Often when we speak about Japan – its economy, society and corporate sector – we refer to demographics as the mother theme, the super-macro reality from which so many Japanese peculiarities are borne. Japan’s most recent half-decade census, conducted in 2020 but released at the end of November 2021, was a stark reminder of the permanence of that theme.1


The census shows a 0.7% decline in population (including foreign nationals), a reduction of just under a million people, since the last survey in 2015. This is the second consecutive decline; nobody thinks it will be the last.


A more jarring statistic is that the working age population fell by 3% (or two and a quarter million people) over the same period to just over seventy-five million. In 2020 there were fewer potential workers in Japan than in 1975. The working age population accounts now for less than 60% of the total, a ratio not seen since 1950. Seventy years on it is many of the same people – the baby boomers – who make up the non-working population, just on a different side of their careers.2


A fragment of good news is that whilst the statistician’s definition of working age population declines apace, the actual number of workers in Japan continues to rise. Last year’s labour force survey puts total employment at just under sixty-seven million people, a rise of six percent in ten years3, largely as a function of greater female participation. Still, more than eight million people sit on the side-lines. Some companies distinguish themselves to employees with their childcare and other facilities. As labour shortages continue to bite, we think such businesses will start to distinguish themselves to investors similarly.


The government is also keen to encourage older workers to delay retirement, or retirees to re-enter the world of work.4 Electronics retailer Nojima made headlines when it changed its internal rules to allow workers to stay on to the tender age of eighty 5. Investors would be wise to look favourably upon companies thinking creatively about their staffing issues, and sceptical of managers who bury their heads in the sand.


The Western model would be, of course, to encourage, or at least to allow, immigrants to take up the roles overlooked by indigenous workers. This is an example which Japan has been reluctant to follow, but could that be changing? Certainly, the Japanese public is largely unmoved by the topic of immigration6. Perhaps this indifference is understandable given the relatively small size of the country’s foreign-born population, but the government’s quiet drive to make immigration easier makes sense7. That said, the Covid-19 pandemic acted as a brake on the international flow of people – one which the Japanese government did not hesitate to stamp upon. Old habits die hard.


For some roles, overseas outsourcing or “offshoring” could be an option, while policies to enfranchise discouraged would-be (or ‘once-were’) workers could help postpone Japan’s labour apocalypse. They could also create opportunities for companies and the stock-pickers who spot them, but long-term solutions they are not. For that, we must look to productivity.


A sunny take on Japan’s productivity situation is that it has much room to improve. In other words, it is risible, the lowest amongst G7 economies. Japan’s problem is concentrated in its service sector and so it is in services that the biggest gains can, and should, be made. Japan’s quest for digital transformation or DX, to which end a new digital agency has been established within the government, will be central to this.8


Elsewhere, Japanese tech and capital goods companies can help boost productivity in manufacturing, but the opportunities for these businesses lie more abroad than they do at home. That so many other economies are hurtling towards a Japan-style demographic crunch – South Korea, Taiwan, Thailand and most importantly China have fertility rates well below the replacement level – bodes well for Japanese automation companies who have already replaced so many workers at home.9


The ramifications of Japan’s – and other countries’ – demographic shift are myriad, the magnitude seismic. It is tempting to disengage. This is a temptation which must be overcome. For all the attendant challenges, the opportunities are many and vast. What is more, the predictability of demographic progression paints a uniquely clear roadmap for what the future will be like. Which companies will suffer and which will benefit is much less obvious, but to make that determination is the great challenge that all investors now face.

The value of active minds: independent thinking