Leveraging The Japanese Labor Market To Bring Your Company Success in 2023

Despite weak economic growth over the past 30 years, Japan has managed to maintain its status as the third-largest economy after the United States and China - and just ahead of Germany. Access to one of the world's most lucrative markets makes the Far East nation attractive to foreign affiliated companies (gaishikei). At the same time, Japan is considered a challenging market. One of the reasons is the labor market, where multilingual professionals are extremely scarce and in high demand. In order for us to understand how to leverage the market, we first need to understand its dynamics.

Shrinking workforce

Japan is home to around 125 million people, 69.3 million of whom are of working age. However, Japan has one of the world's lowest birth rates, with an average of 1.3 children born per woman. At the same time, Japan is an "over-aging" society: according to the National Institute of Population and Social Security Research, the proportion of the population over age 65 rose to a record 29.1 percent of the population in 2021. By 2025, when all 6.5 million "baby boomers" are 75 or older, the proportion is already expected to top 30 percent. By 2040, one in three people in Japan will be over 65 (35.3 percent), according to the calculations.

Looking back, the working-age population peaked in the mid-1990s at 87 million, but has since fallen to the level of the mid-1970s - with negative consequences for economic growth.

To counteract this, Japan would either have to increase productivity per worker, for example through digital transformation, or increase the number of workers. Digital transformation is one area where Japan has the highest upside potential (a nice way of saying "they are far behind"). According to a Deloitte survey from 2021, 98% of companies are either planning or already executing their digital transformation strategy. However, only about 20% of companies say they have the right people who can help them execute their strategy.

With regards to increasing the workforce, the government initially focused on encouraging more women and older professionals to enter the labor market but it also implemented various programs to recruit skilled workers from abroad for certain fields. It is worth mentioning that Japan is seen as a very homogenous society with a strong sense of who is part of the group and who is not. That means, it is a lot more challenging for foreign professionals to fit in than in other countries such as the United States or Europe.

Increase in diversity

Since post-World War 2, the labor market has been dominated by traditional gender roles with men (or salarymen) as the main income earners who pursue careers. Women were and still are more often confined to administrative jobs with little opportunity for career advancement. Even in 2023, women are implicitly expected to leave the workforce when they marry or, at the latest, when they have children. Re-entry is usually far below qualification.

However, with the aging and shrinking population comes an increase in diversity as the government tries to counteract by bringing more women, senior professionals and foreign professionals into the workforce.

With regards to women, the government of former Prime Minister Shinzo Abe during his second term (2012-2020) launched his so-called "Womenomics" approach to better integrate the often well-educated but underemployed women into the labor market. At the same time, childcare services were expanded, among other things. As a result, the employment rate for women has risen from 48.2% in 2012 to 53.2% in 2021.

In addition, the government is trying to encourage seniors to delay their retirement and work longer. This can be done by keeping them employed in the companies where they already work, or by placing them in so-called silver jinzai centers. The aim is not only to combat the decline in the labor force, but also to reduce the burden on the pension system. On the bright side, it keeps seniors engaged, part of a group - a very important aspect in a collectivistic society such as Japan - and prevents the decline in labor. On the other hand, oftentimes people have to work rather mundane jobs that can easily be automated, don't serve much of a purpose to begin with and are simply not making full use of the experience and skills of the senior workforce.

Despite mobilizing women and older skilled workers, Japan continues to face labor shortages in certain sectors, such as agriculture and nursing and care for the elderly. There is also a shortage of highly skilled workers, especially in IT where Japan is facing a shortage of about 300,000 IT professionals per year.

To support this, the Japanese government has provided more support for foreign professionals by establishing special support and counseling centers and translation services. Japan's foreign trade organization, Jetro, also provides support for foreign professionals as well as companies considering employing foreign workers.

That increase in women, senior and foreign professionals in the workforce means there is an increase in diversity. It's not only men in their 20s to late 50s anymore and companies need to find ways to provide more inclusive environments and make the most out of the different perspectives these groups bring to the table.

