Publications

Introduction

Japan has one of the fastest-aging societies in the world. According to the National Institute of Population and Social Security Research, Japanese over 65 years old currently make up about 21% of the population. They are projected to rise to 27% in 2018 and to 35% in 2050. With about 4 million people estimated to become eligible for retirement over 2008 and 2009, the resulting worker shortage is an imminent problem that foreign HR managers in Japan must fully understand in order to counter.

Retiree policy

The Japanese retirement age, when workers can start receiving pensions, is gradually being increased. Japanese are healthier and can work longer than they could in 1960, and with the labor shortage, working longer has become a necessity. The retirement age was changed to 62 in 2006 and 63 in 2007. It will go to 64 in 2010 and 65 in 2013. (These are for men; for women, the changes phase in later.) Under the Act Concerning the Stabilization of Employment of Older Persons, as revised in 2004, companies must offer some kind of stable employment for employees up to this age. This can be in the form of raising their mandatory retirement age (usually 60), eliminating it, or retaining it but providing new positions for retirees.

Most companies seem to be choosing the last option, re-hiring. According to the Ministry of Health, Labor and Welfare surveys, companies with official retirement ages of 60 have decreased only slightly, from 91% of the total in 2004 to 86% in 2006. Companies that have publicized their re-hiring programs include Toyota, Aeon, Mitsubishi Heavy Industries, and several major banks including Sumitomo-Mitsui.

In re-hiring programs, some companies move their senior employees from regular, long-term employment to fixed-term, renewable employment contracts. Their pay can be sharply cut, often by as much as one-half. They may also be transferred to subsidiaries or allied companies according to need. Since the employees have technically passed the company’s mandatory retirement age, they are more open to these changes than they might have been before retirement age, and staff can be rearranged more flexibly.

The government also offers financial incentives for employing older workers. For each full-time employee between the ages of 60 and 64, the company can receive payments of 500,000 yen (about $4,700) for large companies, or 600,000 yen (about $5,600) per employee for small or medium-sized companies. Incentives are lower for part-time employees.

Fortunately, older Japanese employees tend to be relatively enthusiastic about continuing to work past 60. Japanese often see their work as a source of pride, and like to be able to keep busy after retirement. According to the Japan Institute for Labor Policy and Training, 60% of workers say they want to continue at the same job after they turn 60. So far, large companies with re-hiring programs are usually retaining 50 to 70% of their employees past that age.

Japanese law prohibits age discrimination in theory; however, this is often not followed. Although seniority is respected in Japanese culture, some recruiters tend to negatively view older people looking for work. This is a mistake, as they may have valuable skills.

Filling the gap

Japan’s “baby boom” generation entered the world in 1947. In 2007, this generation began to retire. In the short term, they can be re-hired for several years. However, they will eventually retire, and this means a persistent shortage of employees. Key talent is already in short supply in Japan, and this can only get worse due to demographic trends – by 2050, the workforce will have shrunk by an estimated 17 million.

One of the ways the gap might be filled is through increased importation of foreign workers. However, Japan continues to allow very few of these. According to the MHLW’s most recent statistics, about 20,000 more people entered Japan under its foreign worker program in 2006. In contrast, France received 140,000 new immigrants in 2004, even though its population is about half Japan’s. In total, there are about 1.4 million foreigners legally working in Japan, and another 1.7 million illegal immigrants, as estimated by the Ministry of Justice.

There are some signs that Japan may be warming to larger numbers of immigrants. In a December 2007 poll by the Mainichi Daily News, nearly two-thirds of respondents said they supported allowing unskilled workers into Japan (currently, only skilled workers are allowed). However, Japanese continue to prize their country’s ethnic and linguistic homogeneity. To make up for population decline, Japan would need to import three to four hundred thousand foreigners a year until 2050. Japanese are not likely to be open to that high level of immigration.

Another way to fill the workforce gap is through greater employment of women. Almost all women join the workforce after finishing school in Japan, but about 70% quit when they are married or when they have children. Many also occupy career tracks with few prospects of promotion. Employers are increasingly implementing childcare leave and other accommodations to make workplaces more female-friendly. With experienced people retiring in greater numbers, it is crucial to give women opportunities for career development and promotion as well.

Health and pension systems

Japan’s aging population is leading to greater costs in social support for the retired. Currently, there are about three Japanese workers supporting each retiree; ten years from now, in 2018, there will be only two. Pension premiums are scheduled to grow steadily over time to make up for these demographic changes. The next scheduled increase in premiums for Employee Pension Insurance (the main government pension program) is in September 2008, from 15.35% to 15.7% of salary. There will be similar rises every year until at least 2018, when the rate will be 18.3% of salary.

In addition, companies are seeing their private pension obligations grow significantly. One countermeasure is to replace defined-benefit pension systems (where retirees get guaranteed pensions no matter what) with defined-contribution systems (like 401(k) plans). However, the law currently only allows employers, not employees, to pay into defined-contribution pension systems, slowing acceptance of this type of system.

National health insurance premiums currently stand at 8.2% of salary. For employees at least 40 years old, another 1.23% is taken for long-term care insurance. Although no increases are currently scheduled, they seem inevitable, as health care expenditures are projected to triple by 2050 (as a percentage of GDP). In addition, hospital co-pays were recently raised from 20% to 30% of total fees, making individuals responsible for a greater share of their medical costs. (This co-pay is lower for seniors.)

Conclusion

Strategies for success as foreign HR professionals deal with Japan’s demographic crisis include the following:

• Making efficient use of aging employees’ skills as they pass retirement age, and making sure they are treated well if they are not in management positions.
• Being receptive to elderly job-seekers, or even seeking them out when they have in-demand skills.
• Overhauling private pension systems so that the rising percentage of older workers does not become a huge burden.
• If practical, importing more foreign workers and seeing that Japanese employees work well with them.
• Incorporating women into the workplace on an equal basis and working to retain them even after they have children.

In some cases, these shifts may run up against the corporate culture of your Japanese employees. However, Japanese employment practices are no longer set in stone, and foreign companies often attract more Western-minded Japanese. Promoting new policies and mindsets in the workforce should help moderate the growing effects of Japan’s aging society.

Go back to HR Issues & Recruiting Publications for Japan

Go back to the Pacific Bridge Homepage