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Japan's labor shortage imperils economic growth

A declining workforce is already crimping the construction and service industries

TOKYO -- Construction companies in Japan are scrambling to hire site managers as the industry is gearing up for a surge in building projects ahead of the 2020 Tokyo Olympics. 

A website operated by C4, a specialized job placement service for construction managers, has attracted over 2,000 employment offers for work for the next several months from major construction companies alone. 

Since around January, large general contractors have been transferring their permanent full-time employees from stints in Japan's northeastern areas affected by the March 11, 2011 earthquake and tsunami to construction sites in Greater Tokyo, according to C4. 

This trend has led to an increase in the number of construction sites in disaster-hit areas that are supervised by managers dispatched from temp agencies.

Consequently, the wages of building managers working in these areas have shot up. Their annual income is now 1 million yen to 2 million yen ($9,000 to $18,000) higher than what their counterparts in the Tokyo area earn. But even the higher pay is not resolving the shortage of construction managers in the disaster-hit area. 

"We are finding it difficult to take orders for building condominiums other than those in central Tokyo within the Yamanote Line," said an executive at a second-tier construction company, referring to the prized area within the loop train line in the center of the capital.

With both labor costs and material prices rising, construction companies are becoming more choosy in taking orders, focusing on highly profitable projects.

Some real estate developers are even deferring the placement of construction orders until after 2020.

"We are refraining from starting new projects in central Tokyo," said a senior executive at a major real estate developer.

Olympic drag

The Tokyo Olympics will choke private-sector investment instead of stoking economic growth, predicts Ryutaro Kono, chief Japan economist at BNP Paribas, in a report he released in March.

Kono said an acute labor shortage will make it hard for businesses to invest in plants and facilities.

Even if the unemployment rate, which has just fallen below 3%, declines further to around 2% and people who are able to work but are not currently looking for jobs return to the workforce, the maximum number of workers who will become available in the coming years will be 990,000, which is half the number of jobs expected to be created due to the economic effects of the Olympics, according to Kono's projection.

Kono warns that if work and jobs related to the sporting event are given priority, the operations and investments of other industries and businesses will be seriously hampered -- in effect, clipping economic growth. 

Stuck in a bind, there is no way for Japan to prevent the looming labor crunch other than opening its doors to unskilled foreign workers. 

Japan's working population, the number of people aged 15-64, has shrunk by 10 million since it peaked two decades ago, sliding to 77.28 million. It will fall by another 3 million by the time the capital hosts the Summer Games, according to an estimate by the National Institute of Population and Social Security Research.

Deflation nation

In the retail and restaurants industries, a growing number of companies are downsizing their operations and services in response to a manpower shortage and the government's policy campaign for reform of the nation's work culture known for notoriously long hours on the job

The Royal Host restaurant chain, operated by Royal Holdings, ceased 24-hour operations at its outlets altogether at the end of January.

"We have to expect a fall in revenue," said Royal Holdings President Yasuhiro Kurosu.

And the situation will worsen. 

"Japanese companies have allowed the structure causing oversupply to remain unchanged despite the certainty of a long-term contraction of the population," said Yasunari Ueno of Mizuho Securities.

Ueno argues that companies in the service sector should adjust to the demographic decline by closing unprofitable stores and ending unpopular services.

Japanese companies' efforts to adapt to the shortage, however, will not prevent the shrinking population from eroding the economy's growth potential. 

Japan's potential growth rate will decline to 0.4% during the 2016-2020 period, Mitsubishi Research Institute predicts. If nothing is done, the rate will sink further to 0.1% during the 2026-2030 period, with the labor shortage pushing it down by 0.5 percentage point, according to an estimate by the institute.

In the nursing care industry, which is facing a chronic shortage of workers, there is a growing trend toward hiring foreign nationals.

Medical Care Service, which operates group homes for the elderly, has employed about 50 Filipinos and Brazilians who have permanent residence rights in Japan.

Japan's population decline is increasingly affecting the country's economy. The nation urgently needs to develop a coherent strategy to tackle the challenge. 


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