REPEAT:MNI ANALYSIS:Labor Shortages New Threat to Japan Growth

Repeats Story Initially Transmitted at 04:35 GMT Aug 14/00:35 EST Aug 14

By Max Sato

     TOKYO (MNI) - In addition to uncertainty due to foreign economic conditions

or geopolitical risks, there is a growing concern in Japan that domestic labor

shortages will choke growth unless firms invest more in innovation and the

government supports such efforts.

     "Labor shortages are becoming a bottleneck for growth and can affect the

demand side. We must keep a close watch," a Cabinet Office official, who

declined to be identified, told reporters last week prior to the release of the

Q2 GDP data.

     "The situation may have a negative impact on employment in the short term

but it should be positive to the overall economy in the longer term as firms

invest in equipment to cope with labor shortages," the official said. "We must

help them with a policy response to turn the situation into a positive

development."

     Labor shortages are forcing some firms to cut operating hours or close

unprofitable outfits, and in the worst-case scenario, causing bankruptcies.

Short-staffed operations are also making employees work longer hours and

preventing them from taking time off.

     Capital expenditure data may be starting to reflect increased investment in

automation to deal with the effects of labor shortages.

     In April-June GDP data released Monday, business investment rose 2.4% on

quarter in Q2 -- above the MNI survey median forecast for +1.4%. It was the

third straight quarterly rise and the pace of growth accelerated sharply from a

0.9% gain in Q1. It pushed up the Q2 GDP by 0.4 percentage point.

     Capital investment plans have been solid, as shown in the Bank of Japan's

Tankan business survey, but companies have been generally cautious about

implementing those plans until recently.

     Japan needs reforms both on the supply and demand sides of the economy as

its productivity gains have lagged and wage hikes have been slow, Economic and

Fiscal Policy Minister Toshimitsu Motegi said last week.

     "The biggest issue for Japan is that the size of its GDP is growing and

employment is increasing but the economy's growth potential is not rising," he

told reporters in a group interview. "It is like we don't have enough muscles

while our body is getting bigger."

     Motegi said the supply side of the economy needs reforms, such as improving

the quality of workers, raising labor productivity and investing in innovative

growth areas.

     On the other hand, the demand side also has room for improvement in the

pace of annual wage growth, the level of minimum wages and the government

initiative to implement equal pay for equal work, he said.

     "I want to focus on how we can regain the strength of household spending,"

he said.

     Labor supply shortages are also affecting sentiment.

     "Labor shortages are spreading throughout the economy," Cabinet Office

director of regional economies Masahiko Tsutsumi told reporters last week.

"Staffing agencies and want-ad publishers see labor shortages as positive while

construction, transportation and security firms are reporting lost business

opportunities."

     Data released on Aug. 8 showed the Economy Watchers sentiment index for

Japan's current economic climate posted the first month-on-month drop in four

months, down 0.3 point at 49.7 in July on a seasonally adjusted basis after

rising a sharp 1.4 points in June, but the level remained relatively high in the

current recovery phase.

     The slight drop in sentiment reflects the adverse effects of chronic labor

shortages but also short-term weather factors. Heavy rainfalls and flooding in

southern Japan in early July caused casualties and long-lasting damage while

heat waves made consumers wary of buying fresh food for fear of food poisoning.

On the other hand, high temperatures boosted demand for air conditioners.

     "Looking ahead, there are expectations for continued business investment,

although there are concerns over labor shortages," the government said,

repeating its assessment from the previous report.

     "Watchers' sentiment on capital investment has been rising gradually but

the report does not suggest a sharp increase," Tsutsumi said. "Firms expect an

increase in investment for raising production capacity or coping with labor

shortages. Some firms also see their clients increasing capex."

     Japan's consumer confidence index edged up 0.5 point to 43.8 in July on a

seasonally adjusted basis, posting the first month-on-month rise drop in two

months after falling 0.3 point to 43.3 in June. The confidence level is

considered fairly high but the index has shown ups and downs in the past several

months.

     Last month, when the June Consumer Confidence Survey showed the key index

fell 0.3 point to 43.3, Toshimi Nishizaki, director of the Department of

Business Statistics at the Cabinet Office, told reporters, "Widely reported

markups for the prices of beer, butter and electricity and other items are

believed to be behind the sharp drop in confidence in overall economic

well-being (by 1.1 points)."

     "But what is more concerning is that the impact of labor shortages is

becoming clearer as people see higher restaurant bills and home delivery costs,"

she said.

     Concerns about the effects of labor shortages add to worries about weak

wage hikes and subdued consumer spending.

     People are also concerned about how much they can save for their

post-retirement lives as reforms for public pension plans and medical services

have been slow. "If there is another push for social security reforms and wage

growth, it will support consumption in a more stable manner," the Cabinet

official told reporters.

     Private consumption posted the sixth straight quarterly rise in Q2, backed

by a modest recovery in average wages amid a tight labor supply and stable fresh

food prices. It rose 0.9% on quarter in Q2 after rising 0.4% in Q1, coming in

stronger than the median MNI economist forecast for +0.5%

     "If we were to watch for a downside risk to consumption, summer bonuses

(paid between June and August) are estimated to be weaker than in the previous

year and heavy rainfalls (in July) might have hurt tourism in some regions," the

Cabinet official said.

     Officials also point to the difficulty in predicting how overseas factors

will affect Japan's growth and inflation prospects.

     "The Federal Reserve's monetary policy has been well managed so far, but we

have to watch how far and at what pace it will taper," the senior Cabinet Office

official told reporters. "The Trump administration's plans for tax cuts and

infrastructure spending are also uncertain."

     In China, economic growth is stable but there is uncertainty over how

sustainable it will be and how the government will manage the real-estate market

bubble, he added.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com