Shortage of multilingual professionals

For people working at gaishikei companies in Japan or more internationally oriented Japanese companies, one other challenge to face is the lack of English skills and functional expertise.

Although English is part of the regular curriculum of the Japanese school system, active English proficiency is limited. The TOEIC test is the most common method of assessing an individuals' English proficiency using a standardized multiple-choice test. The average TOEIC score for Japan is only 512 out of 990 placing Japan 41 out of 49 countries. By the way, Japanese people are generally very good at practicing to pass tests but that does not mean they are familiar with the material. A lot of the test preparation is about how to score high points in the test, not about how to learn the underlying subject.

One of the key characteristics of the Japanese labor market is that they take a generalist approach as opposed to a specialist approach. When new graduates receive an offer from a company, it is not determined which role, which department or even which location in the case of bigger companies. The details will be decided closer to their joining date and after their joining they will be moved through various departments on a regular basis. That means, they have a very good understanding of how the company works and have a strong internal network, however, they do lack functional expertise and depth.

It also appears that the more technically specialized a person is, the lower their English proficiency. The more time someone spends on specialization, the less time is available for language study. Finding a fully bilingual sales engineer who specializes in a particular technology is therefore extremely difficult in the marketplace - and the available candidates can be counted on two hands. The same can be said for JCPA (Japanese certified public accountants). Finding a fully bilingual JCPA holder with excellent communication skills is an incredibly rare find.

To get a feel for how big or small the talent pool of bilingual specialists is in Japan, we can look at how many people are working at foreign affiliated companies. While there are multilingual specialists in Japanese companies as well as non-multilingual specialists in foreign affiliated companies, just looking at the number of employees in foreign companies gives an indication of how small the potential talent pool of multilingual specialists is.

Out of a total of 68.7 million employees, only 510,000 people (0.74%) work in about 2,800 foreign companies. Most of these companies are located in the Tokyo metropolitan area, according to 2020 data from the Ministry of Health, Labor and Welfare.

Advantages of foreign companies as employers

As the problem of labor shortages has become increasingly intense in recent years, companies have become more flexible and open. In many places, for example, there are now more women in management positions. There are more older workers, as well as those from abroad. This might seem completely normal for companies in North America or Europe but for Japan that is still not as common as one might think. There has also been a change in thinking among the employees themselves: Whereas employment with one company until retirement used to be considered the ultimate goal, more and more employees are recognizing the advantages of strategic changes in terms of opportunities for advancement and higher salaries. Young professionals in particular are proactively seeking career opportunities.

This is where gaishikei companies can play to their strengths. One advantage foreign companies have is that they are far ahead of Japanese companies in human resource management. This is especially true of their awareness of and progress in diversity and inclusion (and better compensation). Therefore, to succeed in the battle for skilled workers, foreign companies must be conscious of their "employer branding" and offer options that accommodate workers. It is not "why should we hire you?" but "let me show you what we offer and why you should join us".

Not all companies have deep pockets and attract people simply by offering financial incentives. However, it is advisable to offer flexible working time models as well as the possibility to work from home. While working at the office from 9 am to 6 pm five days a week used to be the norm, this has definitely changed since the pandemic. Certainly, many people still go into the office or even still work 9 am to 6 pm despite flex time but the key point here is that it is their choice to do so.

Lastly, companies should also support their staff in getting used to the new diversity in the company, i.e. being able to work well with colleagues from diverse backgrounds. Just tossing a foreign professional or one woman into an otherwise completely homogenous group rarely goes well and all stakeholders need to be better equipped and prepared for changes. This can be in the form of one on one coaching for the managers or group training and seminars for staff members.

The labor market in Japan is not unique, but it is very different from other markets just like every market has its unique aspects. Companies that have a good understanding of the dynamics of the labor market can use this to their advantage and gain a competitive edge through strategic HR management.