The survey also anticipates a shift in the focus of capital investment of Japanese firms from the overseas market to the domestic market to drive demand.
Japan’s corporate woes: sluggish domestic demand and shrinking workforce
Japanese Prime Minister Shinzo Abe returned to power in late 2012, and since then the endeavors to revive the country’s sluggish economy have definitely accelerated. However, concrete results are yet to be realized to the expected level. The authorities are undoubtedly going to witness tough times ahead while they try to boost Japan’s moribund economy. The main pitfalls are an ageing workforce and slack domestic demand. These are two of the most important inferences drawn by the Reuters Corporate Survey, which was conducted last month for Reuters by Nikkei Research.
The survey, which included 526 large- and mid-sized businesses in Japan, indicates that the majority of Japanese firms surveyed plan to slow down the pace of wage increase as compared to the previous year.
Currently, the policymakers in Japan rely upon higher earnings and higher domestic consumption to jump-push the domestic economy, as per the vision of Mr. Abe. But both these factors do not seem to be a reality if the findings of the Reuters Corporate Survey are to be taken into account. In the survey, almost 40% of the firms reported the problem of shrinking domestic market as their biggest worry over the next three years. On the other hand, 34% of the surveyed firms reported about the manpower crunch. The survey elaborated that whether it is about hiring fresh graduates or mid-career staff, Japanese firms endeavor to find both, especially the technically competent staff.
A sector-wise analysis demonstrated that IT services, transport, as well as other service sector firms are most pessimistic about the ongoing manpower crunch with 40-45% of companies expressing serious concern over the issue. The vexing problem of Japan’s ageing population is evident from the fact that the working-age population has dropped 11% since its peak in 1995 to 77.2 million in 2015. Worryingly, it is expected to shrink to 45.2 million by 2065.
Consequently, 48% of the participating firms intend to invest in training and development of human resources to secure the needed workforce, while 13% plan to hire foreign workers. Though Japan has a restrictive immigration policy, particularly for unskilled labor, a lackluster domestic market compels firms to hire overseas labor. The majority of firms are, however, slowing down the pace of wage rise in comparison to the past year. It is noteworthy that in 2016, the big firms offered an average 2.14% hike in monthly wages, but this year only 19% of businesses have said that they will raise monthly wages by 2% or more. The survey also asserts that Japanese firms intend to cut back on the range of services offered by them to tide over the workforce shortfall. In the survey, Japanese firms revealed their helplessness to deal with the situation.
The problems of labor shortage and lack of domestic demand have outstripped other corporate concerns that usually take a front seat, the poll reveals. Only 9% of respondents showed concern over trade stagnation, which Japan is going through as an outcome of protectionism. Mere 5% of respondents were worried about deflation, which is usually one of the major causes of corporate woes.
The survey also threw light upon an emerging trend in Japan, which relates to capital investment by Japanese firms. The respondents indicated that many of them are shifting focus of capital investment from prominent overseas markets like China and the U.S. to the domestic market with a view to reviving local demand. Only 12% of firms said that they plan to boost capital spending in China, which until now enjoyed the status of being the most important overseas market, and only 18% of firms said that they aim to do so in the U.S. The firms justified their stand on profit motive, maintaining that while it is easy to expand sales in China due to the enormous size of the Chinese market, it is extremely tough to raise profits on account of Chinese regulations, licenses, high labor costs and obscure business practices.
Around 48% of the surveyed firms stated they intend to expand domestic capital investment over the next three years, while 46% did not support that opinion. The expansion of domestic capital investment for labor saving technology can prove to be a wise decision amid the current manpower crunch. However, there is much more to be done to uplift the stagnating Japanese economy rather than pressurizing firms to raise wages and capital investments.