Japanese executives spent the better part of the past decade frantically trying to deal with the consequences of prolonged recession. That meant taking a machete to corporate payrolls, either by forcing older workers into early retirement or by not hiring. Now, after sharply downsizing the workforce, Japan finds it doesn't have enough workers. Economic growth and corporate profits have come roaring back faster than most predicted, driving the jobless rate down to 4.3%, the lowest level since 1998. Job vacancies in high-end manufacturing and information-technology industries are getting tough to fill. And the problem will worsen as Japan's population begins to contract in 2007. "Baby boomers will start leaving the workforce in the next few years, and manufacturers need those skilled workers," says Satoru Ogasawara, an economist with Credit Suisse First Boston () in Tokyo.
Labor conditions are the tightest since 1992, according to a quarterly government survey of 3,000 companies released in September -- a situation aggravated by the fact that the Baby Boom generation is nearing the traditional retirement age of 60. Companies are taking action. In the auto industry, retaining experienced engineers, highly skilled factory hands, and design executives is a big priority. "To have these people retire all at once means that companies will not have enough time to transfer the knowhow to the younger generation," says Honda Motor Co. () President Takeo Fukui. So he is hiring the best of his retirees as consult-ants and mentors for younger engineers.
Even mighty Toyota Motor Corp. (), which still has the best college graduates lining up for jobs, is starting to prepare for a declining workforce in the years ahead. It now offers one-year contracts to top employees who turn 60 to keep them on the job. Some businesses are relying on robots to fill empty job slots. Digital camera and copier king Canon Inc. () hopes to have assembly lines at some of its domestic plants almost entirely automated by 2010. One reason is that younger workers want more glamorous jobs in finance and IT. "People have a negative image of [factory] work as tough and hard," says Canon spokesman Bunji Yano.
With its hand forced by current shortages and the looming wave of retirees, Japan is also rethinking two other issues: ultratight immigration policies and underutilization of the female labor pool. On immigration, a single set of statistics underscores Japan's skewed priorities. The government is still considering a proposal to grant 100 visas a year to Filipino nurses and health-care workers, despite urgent need at hospitals and nursing homes. At the same time it handed out 98,000 "entertainment" visas last year to Asian women, many of them sex workers. Foreign students in Japan, including much needed engineers and IT specialists, must leave the country within 180 days of graduation if they haven't been sponsored for a job by a Japanese company, a laborious task. The Japan External Trade Organization has been pressuring the government to lighten immigration rules, but with limited success.
Women are perhaps Japan's biggest untapped labor asset. Even highly educated women tend to drop out of the workforce in their mid-30s to have children, and they rarely return full-time. In Japan, 55% of all women work, vs. 62% in the U.S. Goldman, Sachs & Co. () economist Kathy Matsui figures that if Japan could raise the percentage of working women to U.S. levels, it would put an additional 2.4 million people into the workforce. To make it easier to integrate women into employment ranks, the government is expanding day-care facilities to handle 2.15 million children by 2009, vs. 1.97 million in 2004.
Change often comes slowly in culturally insular Japan. But for the economy to keep growing, strong action to address the labor shortage is crucial. If demographic trends continue, Japan's population will peak at 127 million in 2006 and then steadily decline to about 100 million by 2050. The nation's future economic prosperity is on the line.
By Brian Bremner, with Hiroko Tashiro and Ian Rowley, in Tokyo