How labor shortages can hamper 'Abenomics'

By Shinya Ajima, Kyodo

Posted at Jul 06 2014 08:35 AM | Updated as of Jul 06 2014 04:35 PM

TOKYO - Japanese businesses across sectors as diverse as retail and construction are struggling to adequately staff their operations, with the labor shortage threatening to take the sheen off the country's nascent recovery from chronic deflation.

The Bank of Japan released data earlier this week suggesting unfavorable developments in the economy, such as delayed construction works and slower retail sales due to the lack of workers, which has been attributed to a rapid recovery in domestic demand since Prime Minister Shinzo Abe's government introduced its "Abenomics" stimulus policies.

"We are never optimistic about business conditions as we face a shortage of skilled workers," Yoshio Murashige, chairman of second-tier general contractor Penta-Ocean Construction Co., said.

The Japanese construction industry is booming to an extent not seen for a long time.

The government has allocated significant funding to rebuilding the areas in northeastern Japan devastated by the 2011 earthquake and tsunami while more construction projects have been launched in relation with the 2020 Olympics in Tokyo.

Murashige's gloom reflected concerns in the industry as a whole that the shortages of seasoned workers, who are normally difficult to obtain, could hamper those projects and fetter growth in the industry.

The number of construction workers in Japan had generally followed a downward path, given a string of government administrations cutting public works outlays from the national coffers. It stood at only 5.03 million in 2012, down 30 percent from 1997, when the corresponding number reached its peak.

The BOJ's Tankan quarterly business sentiment survey showed Tuesday that more companies believe they are running short of workers, with the relevant index deteriorating further in June from March.

In another sign, local governments soliciting bids from construction firms for public works projects often find that no bidder step forward due to rising costs for labor and raw materials.

A weaker yen, a prominent sign of the impact from Abenomics, has helped increase Japanese exports, favorably affecting many manufacturers. But it also caused a rise in costs for general contractors and other developers to import building materials.

The deteriorating business environment linked to labor shortages can be particularly seen in the nonmanufacturing sectors, which are inherently more labor intensive and absorbs more workforce than manufactures.

Zensho Holdings Co., the operator of the Sukiya beef bowl restaurant chain, has been forced to suspend business at some of its outlets due to an employee shortage.

As of late June, 210 of its roughly 2,000 restaurants nationwide were closed, potentially amounting to a 2.4 billion yen ($23.5 million) loss in annual sales, according to the company.

The problem of labor shortages is not necessarily new for Japan as the country continues to suffer low potential growth, with its population aging and shrinking. And this often accelerates national debate on whether to lower immigration barriers and accept more foreign labor to keep the economy growing.

In the past, however, the issue did not draw significant attention. The economy went through a prolonged slump during which addressing weak demand took precedence, rather than labor shortages and other supply-side constraints.

In close cooperation with Abe, the BOJ has pursued its 2 percent inflation goal as measured by annual growth in the consumer price index, providing sufficient money to the economy while purchasing massive amounts of financial assets from banks.

The country's core CPI, excluding fresh food, increased around 1.5 percent in April and May without the direct effect of the April 1 consumption tax hike, with the BOJ expecting to achieve its price stability goal in around 2015, in line with its previously stated goal.

What the central bank envisages by attaining the inflation goal is the sound development of the economy, which means stable inflation must come with strong growth, steady job creation and reasonable wage hikes.

But low potential growth does not bode well for the scenario.

BOJ Governor Haruhiko Kuroda has admitted to the need for addressing supply constraints resulting from labor shortages.

The fiscal and monetary stimulus under Abenomics has rapidly increased domestic demand, Kuroda said, but added that with the development, "problems which had been under water came to the surface."

Abe last month unveiled an update of his strategy for promoting growth, partly focusing on labor market and corporate governance reforms as well as deregulation in order to improve potential growth.