Japan and deflation: Waking the bear

Samantha Ghiotti is the co-founder and CEO of Habitto, a Tokyo-based digital bank that offers high-yield savings and financial advice.

When bears emerge from their dens after hibernation, they immediately begin to search for food. Their metabolic rate wakes up and goes into hyperdrive.

This is an apt metaphor for what economists, politicians, and executives hope to see happen in Japan in the near future.

Image credit: Timmy Loen

Japan has been a sleeping bear for years, with its economy stuck in a deflationary spiral. With low growth, companies lowered prices to support demand and sold at lower margins. The higher demand created economies of scale, driving prices further down.

But there are structural changes at play that could reverse this decade-long deflationary spiral and create opportunities for investors.

Devil’s in the demographics

Demographics don’t lie, and Japan faces significant structural labor shortages – with a gap of about 11 million workers by 2040 – according to Recruit Works Institute. This is especially true in the healthcare sector and digital industries, where the expected gap is 2.3 million workers in the next 24 months.

On the ground, the labor shortage feels real. Having hired employees in many countries, I found Japan to be the hardest I have encountered.

Partly, worker mobility is still problematic, as the traditional employment system in Japan ties workers to one company for life and incentivizes employees to focus on corporate loyalty and avoiding risk. However, the new economy requires continuous learning, risk-taking, and innovation.

Hiring for new economy roles yields very few candidates to choose from, and they do not stay on the market for more than a few weeks. Young, well-educated, digitally savvy candidates have their pick of the jobs on offer.

Younger Japanese workers are also more sensitive to working conditions than their parents and expect more flexibility and opportunities to learn and grow. It is very plausible to see Japanese employers changing some of their working practices to attract candidates with skills that are in high demand, especially those with experience in the digital sector.

Many labor policies are changing and are becoming widely adopted by the private sector, including more focus on work-life balance, hybrid working, and flexitime. The shortage of digital skills is so vast that the Japanese government has set aside a budget of 1 trillion yen (US$6.8 billion) over five years to encourage employees to learn new skills to allow them to switch to higher-paying jobs.

Another part of the equation is that Japanese workers have seen the largest wage increase over the last 30 years – on average 3.8%. The Rengo labor confederation had called for a 5% pay hike.

However, most of the raises were triggered at large or foreign-owned organizations and in response to the recent inflationary pressure due to higher import costs, especially fuel. Many of the SMEs which account for 70% of national employment have provided more modest raises, if any.

Exit ticket?