March 2, 2018 20:30 JST

Rising influence of foreign workers in Japan

The official stance of the Japanese government, especially that of the current Prime Minister Abe, is that Japan is not open to immigration. In recent years, though, the number of foreign workers in Japan has grown rapidly. Between 2012 and 2017, the number of foreign workers nearly doubled, reaching close to 1.3 million in 2017, or roughly 2% of the total workforce in Japan.

The number of foreign workers doubled between 2012 and 2017

In quenching Japan's thirst for additional labor, the impact of foreign workers has been even larger. In 2017, the number of foreign workers increased by 0.19 million, accounting for 23% of the increase in the total number of workers in Japan. For many industries, the inflow of foreign workers is becoming essential. The lodging and food industry is probably the best example. Between 2012 to 2017, while the total number of workers in the industry remained unchanged, the number of foreign workers has doubled to 0.16 million. Foreign workers now account for 4% of the industry workforce in the lodging and food industry.

Foreign workers account for 4% of workers in lodging and food industry in 2017

By type of nationalities, Chinese are the most numerous with 0.37 million people working in Japan, accounting for 29% of the total foreign workers. The composition has become quite diverse in the last few years though. The number of workers from Vietnam has increased nearly ten-fold to 0.24 million in 2017, overtaking the Philippines as the second biggest source of foreign workers for Japan.

Nearly 10-fold increase in Vietnamese workers in Japan in just 5 years

As the working-age population in Japan continues to decline, it is nearly self-evident that Japan needs foreign-born workers to fill the gap. The working-age population, between the age of 15 years and 64 years old, has shrunk by a total of 4.4 million between 2012 to 2017 and is expected to decline by around 0.5 million every year for the next 10 years.

Relentless shrinkage of working-age population in Japan

The current system through which Japan is allowing the foreign-born population to work in Japan is economically inefficient. In practical terms, it is a “Guest Workers” program, allowing low-skilled labor to work in Japan for no more than a few years. In 2017, 40% of foreign workers in Japan had either student or trainee visas. In the lodging and food industry, 58% of foreign workers carried student visa. As they depart Japan when their terms expire, the skills they acquired, both professional and social, will also be lost from Japan. The discussion on whether and how to permanently integrate foreign-born workers in Japan is yet to be discussed as it remains a politically sensitive issue for policymakers.

The majority of foreign workers in lodging and food industry have student visa

Is the inflow of foreign workers hindering wage inflation?

To the extent that it relaxes the labor shortage in Japan, the rise in the number of foreign workers must be weakening the pressure on wages to rise. However, the inflow of foreign workers is unlikely to be a large factor beyond the sluggish of wage growth. Wages of part-time workers, where the impact of foreign workers must be the largest, is rising much faster than the wages for regular workers. The sources of the sluggishness in wage growth among regular workers are likely to lie elsewhere, such as the pessimism over the long-term economic outlook of Japan, and the rigid labor regulation. If a wider embrace of foreign-born workers can improve the outlook of the longer-term growth rate of Japan, one could even argue that it may help corporate managers to decide to invest more in Japan, both in physical capital and in human capital.

It is a long-shot, but one of upside surprises investors should watch out for    

Until recently, foreign workers were not of macroeconomic concern as the number was too small. As it now accounts for 2% of the total workforce and growing nearly 20% per year, it could soon start to have a significant macroeconomic impact. The rapid increase in the number of foreign workers in the past 5 years was a positive surprise, and if Japan can manage to maintain the direction, it could be a promising source of growth for Japan, both in quantitative and in qualitative terms.

As the foreign-born population grows in Japan, it is likely to be a source of negative social tensions. A recession could slow-down or even reverse the rise of foreign-born population in Japan. However, as the reward is to be able to break the deep-seated perception of a permanent shrinkage in the economy, it is one of the upside surprises long-term investors to Japan should keep track of.