Japan’s Talent Tunnel: Navigating the Labor Shortage Crisis
There is a light at the end of the tunnel, even if the tunnel seems impossibly long right now.
With much of the global fear-mongering surrounding generative AI automation and the assumption that it is taking all of our jobs, there is an alternate and more positive perspective for Japan. While the situation appears daunting at first glance, analyzing the data reveals a clear path forward.
A McKinsey & Company article outlined an assumption of the effects AI would have on Japan by 2030, which appears to be accurate so far. Prior to the pandemic, Japan was on track to automate 27% of existing work tasks by 2030. While that could replace the jobs of 16.6 million people, it would still leave the country with a shortfall of 1.5 million workers in 10 years. What’s more, the tight labor market could make it difficult for employers to free up people and resources to develop the new growth opportunities that could emerge with automation.
Like McKinsey, I believe there are chances to create mutually beneficial options for employers and employees in Japan. These options may start with embracing job role reforms, welcoming new forms of employment and strategically, but responsibly, integrating AI. By taking these actions, Japan’s businesses can turn a looming labor shortage into an opportunity for innovation and leadership, both locally and globally.
Deep Structural Nature of the Crisis
Japan’s population is in decline while rapidly aging with low birthrates. The population situation is deeply systematic and will need nation-wide work reforms to solve; it will most likely take decades to fix.
Instead of focusing solely on demographics, we must look at the mobilization and usage of skills alongside the integration of AI. After understanding the problem in its entirety, we can begin to look at defining or chipping away at it with solutions.
In my view, there appears to be four “bite-sized” problems contributing to Japan’s labor shortage that will need to be resolved as population levels begin to balance out over the decades to come. They are: Inflation, infrastructure, intelligence and inflexibility.
Inflation Barrier: Unlivable Starting Salaries
New professionals in Japan earn nearly unlivable wages after graduating from college, creating a significant barrier to attracting young talent. As of 2024, Japan’s average starting salary for new university graduates is about ¥206,700 per month, equating to about ¥2.48 million annually. This figure places Japan in the lower-middle range globally for graduate starting salaries.
The Mainichi highlighted this issue earlier this year where they asked about the minimum desired starting monthly salary, the most common answer among undergraduates was “at least ¥250,000” at 26.1%. Among graduate students, “at least ¥300,000” was the most common response, chosen by 31%. While some firms such as Dai-ichi Life Holdings (¥321,000) and Itochu Corporation (¥305,000) have increased salaries to attract top talent, the general market is falling short .
The reality is that to live comfortably in Japan, particularly in Tokyo, while also saving money, a net income of around ¥450,000 to ¥500,000 per month is required. This is supported by data which notes that average living expenses in Tokyo are around ¥317,305. Promptly throwing money at new grads as a reactionary solution could open us all up to more problems such as faster rates of inflation. However, if new grads cannot live on their own and employers do not allow work from home, their options are severely limited.
Infrastructure Roadblocks for Women Returning to Work
A massive portion of the potential workforce is blocked by infrastructure issues, specifically mothers looking to return to the workforce. While the number of women in Japan’s paid workforce increased significantly—from just over 60% of women aged 30–34 in 2006 to 80% by 2023—these figures can be misleading .
Many women and seniors opt for part-time rather than full-time employment. In terms of hours worked, total labor input has not increased significantly. Consequently, labor shortages remain unresolved. There is likely an untapped talent pool of 2-3 million women in the 35-65 age group who have been outside of the workforce for 10 years or more. The majority of these talented women have well over three years of working experience along with college degrees. Many were forced to choose between leaving the workforce or not having a family, and now that they wish to return, they face too much adversity.
Intelligence Gap: Wasting Senior Wisdom
In the pursuit of modernizing management, we are inadvertently wasting the wisdom of talent who are over 60 years old. While “old boy” networks have merits, many organizations are slow to move their current retirement age from 60 to 65 years or older.
Employees that reach their retirement age at 60 are often forced into one-year contracts with fixed salaries that are frequently in the 30-60% range of their final base salary value. This creates a drain on intelligence and motivation. Understanding the trends, the average working age in Japan is going to increase for at least the next 5-10 years.
Structural Inflexibility in HR Frameworks
Japan’s HR frameworks emphasize rigid job standardization, creating the final major hurdle. Japan has fixed descriptions, static salary bands and traditional career ladders. This is also a cultural issue with deep stigma against non-permanent forms of employment, despite the high protections permanent employees enjoy.
Adding multiple forms of employment options along with the allowance of several gigs for employees might provide a massive mutually beneficial solution for all four of the problems mentioned. However, non-permanent forms of employment will need to be better regulated while providing equal levels of protection to eliminate cultural stigma.
Four Strategies to Navigate the Crisis
In spite of all the issues surrounding Japan, there is still an opportunity to leverage what appears to only be negative and use it to create positive outcomes. Research suggests four potential strategies that can help make a difference and head us in a better overall direction.
