Japan is without a doubt a fascinating country. From a business perspective, the changes to the labor market are particularly interesting as we have not only a shrinking but also a rapidly aging workforce. Let’s look at what changes that brings but also why moving forward we will require even more cross-cultural competence in order to succeed in this market.

Labor Market Size

In Japan, we are looking at a population of roughly 126 million people. Twenty five percent – 1 out of four! – is 65 or older. That means, we only have a working population of roughly 69 million people. That’s still more than the total population of the UK, so what is the problem? Well, if we zoom in and take a closer look at foreign capital firms – or gaishikei companies – we see that only 640,000 people are employed by foreign capital firms. That is less than 1%.

Source: FRED Economic Data (link)

Japan’s English language capability is ranking 41st out of 49 countries in Asia, even behind many less developed countries. That means, the pool of professionals who are bilingual is extremely limited. Of course even for foreign capital firms not everyone needs to be fully bilingual. But what you need to run an effective business locally on the ground is at least a certain level of English proficiency for most people and also a certain level of open-mindedness. You might find a few English speaking professionals amongst the Japanese companies for sure but the majority of them will be generalists as opposed to specialists. And that is what you need, bilingual mid-career professionals who are specialized in a particular job function.

Even during COVID-19 the unemployment rate only slightly went up to about 3% but it is still extremely low especially compared to other countries. The war for talent is real and attracting and retaining key talent will be a huge challenge moving forward especially when looking for young high potential bilingual talent.

On top of that, the overall population has been declining since 2010. That means, we have a population that is not only rapidly aging but also shrinking. That will naturally lead to a drop in workforce if no measures are taken to counterbalance it.

(source: worldpopulationreview.com)

But there is more. The number of Japanese students studying overseas is also declining. In 2018 the number of students studying abroad was 115,146 but it dropped to 107,346. That does not sound like much of a drop but it’s important to look at the breakdown of the number. Only 1,924 students – or approximately 1.8% – studied overseas for more than a year. The vast majority with above 70 to 75% in 2018 and 2019 (source for 2018 and 2019) respectively studied overseas for less than a month. That means, not only do we have a shrinking and overaging workforce, we also have a young generation that is lacking hands on experience in other countries.

What Changes Are Visible Already?

With a shrinking, aging and introverted workforce, what are your options if you want to grow the business? On a country level the only options are:

1. Increasing women participation rate

2. Improve productivity by utilizing technology, AI and robots

3. Open your doors to foreign professionals

With regards to women in the workforce, we are already seeing an increase over the last decade driven by ex-Prime Minister Abe’s Womenomics. Granted, it can be argued that a lot of them are either in non-full time employment or other low skilled professions. However, they are still counterbalancing the shrinking workforce.

Labor Force Participation of Women, Japan – Source: World Bank Data (link)

As for technology, robots and AI, this is an area that we will see changing rather slowly over the decades. Although known for high tech, most businesses in Japan are small and lack the resources to invest in technology. Due to COVID-19 and remote work, we are seeing more and more a push towards digitalization and the abolishment of the traditional corporate seal of approval known as the hanko.

That leaves us with foreign professionals. That is an area where we certainly saw a substantial increase over the last decades, especially with regards to IT. While we might not see it at traditional Japanese companies in traditional sectors, we will see that more and more foreign capital firms and internationally oriented Japanese companies will (have to) welcome more foreign professionals. That will give them access to highly skilled professionals who have access to the latest technology and can also build a bridge to other markets.

In the grand scheme of things, it is not only a shrinking workforce but overall population. That means apart from products and services for the elderly, companies will have to look outward for new markets. Not only for new markets to sell their products and services to, but also as a way to source products and services from.

That means, we will see more and more interactions with people from different backgrounds. Not only are we dealing with a more diverse workforce locally, we are also seeing an increase in procurement from overseas and companies trying to sell overseas. So even if they are not dealing with people from different backgrounds internally, their supplier or their customers will most likely be foreigners.

Combine that with a shift to decentralized work with people working partially or completely from home, it is obvious that communication skills in general and cross-cultural communication skills in particular will be key in order for any business to succeed moving forward.

How To Tackle The Issue

Communication is not only about speaking a particular language, and being able to speak English or Japanese alone is not enough. Language itself is simply a tool, but just because someone speaks another language doesn’t necessarily mean they know how to conduct business within that culture. What is required is awareness of cultural differences. Not only between Japan and “overseas” but even within the growing diversity of the Japan-based labor market.

CFO to CEO “What happens if we invest in our people and they leave?” – CEO to CFO “What happens if we don’t and they stay?”

Investing in your employees is always a good investment. In a market that is known for its war for talent, it is not a luxury but prerequisite in order to attract and retain the best talent. 

In addition to typical management training, it is of utmost importance that managers as well as non-managers are trained on cross-cultural communication.

It will lead to better cohesiveness within teams and across teams. That in return leads to better engagement, motivation, productivity and ultimately business results.

At the same time, it will lead to better relationships with suppliers and customers. Procurement will be able to relate better and negotiate better conditions. Your sales teams will be able to develop better relationships with your customers and in return close deals more successfully.

Investing in cross-cultural communication is not a luxury but required for all businesses who want to lead with empathy and build better relationships internally and externally.

What has been your experience with cross-cultural communications in Japan? Do you feel your company is ahead, or behind the curve when it comes to tackling the issues of the evolving socio-economic landscape in Japan?