Japan’s IT Labor Productivity Plummets: A G7 Outlier
Japan, long regarded as a technological powerhouse, is facing an alarming decline in IT labor productivity. Between 2019 and 2023, Japan’s IT sector experienced the steepest drop in labor productivity among the Group of Seven (G7) leading industrialized nations. Despite a significant increase in the IT workforce, profit growth has not kept pace, raising concerns about the country’s economic competitiveness and future growth prospects.
This article explores the scale of Japan’s productivity problem, the underlying causes, and what it means for the nation’s economy and society. We also examine how Japan compares to its G7 peers and what steps experts believe are necessary to reverse the trend.
How Bad Is Japan’s Productivity Problem?
Japan’s labor productivity has been a persistent concern for decades, but recent data reveals a particularly sharp decline in the IT sector. According to the Japan Productivity Center and OECD data, Japan’s IT labor productivity dropped by 13% from 2019 to 2023—the largest decrease among G7 countries and the only double-digit decline in the group. In contrast, the United States and United Kingdom saw increases in IT labor productivity during the same period.
Overall, Japan’s labor productivity ranked 29th among the 38 member countries of the Organization for Economic Cooperation and Development (OECD) in 2023, with an hourly productivity of $56.80. This places Japan at the bottom of the G7, far behind the United States ($97.70 per hour) and even below the OECD average of $65.20 per hour. Ireland, the top-ranked OECD country, boasts a staggering $154.90 per hour.
Japan’s productivity gap with the United States has widened over time. In 2000, Japan’s productivity was about 70% of the US level, but it has since slipped to below 60% in recent years. The decline is not limited to IT; Japan’s overall productivity has stagnated or fallen in many sectors, especially services.
IT Sector: More Workers, Less Output
During the COVID-19 pandemic, Japanese companies invested in digital tools such as video conferencing and expanded their IT workforce by 20%, reaching 2.35 million employees. However, the added value generated by the sector grew only 5% from 2019 to 2023. By comparison, the US IT sector’s added value jumped 39%, and Germany’s rose 12% in the same period.
This means that while more people are working in IT, each worker is generating less value on average—a troubling sign for a country facing demographic decline and labor shortages.
Why Is Japan Falling Behind?
Multiple factors contribute to Japan’s lagging productivity, both in IT and across the broader economy. Experts point to structural, cultural, and technological challenges that have proven difficult to overcome.
1. Customized IT Systems and Legacy Practices
One major issue is Japan’s reliance on highly customized IT systems. Unlike US companies that offer standardized, cloud-based services, Japanese firms often develop bespoke solutions for each client. This approach requires significant manpower for operation and maintenance, reducing efficiency and scalability. As a result, productivity gains from digitalization are limited.
2. Slow Pace of Digital Transformation
Japan’s efforts to become an advanced IT society have fallen short. The limited adoption of digital government services, such as the My Number identification card, and the lack of ride-sharing platforms highlight the country’s slow digital transformation. Many businesses still rely on paper-based processes and face regulatory hurdles that stifle innovation.
3. Labor Market Structure: Lifetime Employment and Non-Regular Workers
Japan’s traditional lifetime employment system, while providing job security, limits worker mobility and flexibility. To cope with global competition, firms have increasingly hired non-regular workers (part-time, temporary, or contract employees), who now make up nearly 40% of the workforce. These workers typically earn less and have fewer opportunities for skill development, which discourages investment in new technology and suppresses productivity.
Professor Miho Takizawa of Gakushuin University, who supervised the Japan Productivity Center’s research, commented:
“Japan’s labor productivity remains low mainly due to Japanese companies’ failure to invest in human resources through measures such as wage hikes. It is also necessary to promote investment in intangible assets, including the digital field, to boost added value.”
4. Underinvestment in Human Capital and Innovation
Observers note that Japanese companies have been slow to invest in employee training, reskilling, and intangible assets like software and intellectual property. This underinvestment hampers innovation and limits the ability to adapt to new technologies such as artificial intelligence (AI).
5. Demographic Pressures and Labor Shortages
Japan’s aging and shrinking population is often cited as a cause of labor shortages. However, despite a declining working-age population, the total labor force has increased due to higher participation by women and the elderly. Yet, because productivity remains low, Japan needs more workers to produce the same output as other countries. Some experts argue that Japan’s labor shortage is, in part, a productivity problem: if productivity matched US levels, Japan could operate with far fewer workers.