Redesign Job Roles for Agility
The traditional rigid career tracks common in Japan must evolve. McKinsey and the OECD Development report outlines the potential for role modularization, where work is broken down into smaller skill blocks and shared into gig or freelance work. Since automation could displace around 56% of the work activities being done across Japan, this approach allows companies to tap into diverse talent pools.
To implement this effectively, organizations should conduct work decomposition analysis to identify tasks within each job and focus on skill clusters rather than rigid job titles. By introducing project-based assignments and creating internal marketplaces where employees can apply for short-term internal gigs, companies can achieve the necessary flexibility to navigate the labor shortage.
Invest in Reskilling at Scale
Combining role flexibility with a deeply rooted AI partnership requires reskilling workers pre-graduate, returning to work and post-retirement. This effort is supported by the Japanese government, which pledged ¥1 trillion ($7.5 billion) to reskilling workers. Google agrees in reskilling, noting that Japan is uniquely positioned to combine robotics with AI technology to dramatically raise productivity.
Implementation requires launching skills assessment programs to identify gaps and prioritizing technical, digital and cross-functional training. Partnering with universities and EdTech platforms to develop tailored learning journeys, alongside using micro-certifications for busy professionals, will be key to building an AI-ready workforce.
Expand Flexible Work Models
Companies need to work in parallel with reskilling efforts to create an environment where individuals can fully demonstrate their skills. A working environment that is not necessarily a physical office, but one that is flexible around location and employment type, is critical for future success.
To achieve this, organizations must redesign policies to legitimize flexible work, including freelance contracts and side jobs. Research by Nippon Institute For Research Advancement (NISA) reveals that about 2.75 million Japanese workers engage in gig work part-time. It is essential to establish clear engagement models that define when to use internal employees versus external talents, and to use freelance management systems (FMS) to manage these external resources effectively.
Deploy AI Responsibly
When deploying AI, it must be done in the spirit of equity and accessibility. AI systems should be seeking opportunities for development and greater efficiencies, but under careful watch by humans—not the other way around.
Japan’s Ministry of Economy, Trade and Industry (METI) created “AI Governance in Japan” to address this. Additionally, the Japan Deep Learning Association (JDLA) provides reports on implementing governance.
Businesses should focus AI applications on augmentation rather than replacement, such as using AI for skills mapping and performance management support. Establishing AI ethics guidelines to ensure bias-free algorithms and training employees in “AI literacy” are critical steps. Piloting human-in-the-loop systems ensures a balance between automation and human judgment.
Addressing Common Concerns in the Labor Market
A common question that arises is whether Japan’s labor shortage is unique. Japan ranks ninth in terms of the rate of declining population, meaning other nations are facing similar crises. Taking a look at the World Population Review, we can see the proportion of other countries that are facing the same problem. The difference for Japan is the proportion of the damage to GDP, though this shared global challenge opens up opportunities for diversity of thought to solve issues together.
Another frequent concern is the role of automation. While fear-mongering exists, the reality is that AI applied to robotics can help reduce dependence on human commands and enable businesses to better manage supply chains, directly addressing the challenge of labor shortages. Japan is well-positioned to lead the world in AI-enabled industrial innovation rather than suffer from it.
FAQ
What is the projected scale of Japan’s labor shortage?
Even with expanded labor force participation and automation, Japan is likely to face a shortage of 1.5 million workers by 2030. This accounts for a projected 16.6 million jobs lost to automation being offset by new job creation and existing growth.
Is the labor shortage unique to Japan?
No. Japan ranks ninth globally in terms of population decline rates. Many other nations, particularly in Europe and Asia, are facing similar demographic challenges. However, the proportion of damage to Japan’s GDP makes the situation particularly critical here.
Does AI automation threaten Japanese jobs?
While AI is expected to automate 27% of existing work tasks, the prevailing view is that it will augment rather than replace the workforce. Given the population decline, AI and robotics are seen as essential tools to bridge the gap in labor supply rather than a threat to employment.
Why are entry-level salaries in Japan so low?
Despite high living costs in cities like Tokyo, the average starting salary remains around ¥206,700. This is largely due to traditional seniority-based pay structures and a cautious approach to inflation, though some major firms are beginning to raise starting wages to compete for talent.
Light at the End of the Tunnel
A declining and aging population is a massive problem that will take decades to overcome. As the proverb says, “How do you eat an elephant? One bite at a time.”
We can see there are deep structural and systematic problems, but they can be segmented and taken apart. Inflation, infrastructure, intelligence and inflexibility can be fixed in time if we redesign job roles, invest in reskilling, expand flexible work models and deploy AI responsibly.
By embracing these reforms, Japan’s businesses can turn labor shortage into an opportunity for innovation and leadership on a global scale. The time to start eating the elephant is now—assess your organization’s flexibility today and begin the necessary structural changes to secure your future workforce.
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