Abe’s Third Arrow flies: foreign workers and Japan's labour shortages

Image credit: Prime Minister's Office of Japan (Creative Commons: Facebook)

Japanese prime minister Shinzo Abe has fired the third arrow of Abenomics: structural reforms. A bundle of 126 measures that have been introduced to attract foreign workers comes in the wake of the passage of a divisive foreign worker bill on the 8 December 2018. The purpose of the bill is to recruit 345,000 foreign workers over the next five years to address labour shortages and will take effect in April 2019.

The foreign worker bill and the accompanying measures to attract overseas talent are perhaps the most significant structural reform that Abe has implemented since taking office in late 2012.

This third arrow of Abenomics has mostly been left unused over Abe's term of office. Instead, the Japanese government has relied on expansionary fiscal and monetary policies (the first and second arrows) to stimulate the economy after decades of stagnation. While these policies have spurred modest economic growth, they have not resolved the underlying issues that have caused Japan's economic stagnation. The most pressing issue is Japan's rapidly aging population.

Japan’s unemployment rate is at its lowest point since the early 1990s, but 14 key industries including construction, hospitality, and nursing care are facing severe labour shortages. The declining size of Japan’s labour force is a problem that will steadily become worse, as the population shrinks by almost a third, from 126.7 million in 2017 to 88.1 million by 2065. To make matters worse, the percentage of seniors is expected to rise from 28.1 per cent to 38 per cent by 2065. This demographic bomb will be a drag on the national economy for generations to come.

The Japanese government has implemented policies to increase birth rates and promote the inclusion of women and senior citizens in the labour force but persistent labour shortages suggest that existing policies are unable to defuse the problem.

The Abe government therefore, had two options. The first was to offset the decline of the labour force by increasing productivity and the second was to drastically import more foreign workers. The prime minister abandoned labour law reforms in March 2018, which left increasing the number of foreign workers as the only viable alternative - a fact acknowledged by the passage of the new foreign worker bill, which became law despite widespread opposition.

Apart from addressing labour shortages, foreign workers will play a role in revitalising the economy by starting businesses and helping Japanese companies enter overseas markets.

In response to critics that argue that the new foreign worker bill does very little to prevent the exploitation of foreign workers, the Japanese government has introduced 126 measures to support foreign workers, and better integrate them into society. The majority of these measures aim to promote coexistence between local Japanese and new arrivals. One such measure includes the establishment of Japanese language schools and multicultural consultation centres in each prefecture. Another is the use of regional revitalisation subsidies to provide financial support to communities so they can fully accommodate foreign workers. Most significantly, the Japanese government is set to establish agreements with eight Asian countries, which will help law enforcement prosecute brokers and companies that exploit foreign workers.

However, these reforms are unlikely to be successful at recruiting foreign workers unless Japan becomes an attractive place for foreigners to work and live. Japan currently ranks 29th out of 63 countries in the IMD World Talent Ranking in terms of its ability to attract foreign talent. Lagging far behind other Asian countries like Singapore (13th), Hong Kong (18th) and Malaysia (22nd).

Japan’s higher living standards and salaries give it an advantage over other Asian countries in attracting overseas talent but there are still major deterrents that may prompt foreign workers to look elsewhere. The most pressing of these include the difficulty finding employment without fluency in Japanese and visa restrictions that prevent blue collared workers from bringing their families with them. As a result it is unlikely that the foreign worker bill will result in a substantial increase in the number long-term permanent residents needed to resolve Japan’s labour shortages.

After six years in power Shinzo Abe has for the most part been unsuccessful in implementing structural reforms aimed at solving the problems caused by Japan’s aging society and shrinking workforce. While the passing of the foreign worker bill may not be the silver bullet that solves Japan’s labour shortages, it is an admission from Japanese government that foreign workers are necessary and needed. This break with conventional thinking may result in the implementation of other long needed structural reforms.

The third arrow has been fired, now we’ll see if it can hit the target.

Andrew Thomson is the International Trade and Investment Fellow for Young Australians in International Affairs.