Japan Labor Shortage Poses Challenges

Japan needs to resolve its severe labor shortage, last seen roughly a quarter-century ago, to achieve sustainable economic growth, a government report shows.

The economy looks to be in the third-longest expansion phase in the postwar era, but consumption remains weak as wage growth is tepid despite tight labor market conditions, according to the white paper on the economy and finances for fiscal 2017, released on Friday, Kyodo reported.

As productivity in Japan still remains lower than in other major developed economies, it should promote labor reform—cutting long work hours and eliminating unjustifiable discrimination between regular and non-regular workers—and greater use of advanced technology such as artificial intelligence.

"It's one of the major limitations that the Japanese economy needs to overcome to realize sustainable growth," the white paper said, referring to the country's labor shortage. "At the same time, it could also create a big opportunity to boost productivity and break with deflation."

Since taking office in late 2012, Prime Minister Shinzo Abe has been seeking to pull the Japanese economy out of chronic deflation under his "Abenomics" policy mix that includes bold monetary easing by the Bank of Japan.

But beating deflation remains an unattainable goal four years later as the BoJ has pushed back the timing for hitting its 2% inflation target for the sixth time.

The paper, presented to the cabinet, acknowledges that more women and elderly people—who tend to prefer working relatively short hours—have joined the workforce even though overall labor is still in short supply.

The unemployment rate fell below the 3% mark in February for the first time since 1994, while job availability has been at the best level in over four decades in Japan as companies hunt for workers.

However, such improvements have yet to translate into strong wage growth for workers, promoting the government to describe it as a "new phenomenon". The white paper stated that companies, aware of future economic and other risks, appear to be dragging their feet.

Tepid income growth has been blamed for sluggish private consumption, which accounts for nearly 60% of the Japanese economy.

In analyzing consumer trends, the white paper refers to a growing number of "minimalists" among young people, or those who hope to keep their material possessions at a minimum, and increased social security payments by people in their 40s and 50s.

The release of the annual report comes as Abe, who has been calling on companies to increase pay for workers, is now spearheading labor reform and views stepped-up investment in human resource development as the key to rev up the economy.