Photograph by Peter Jaehnel — picture-alliance/dpa/AP
By Bob Moritz
June 4, 2015

About 25 years ago, I worked in Japan for three years. Those were heady days for the country’s companies and its economy. Economic growth, investment – those were the hallmarks of Japan in the 1980s. And then the bubble burst and the “Lost Decade” entered. As I return to Japan this month, I find Japan in a tepid recovery from different challenges. As I was then, I am optimistic about Japan’s future – its public and private sectors have identified the key issues and implemented policies to attack them. Time will tell, however, how well these policies succeed.

It is important to note that Japan is confronting its economic troubles at a time of uncertainty on other fronts. For example, it is facing rising geopolitical threats from China’s increasing muscle-flexing in the region. Prime Minister Shinzo Abe is reacting to that threat in multiple ways, reaching out more internationally and continuing work on a trade deal, the Trans-Pacific Partnership, that would include the United States and 11 other Asian-Pacific nations. And, just last week, the United States and Japan announced deepened military ties around cybersecurity and ballistic missile defense systems – increasing Japan’s regional responsibilities.

Economically, recent data indicates that the road to recovery will be longer and more modest than hoped. Last week, Japanese data showed decreased April consumer spending compared to a year earlier, and an annual inflation rate near zero. To be sure, we have seen fiscal stimulus measures at the same time that the Bank of Japan has been buying government bonds and other assets as part of a massive effort of quantitative easing. But, while these efforts have boosted the Nikkei to a 15-year high and increased the competitiveness of Japanese exports, they’ve not sufficed to put the economy on a solid, self-sustained footing.

For example, while growth is expected to increase in 2016 before the next consumption tax uptick, it’s also expected to settle into a rate of less than 1% for the foreseeable future. Moreover, while Japan has already engaged in substantial quantitative easing, the central bank will likely need to expand its stimulus program further in 2015 to combat deflation. Indeed, on April 30, the Bank of Japan announced that it’s unlikely to achieve its 2% inflation target until April to September 2016. In addition, though Prime Minister Abe has made wage increases a significant part of his economic plan, the data just released on household spending shows more work clearly lies ahead on this front.

Stepping back, there are several root causes of this situation that Prime Minister Abe and the central bank are addressing, but I want to flag just one. Japan faces a serious, structural obstacle to long-term economic health because of its increasing talent gap. I’ve written many times before about the talent gap that companies in the developed world are confronting, but the situation is perhaps most evident in Japan. Understanding why and confronting those reasons head-on is crucial to robust growth for this important U.S. ally.

First, there is the steady decline of Japan’s total population – greater than 25% is over age 65. Thus, the world’s most indebted government also has the highest percentage of its citizens over working age. Indeed, the working-age population (those between 15 and 64) is expected to fall by 40% by 2050, according to the National Institute of Population and Social Security Research in Japan. Without a substantial shift in policy, scarcity will intensify and the global war for talent will likely put Japanese companies at a disadvantage relative to other global corporations.

Of course, Japanese CEOs know this all too well. In PwC’s 18th Annual Global CEO Survey published earlier this year, 92% of Japanese CEOs were concerned about the availability of key skills (compared with 73% of global CEOs and 78% of U.S. CEOs). Yet, many Japanese companies are playing catch-up with their global peers in core strategic efforts to attract needed talent. For example, only 53% of Japan’s CEOs have corporate strategies to promote talent diversity and inclusiveness compared with 64% of global CEOs and 74% of U.S. CEOs.

That said, the nation will likely need a substantial shift in policy if it will overcome its talent gap, and there are three potential options. First, Japan could incentivize natural population growth, but it seems unlikely that government policies could reverse its declining birth rates. Second, Japan could lower immigration barriers and do what many other countries around the world are doing – searching for talent across the globe and bringing it home. Given entrenched attitudes to foreign labor, however, this too seems unlikely.

So, what then do many observers and Japan see as its best path to build its skilled labor force? Closing the workforce gender gap. In PwC’s latest Women in Work Index, which captures various measures reflecting female economic empowerment, Japan ranked 24th out of the 27 OECD countries monitored. Japan also ranked 104 out of 142 countries in the World Economic Forum’s 2014 Gender Gap Index – the widest gap of any developed country. If Japan will not seek talent from without, it must build it from within. And Prime Minister Abe has made this a priority, declaring a goal to fill 30% of Japan’s leadership positions with women by 2020.

Japan faces many challenges, but I am confident it can overcome them. It won’t be easy, but Japan recognizes its issues and is confronting them aggressively. As I talk with Japanese CEOs during my time here, I am excited to hear what they’re planning.

Bob Moritz is chairman of PricewaterhouseCoopers.

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