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Productivity pivotal to future Japanese prosperity

Productivity pivotal to future Japanese prosperity
  • Archibald Ciganer
  • 31 January 2020
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When you strip economic growth back to its basic parts, it is essentially powered by population growth, particularly a growing labour force, as well as improving productivity.

In applying this equation to Japan, the country's challenging demographic trends are well documented - with its aging and shrinking population representing perhaps the biggest risk to Japan's long‑term growth outlook. However, crucially, Japan is taking action to counteract this challenge - and the magic word is ‘productivity'.

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Efforts to boost productivity are being driven by both the public and private sectors in Japan. On the public side, a focus on broad structural reform is creating a more flexible and dynamic working environment, with increased workplace participation a key objective. Meanwhile, the private sector also understands the need to boost productivity in order to stay globally competitive. Companies are investing in new technology and systems with the aim of encouraging smarter, more efficient work practices.

Structural workplace reform

A range of government initiatives, from new laws and policies to investment in infrastructure to financial incentives for companies, have all been specifically aimed at encouraging a more inclusive, and dynamic, Japanese workforce.

The historically inflexible nature of Japan's labour market goes some way toward explaining why Japanese productivity has slipped behind global peers over recent decades. Tradition and culture meant that jobs were generally considered to be for life, creating limited competition and few opportunities for advancement, and so little incentive to move. This kind of inflexibility has a negative impact on productivity.

While it will take time for the ingrained one‑company ‘salaryman' mentality to unwind, the benefits of free and open movement are already apparent. Businesses are also employing more staff on temporary or contract bases, which makes for a more flexible and efficient pool of labour than was possible in the past.

The ‘Womenomics' agenda

Meanwhile, Prime Minister Shinzo Abe has emphasised Womenomics as a central component of his economic growth agenda. A large percentage of Japanese women leave the workforce after their first child, and many never return to full‑time employment. In response to this problem, the government has announced several initiatives - such as extending paid parental leave, expanding childcare services and increasing the number of women in company management roles to 15% by 2020.

These policies are having in encouraging more women back into the Japanese workforce. The percentage of working‑age women in employment reached a record‑high 72% in September 2019. This compares with a 67% female employment rate in the US, with the gap widening noticeably over the past five years.

However, there is still more to do. Japan's gender pay gap, for example, remains one of the widest in the world. Also, the sharp increase in female employment over the past 10 years has been driven by a rise in the number of women working in part‑time or non‑regular jobs.

Encouraging older workers to remain in the workforce for longer is another government priority to help boost productivity. In 2013, a rise in the mandatory retirement age started to be phased in, rising from 60 to 65 by 2025. The government has also introduced subsidies for companies employing or retaining staff beyond retirement age. 

Private sector investment

Crucially, after decades of underinvestment, the private sector is also beginning to act, with more Japanese companies investing in human and physical capital and pioneering new and innovative productivity‑enhancing solutions. Born of necessity, these companies are pushing the boundaries of what is possible today.

Japanese companies, for example, are investing heavily in automation and artificial intelligence technologies, with the aim of improving or optimising processes. While we are still in the relatively early stages of these disruptive trends, Japanese companies, both large and small, are increasingly utilising intelligent machines and automation technologies. As this trend continues and broadens across industries, the impact on Japanese productivity could be significant. The most significant impact could potentially be felt in Japan's service sector, where productivity lags that of the US by some margin.

One of the hottest developing areas in technology currently is in service‑industry software, like robotic process automation. One company that believes in the disruptive, productivity‑boosting potential of this technology is SoftBank. In late 2018, the Japanese multinational conglomerate invested $300m in US start-up Automation Anywhere.

If Japan is to counteract its long‑term demographic challenges, improving productivity is the key. To this end, efforts to boost workforce participation are bearing fruit. Meanwhile, closing the productivity gap between the manufacturing and service sectors in Japan is also a priority. Importantly, the combination of public and private sector efforts could deliver a meaningful boost to Japanese productivity, counteracting demographic challenges and paving the way for potentially sustainable long‑term growth.

Archibald Ciganer, portfolio manager of the T. Rowe Price Japanese Equity Fund

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