell about 7 percent to 76 million between 2009 and 2017. The working-age population is projected to further decline to 45 million by 2065. Unemployment, at 2.47 percent, is the second lowest within the OECD, a group of 35 mostly wealthy nations. The job-to-applicant ratio this April was a sizzling seasonally adjusted 1.59 times. “Demographics, in that way, are a really good thing,” he says.

Government tax reform further spurs the cull. Prime Minister Shinzo Abe ended debt moratorium for small and mid-size companies shortly after starting his second stint as prime minister. He also introduced corporate tax policies based on firm size in which companies pay for the right to operate, regardless of profitability.

While very low interest rates under Abe’s easy money policies prevent more zombies from dying, the number of non-manufacturing companies in Japan fell 16 percent over the 11 year period ended last March. As a group, they are far less profitable than U.S. service sector companies. Reducing their numbers further would encourage new and more efficient firms to enter the market, unencumbered by competition from inefficient ones. “The point is that Japan doesn’t need more companies, it needs more profitable ones,” says Smith.

Most people believe economic and population growth go hand in hand, because an economy can only grow two ways. Either the output of each worker rises or the number of people working increases. However, Smith notes throughout history that incomes drop when working populations grow faster than jobs. For example, China introduced a one-child policy in 1979 to prevent a rising population from destabilizing its economy. He suggests a similar underlying dynamic is driving populist movements in the United States, United Kingdom and Europe. “The growth of the U.S. population is not a strength. It’s a weakness,” he concludes.

While Trump blames globalization for the loss of U.S. jobs, the greater threat comes from jobs automation. Computers and robots are replacing humans in ever-lower added-value positions. An Oxford University study published in 2013 reports that 47 percent of U.S. jobs are susceptible to technological redundancy. “When half of jobs are in danger of being replaced by technology, what’s so good about having a fast growing population?” Smith asks.

Could Japan be well positioned to benefit from emergent technologies? The nation’s aging labor force is shrinking, educated and dedicated — attributes that match what labor-saving producing firms need in tomorrow’s knowledge-based economy.

Elsewhere, firms train workers. Once skilled, they leave to join other companies. Here, it is unusual for anyone past the age of 35 to leave their job. An older working population also has advantages. “Workers gain knowledge over time. They do not get it with youth,” thinks Smith, adding, “The world doesn’t need much brawn anymore.”

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