The Daily Update: Japan's Productivity Problem

We have spoken at length about demographics both in these daily updates and as part of our general macro view. In a world where a shrinking and ageing workforce means that productivity needs to increase to try to keep the status quo, we were surprised to find that Japan not only has a rapidly ageing workforce but also the lowest labour productivity in the G7.

According to the Japan Productivity Center’s International Comparison of Labour Productivity report Japan ranks twenty-first for labour productivity among the 36 nations of the Organization for Economic Cooperation and Development (OECD). The OECD data found that Japan’s per-hour labour productivity is around $47, around 60% of that in the US.

One of the main reasons that Japan lags so far behind the other G7 countries is the culture of long working hours that in some cases has led to ‘Karoshi’ meaning death by overworking. Nearly a quarter of Japanese company’s employees, or salarymen as they are known, work more than 20 hours of overtime a week and most work for the same company for their whole career. However, this does not lead to better productivity. The culture is self-defeating as the time is spent with full schedules of meetings, onerous paperwork, or menial tasks, none of which are productive. Japan’s workplace culture of long hours and rigid hierarchies is now not the good thing it once was.

Adding to the problem is that productivity growth has been hobbled by poor competitive pressure and an inflexible labour market, especially in the service sector, which employs two-thirds of the working population in Japan. Added to this is the major problem of Japan’s ‘zombie companies’. Heavily indebted companies and even uncompetitive divisions of large conglomerates have often been kept alive by their ability to roll over debt with the continued support of the banks. These companies act as a barrier to overall productive growth, as the survival of weak companies contribute to lowering the average overall productivity. These companies are detrimental to any economy, as they take up market share and lock up growth that should be available to more successful and dynamic companies.