1. The Bright Side of Japan’s Labour Crunch

    By Joji Sakurai. Autumn 2018
    Illustrations by Tatiana Boyko.
  2. Innovation is often born out of necessity. Praveen Kumar, manager of Baillie Gifford Shin Nippon and deputy manager of the Baillie Gifford Japan Trust, tells Joji Sakurai that Japan’s staff shortages have sparked creativity and investment opportunities.


    This article originally featured in Baillie Gifford’s Autumn 2018 issue of Trust magazine.

  3. Derelict homes on weed-choked plots hardly seem a token of a vibrant future. But for one company in Japan, they represent a trove of opportunity in a demographic crisis that combines dismal birth rates, a shrinking workforce and a greying population.

    As Japan’s population declines, it has been left with a glut of about 8 million abandoned homes, known as ‘akiya’, across the country. Katitas, held in Baillie Gifford Shin Nippon, buys up such houses, renovates them and sells them at an affordable price – rejuvenating communities and giving young families a start. The company went public in December last year and saw net profit grow 30 per cent during the 2017 financial year.

    Katitas is a compelling example of the opportunities to be reaped in what looks like an alarming demographic picture – often cast as condemning Japan to long-term decline. One of Japan’s most pressing issues is an acute labour crunch as its working age population, which peaked in 1997, continues to shrink. There are currently about 160 job openings for 100 applicants, the tightest labour market since 1974. One-third of Japan’s construction workers are over the age of 55. Many all-night restaurants in Japan are closing because they cannot find enough staff. And Yamato Transport – Japan’s largest parcel delivery company – is mulling an exit from Amazon same-day deliveries because of a lack of drivers.

    Yet there is another way to look at labour shortages that points to a brighter future for Japan’s economy, according to Kumar. With Japan’s unemployment rate at 2.5 per cent, companies are in fierce competition for talent. This is putting upward pressure on wages, which could help Japan to finally emerge from its deflationary trap, spurring a virtuous circle of consumer-driven growth.

    “The labour market shortage is a powerful theme,” says Kumar. “You can see how this could drive further wage growth, which in turn will have a positive effect on consumption and inflation in the long run.”

    Outsourcing and labour-saving technologies are the stellar growth drivers in the labour crunch. And a new breed of entrepreneurs is exploiting this opportunity whilst the headlines remain gloomy. “In the context of the labour shortage you have companies, mostly in the construction and service sectors, that are suffering due to their inability to hire and retain staff. On the other hand, the labour shortage is proving to be a strong, structural tailwind for companies like specialist staffing firms and online platforms dedicated to improving operational efficiency, which are seeing strong growth in sales and profits as a result. Globally, the desire to improve productivity and efficiency amidst rising labour costs through factory automation is also proving to be a strong tailwind for Japanese robotics companies.”

    One company that is benefiting from this structural tailwind is the specialist staffing company Outsourcing Inc, which both Baillie Gifford Shin Nippon and the Baillie Gifford Japan Trust hold shares in. During Japan’s long period of stagnation, companies began to rely heavily on contract workers over permanent staff to rein in costs. The government subsequently introduced legislation that requires companies hiring staff working on temporary contracts for more than five years to employ them as permanent employees. Outsourcing’s business model effectively hires such workers from major corporations as regular employees – providing them with the benefits of permanent staff – and leases them back to the company from which they originally came. The client pays an annual fee to Outsourcing and also pays the workers’ wages.

    “They are killing two birds with one stone,” says Kumar. “Not only are they providing this large pool of experienced workers to companies that need them, they are also hiring these contract workers from their clients and employing them as their own full-time employees, giving them all the associated benefits such as pensions, insurance and wages commensurate with their experience and expertise. This arrangement removes a potentially expensive staff overhead for clients.” Meanwhile, Japan’s world-leading expertise in robotics gives it natural advantages in labour-saving strategies. Cyberdyne is a company in the Baillie Gifford Japan Trust’s portfolio that makes a robotic exoskeleton, enabling the physically disabled to walk. Now its technology is being used on construction sites to help workers perform heavy lifting.

    Other labour-saving technologies exploit inefficiencies in Japan’s economy – a system of middle-men and legacy relationships that push up costs for consumers. Infomart, for example, allows restaurants to place orders online from suppliers, in an industry greased by personal contact. Broadleaf runs a platform for garages to shop around for auto parts online. Both companies, which are in Baillie Gifford Shin Nippon’s portfolio, challenge cherished practices that serve as social binders but hold back an urgent need to boost productivity. “What I’ve seen over the years is an increasing number of young, dynamic entrepreneurs who are basically fed up with the status quo – and are willing to take risks,” says Kumar.

    And Katitas – the company that renovates abandoned homes – is a pioneer in promoting Japan’s most important neglected labour resource of all: its women. About 40 per cent of Katitas’s workforce is female and the company is proactive about bringing them into management. Last year, all five top salespeople on Katitas’s staff were women. And unusually for Japan, the company extends generous maternity leave – without any career setbacks to be expected upon return.

    “Katitas is an example of a progressive company that is putting its words into action by encouraging more women to take up challenging roles. It is a good, and by no means an isolated, example of how the labour shortage in Japan is changing corporate behaviour,” says Kumar. “I strongly believe that, contrary to the downbeat commentary you see in the financial press and elsewhere, there is a brighter side to Japan’s labour crunch both for investors and for society at large.”


    Annual past performance to 30 June each year (%)







    Baillie Gifford Shin Nippon






    The Baillie Gifford Japan Trust







    Source: Morningstar. Share price, total return.
    Past performance is not a guide to future returns.


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    Joji Sakurai has written for the Financial Times, the New York Times, Foreign Policy and others. The veteran Associated Press correspondent likes to write about Japan, business, politics, travel and long-distance running.