(upbeat music)
- How is demographics changing Japan?
For decades, we have talked about Japan's aging society,
but something fundamental is shifting now.
Japan's working age population
defined as everybody who's aged 15 and above
has started to shrink since 2021,
not just lower growth, but actual decline.
And here is the paradox.
The working age population is going down,
but productivity is on the rise.
GDP per capita is also going up.
And after 30 years of deflation,
inflation is back in Japan.
So today, we are asking a critical question.
If you cannot fix the labor shortages,
what do you do instead?
And what does that mean for workers,
for companies and for an economy,
which is becoming the world's laboratory
for higher productivity lower labor growth?
(upbeat music)
Hello and welcome to Understanding Japan.
I am Juhi Malik, your host,
and head of macro research marketing at Nomura,
joining from Singapore.
And on this inaugural episode of the podcast,
we have with us Kyohe Morita,
Nomura's chief Japan economist,
joining us live from Tokyo,
as we discussed how is demographics changing Japan?
Morita san, welcome to the podcast.
- Thank you very much.
- Thank you for being with us today.
We know that Japan faces a rapidly shrinking
and aging population.
Let's start with the obvious question there.
Why are these labor shortages such that they cannot be fixed?
- First, let's look at the two facts
about the Japan's demography,
including population and labor force.
First, the number of people in Japan
who are aged at 15 and more has been declining since 2021.
Why does that age matter?
- Well, 15 is when people finish
their compulsory education process.
So theoretically, this group of population aged at 15
or above represents the absolute maximum ceiling
of Japan's potential workforce.
And that ceiling has been declining since 2021.
And second, and that is more surprising.
Despite that shrinking ceiling
of the maximum labor supply,
maximum possible labor supply,
Japan's actual labor force has gone up
since the early 2010s.
How did they pull that off?
They did it by tapping into two main risk of labor force.
Throughout the 2010s,
Japan brought more of women and elderly people
into the labor market,
which led to a higher labor participation.
And then we moved into the 2020s.
Then the source of foreign workers started to increase,
particularly those from Vietnam, Indonesia,
and the Philippines contributed to this increase
in foreign workers.
But then, here's the problem.
These two sources are gradually shrinking.
For example, domestic participation,
labor participation has practically maxed out.
And then immigration is also slowing,
particularly under the Takaichi cabinet
that took office back in October 2025.
We therefore believe that
Japan's labor shortages have become incurable.
Understood, so as you say,
these labor shortages are now incurable.
But on the other hand,
if you look at Japan's GDP per capita,
that is still rising and not falling.
So what is it that sort of replacing these missing workers?
Or in other words,
what are the Japanese companies doing now
that they cannot hire more workers?
Well, labor shortages have not gone away from Japan.
Japanese companies, however,
have finally come to realize
that they can't simply fix the shortage of labor force
by, for example, extending the retirement age.
But they now understand that they have to change themselves
so that they can be more used to the shortage of labor force.
But then how are they doing it?
Well, mainly by cutting down on labor dependence,
and in order to do so,
they are now making more investment
into something that can save labor force,
including automation, software, and digital tools.
If these tools can save labor,
it will be a top priority for Japanese companies
in terms of investment.
This mindset shift is creating new story
for Japan's economy.
It is transforming into an economy
driven by labor productivity,
rather than labor input.
More simply, Japan is expected to grow through inspiration,
rather than perspiration.
This is a massive wake-up call for investors,
particularly in Japanese equity markets,
after a 30-year slumber.
Morita-san, could you give us some concrete examples
where and how do you see this exactly there?
Yes, the typical areas where we can experience
such a shift to less labor dependence,
are restaurants and hotels,
which used to be regarded as one
of the most labor-intensive sectors.
For example, today, if you visit the restaurant in Japan,
you may well be asked to make orders on the tablet,
find your food served by a robot,
and settle your bill using the self-checkout.
This is only a typical example,
but a similar shift away from labor
is actually happening,
both at B2B and B2C levels.
That brings me to the next question,
why now, why is there something
which did not happen, say, five or ten years ago?
Yeah, why didn't this happen before the 2020s?
Again, we need to come back to the story of what happened
to Japan's demography in 2021.
That is, the beginning of declining a number of people,
aged at 15 or more,
or labor shortages being incurable.
Until this happened,
Japanese companies had believed
that they could solve the shortage of labor force
through more participation,
but now they have realized that they can no longer solve
the shortage of labor force.
Understood.
So the companies are finally adopting
to robots and automation now.
We still have some workers who are there,
and these workers are finally getting wage increases as well.
Why don't these rising wages still
don't feel like a win for the households?
Well, workers and households are really a key part
of this dynamic.
First, we expect real wages to grow more substantially
going forward.
True, the wage hikes so far
have made a big difference for families,
but that's because Japan has faced
the series of external inflation shocks,
such as rise price shocks that occurred in 2024 and 2025,
which was then followed by geopolitical tensions
in 2026.
And also, Uyghur has hit per capita purchasing power
during the course.
However, that is set to change now.
As mentioned earlier,
we expect the labor productivity to grow faster.
If labor productivity improves,
the companies will be more willing and able
to offer higher wages,
allowing salary growth to outpace price growth.
And second, we expect the households
to increase their exposure to risk assets
as wages rise, inflation will be more homegrown,
meanwhile, as much as half of Japanese households
financial assets have been held in cash
and cash equivalents,
because value tends to erude under inflation.
In a nutshell,
with labor shortages being chronic,
companies and households are gradually redesigning their norms.
You mentioned the households are increasing
their exposure to risk assets.
For our listeners, can you help quantify
how big is that shift?
And is it happening at a pace
which is fast enough for it to matter right now?
Yes, let's look at a shift to risk assets again.
We can find that even in Japan,
the percentage of cash and cash equivalents
held by households who used to believe
cash was staking under inflation
has been declining visibly.
And instead, stocks are increasing their presence
through this kind of household portfolio shift
was not solely induced by inflation
and institutional change.
That is, the introduction of the so-called NISA
or tax exempt accounts for individual investors
also served as an institutional motive
for such a shift to risk assets. However, we believe a shift to risk assets will be more embedded in Japan as inflation turns more homegrown.
Or it doesn't. If there is one thing which the investors need to watch to know whether this redesign of norms by companies as well as the households is actually working, what would that be?
Well, investors should monitor Japan's real wages which are defined as the ratio of nominal wages divided by price levels because real wages function as an indicator to show to what extent inflation has been homegrown and how much labor productivity growth has been embedded.
Therefore, if real wages are continued growth, even under inflation, we will feel safe to conclude that both companies and households are redesigning their norms.
Thank you once again Morita-san for being with us. So we've got fewer workers, more robots, rising pages which do not keep up with inflation quite yet.
But here is what is fascinating. The companies are not waiting for a policy fix, they are adapting. The workers are getting wage increases for the first time in many years.
And the households are finally shifting out of cash and into risk assets. This sounds less like a crisis and more like a fundamental transformation of how an economy works.
And that raises the next question for us. How are the Japanese companies changing and can they change fast enough? And what does that mean for earnings growth as well as stock market liquidity?
In the next episode, we will sit down with Tomuchika Kitaruka, Morita's chief Japan equity strategist to discuss how Japanese corporations are undergoing a massive transformation.
I am Juhi Malik and this was Understanding Japan. If you enjoyed our content, I hope you would follow us from the usual podcast channels. Give us a like and share it with anybody who you think might be interested.
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