Comparing Japan to Its G7 Peers
The contrast between Japan and other G7 economies is stark. The United States, for example, leads the G7 in labor productivity and has seen robust economic growth, thanks in part to high worker efficiency, strong investment in innovation, and a dynamic business environment. According to Morning Brew, the average US worker produces $171,000 of goods and services annually, compared to $96,000 for a Japanese worker.
US companies benefit from updated machinery, advanced software, and a culture that encourages job mobility and entrepreneurship. These factors have helped the US tech sector become a global leader, while Japan’s IT industry has struggled to keep pace.
Other G7 countries, such as Germany and the UK, have also managed to increase IT labor productivity, albeit at a slower rate than the US. Ireland’s rapid ascent to the top of the OECD productivity rankings is attributed to its success in attracting IT firms with favorable tax policies and a focus on innovation.
Consequences for Japan’s Economy and Society
The decline in IT labor productivity has far-reaching implications for Japan’s economy, society, and global standing.
1. Economic Growth and Competitiveness
Low productivity constrains economic growth and limits Japan’s ability to compete internationally. As the gap with other advanced economies widens, Japan risks falling further behind in key industries, including technology and services.
2. Wage Stagnation and Living Standards
Stagnant productivity translates into stagnant wages. While Japan has managed to reduce excessively long working hours, wage growth has lagged behind other G7 countries. This has contributed to lower living standards and a growing sense of economic insecurity among workers.
3. Outflow of Talent and Capital
Japan’s prolonged economic slump has led to concerns about “Argentinization”—a scenario in which high-quality people, goods, and money flow out of the country in search of better opportunities. The number of Japanese permanent residents overseas is rising, and Japanese companies are increasingly investing abroad for higher returns.
4. Social and Demographic Challenges
With an aging population and low birth rate, Japan faces mounting pressure to maintain economic vitality. If productivity does not improve, the country may struggle to support its social welfare system and ensure a high quality of life for future generations.
What Can Japan Do to Reverse the Trend?
Experts and policymakers agree that reversing Japan’s productivity decline will require bold reforms and a willingness to embrace change. Key recommendations include:
- Accelerating Digital Transformation: Moving away from customized legacy IT systems toward standardized, cloud-based solutions can improve efficiency and scalability.
- Investing in Human Capital: Companies need to prioritize employee training, reskilling, and wage growth to foster innovation and adaptability.
- Reforming Labor Market Structures: Easing rigid employment practices and promoting mobility between regular and non-regular workers can help match skills with market needs.
- Promoting Innovation and Intangible Assets: Greater investment in research, software, and intellectual property is essential for boosting productivity in the digital age.
- Leveraging Artificial Intelligence: The adoption of generative AI and other advanced technologies offers a potential path to higher productivity. Some Japanese IT giants, such as NTT Group, are already aiming for a 20% increase in work productivity per person through AI-driven efficiency.
The Japan Productivity Center emphasizes the need for Japan to be more effective in producing results through technical innovation and reskilling, especially as the country faces labor shortages due to a shrinking population.
Broader Implications: Rethinking Growth and Well-being
Some experts argue that Japan’s challenges go beyond productivity and GDP rankings. The focus should shift toward comprehensive well-being, encompassing not just economic output but also quality of life, social infrastructure, and environmental sustainability. The capital approach, as outlined in the Dasgupta Review, suggests that well-being can be enhanced by investing in private capital, social infrastructure, natural capital, and human capital.
While GDP and productivity stagnation are serious concerns, Japan may need a new vision for growth that prioritizes a richer life experience and broader measures of prosperity.
In Summary
- Japan’s IT labor productivity fell 13% from 2019 to 2023, the steepest decline among G7 countries.
- Despite a growing IT workforce, profit and value-added growth have lagged, highlighting inefficiencies.
- Japan ranks last among G7 nations and 29th among 38 OECD countries in overall labor productivity.
- Key causes include reliance on customized IT systems, slow digital transformation, rigid labor market structures, and underinvestment in human capital and innovation.
- Consequences include slower economic growth, wage stagnation, talent outflow, and demographic challenges.
- Experts recommend accelerating digital transformation, investing in human capital, reforming labor markets, and leveraging AI to boost productivity.
- Japan may need to rethink its growth model, focusing on comprehensive well-being rather than just GDP.
