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Abe’s immigrant dream is a wage nightmare

by William Pesek

As it peers into an uncertain future, Japan’s biggest problems can be summed up in a number: 250.

Add a percentage sign and that’s how much debt the nation owes relative to its economic output. Add three zeroes, making it 250,000, and you get the rough number by which Japan’s population shrank in 2013. It was a record slide, and one that got Shinzo Abe’s attention. To counter the trend, Japan’s prime minister wants to import 200,000 foreign workers a year. They would buttress a shrinking workforce and pump dynamism into an insular business culture.

The proposal could be a nonstarter; many Japanese still revel in a homogeneity that they believe fosters cohesion and limits crime and other social ills. Also, Abe has shown zero political will to push through other structural changes, so why expect him to fight to open the demographic equivalent of a Pandora’s Box? But there’s another reason why casting open the immigration floodgates would be a risky gambit: The move might work at cross-purposes with Abe’s push to get companies to up wages — which are critical to his revival plans.

Many of these foreign laborers will get paid a fraction of what Japanese do. The most pressing labor shortages are in the Tohoku region, where reconstruction efforts continue three years after a record earthquake and tsunami. There’s no way workers from Thailand, Myanmar or Bangladesh will get paid anywhere near what locals do to rebuild towns like Natori, clean up Fukushima or construct 2020 Olympics facilities in Tokyo. Such contract workers won’t be getting local bonuses or benefits.

The same goes for nurses from the Philippines, Indonesia and elsewhere clamoring for jobs in the world’s most lucrative geriatric market. Even if bureaucrats make it easier for caretakers to transfer qualifications (passing the Japanese-language exam has proven all but impossible), salaries will pale in comparison to those of Japanese.

Also, the bulk of their wages might be sent back home in the form of remittances, which reduces consumption opportunities in Japan.

Bottom line, Japanese companies would see migrant workers as a means to reduce wages. So let’s add the immigration-wages question to the list of Abenomics paradoxes. One is how you create inflation without unnerving the bond vigilantes.

Another: how Abe expects consumers to spend more when sales taxes are rising, wage increases are scarce and a weaker yen is boosting energy costs.

And how does the government expect corporate executives to raise salaries when it won’t do its part to lower trade barriers, tweak corporate tax rates and empower the female workforce?

Still, Japan should indeed increase immigration, and now. The birthrate is negligible and Japan’s graying is leaving fewer and fewer workers to service the world’s biggest debt burden. Here, Germany’s experience with immigration is instructive, says Martin Schulz, a former Bank of Japan researcher and now senior economist at Fujitsu Research Institute. “The German-born and Japan-born population shrank roughly by 250,000 people last year, but Germany’s population grew by about 120,000, while Japan’s shrank,” Schulz explains. “The difference has been even stronger when comparing the impact on employment — on the working-age population.”

Singapore offers its own examples. The secret to its success is labor mobility and diversity. Imported human capital isn’t necessarily smarter, but having a variety of opinions around a conference table to brainstorm, problem-solve and strategize leads to increased innovation and economic growth. Of course, Singapore also is a cautionary tale of the unintended consequences of stamping all those work visas. On the upper end of the wage spectrum, rich investment bankers and entrepreneurs drive property prices and living costs out-of-reach for the middle-class, while lower-income workers depress wages.

The answer for Japan is to manage the inflow of talent and anticipate the side effects. “In the short-term, it is certainly possible to have both a rise in wages and labor population — if you have an accompanying rise in production or a rise in marginal product of capital,” says Naomi Fink, chief executive of EuroPacifica Consulting.

Raising productivity and cultivating innovation is key. If Abe makes good on attracting hundreds of thousands of overseas workers — and that’s a big “if” — he must accompany the inflow with deregulatory steps ranging from tax incentives for startups and venture-capital pools, to education and training reforms to encourage more risk-taking among young Japanese. He must internationalize corporate-governance practices, scrap the seniority-based promotion system and, finally, make sure Japan properly values its imported talent.

“Lots depends on the fine print of immigration terms,” says Jeff Kingston, head of Asian studies at the Tokyo campus of Temple University. “Is it more of the Kleenex approach — use and toss? Or will they develop reasonable criteria for permanent residency?”

Abe’s 200,000-immigrant dream need not become a wage nightmare for Japan. So long as Japan recalibrates its economy accordingly, immigrants could infuse Abenomics with the energy is currently lacks.

William Pesek is a Tokyo-based Bloomberg View columnist.