In 1999, we proposed that part of the solution to Japan’s demographic crisis is higher female labor participation, which — at 57 percent at the time — was among the lowest in the developed world. Japan stood out from its developed country peers with its pronounced “M-curve” of female employment, reflecting the fact that over 60 percent of Japanese women quit working after giving birth to their first child and typically stayed out of the workforce until their children were grown. Despite this, however, few paid any attention to this issue, and the term “diversity” was not part of the Japanese vernacular. The prevailing view was that low female employment was simply a fact of Japanese life, and for a variety of reasons — most of them cultural — the system would be impossible to change.

In our 2014 report, “Womenomics 4.0: The Time is Now,” we argued that closing the gender employment gap could lift Japanese GDP by nearly 13 percentage points. When Prime Minister Shinzo Abe first highlighted “womenomics” — getting more women into leadership roles to boost the economy — as a core pillar of the nation’s growth strategy in early 2013, many were deeply skeptical that top-down political pressure would lead to any meaningful change. Remarkably, however, in less than three years, Japanese female labor participation has risen sharply to a record high of 66 percent, surpassing that of the U.S. (64 percent). What factors have driven this progress and what more needs to be done?

Labor shortages

Part of the recent spike in female employment is the result of acute labor shortages. Japan’s unemployment rate has fallen to a historical low of 3.3 percent, and the job openings-to-applicants ratio stands at a 23-year high of 1.28X, meaning there are 28 percent more jobs available than Japanese seeking work. The situation is particularly harsh in service industries such as healthcare, construction, retail and transportation. While the government is permitting more foreigners to work in some of these areas, supply remains scarce and employers have been forced to tap into the female talent pool. However, the majority of women have been taking on part-time rather than full-time jobs. In order to cope with a prolonged period of deflation, companies shrank their cost bases by shifting employees from full-time to part-time contracts. As a result, part-timers now account for over 40 percent of total workers, with women accounting for around 57 percent of all temporary staff.

Child care, parental leave benefits

Another factor driving higher female employment has been increased child care capacity and child care benefits. In 2013, the government set a target of expanding day care capacity to eliminate the 400,000 children on nationwide day care waiting lists by 2019. During FY 2013-14, day care capacity was increased by 219,000 spots, or roughly halfway toward the goal, and according to the updated plan, the 2019 goal has been raised to 500,000. While still insufficient, the government will likely target increased day care services in its upcoming fiscal spending package. In addition, the government augmented the ratio of replacement pay during parental leave from 50 percent to 67 percent for the first six months and extended entitlement to non-regular workers. Surprisingly, Japanese child care leave benefits now rank among the most generous in the developed world.

Diversity disclosures and targets

While there are more Japanese women working than ever before, there is still a dearth of females in leadership positions. To this end, on April 1, a new law, called the “Female Employment Promotion Legislation,” went into effect. It requires large-scale private and public sector entities (>300 employees) to disclose gender diversity targets, accompanied by specific action plans. While critics argue that targets are not as effective as quotas since there is no retribution for non-compliance, we still regard this as a meaningful step forward since gender-related disclosures have been virtually absent, and this new legislation should improve transparency. (After all, it’s hard to move the needle if you don’t know where the needle is). We also believe that — similar to corporate governance reforms — target-setting and peer pressure will force many firms to start thinking about diversity more seriously, since management will now be held accountable for meeting their diversity goals.

What more should be done?

Even with the progress seen since 2013, the fierce demographic headwinds mean that the government, private sector and society must work together to take even bolder steps to accelerate female labor participation. Japan is certainly not alone with its demographic challenges, so when the G7 leaders meet in Ise-Shima, Abe should underscore his commitment to womenomics with more concrete action such as the following recommendations:
• Neutralize the tax and social security codes: The current system of spousal tax and social security deductions need to be amended so they stop discouraging married women from working full-time outside the home.

• Legislate equal-pay-for-equal-work and introduce more flexible labor contracts: Due to the unequal treatment of part-time versus full-time employees, the government should look to the “Dutch model” of “equal-pay-for-equal-work” in order to raise the incomes and status of part-time workers. Moreover, the government should consider the American Chamber of Commerce in Japan’s proposal to create a new type of “regular employee” labor contract that encourages women to return to the workforce as regular employees and retain pay and promotion opportunities.

• Expand caregiving capacity: Increase the capacity and affordability of day care and nursing care via greater deregulation. One domestic solution would be to leverage retirees and stay-at-home parents to provide child care and after-school care within local communities. Immigration rules should also be liberalized to make it easier to hire foreign domestic workers and caregivers.

• Reform working hours and create more flexible work environments: Japan ranks second in the OECD for the longest number of hours worked annually. Much of this is caused by traditional seniority-based evaluation systems. Employers should adopt objective and performance-based evaluation plans and promote more flexible work arrangements (including job-sharing and telecommuting).

• Eliminate unconscious biases: Society needs to eliminate unconscious biases about gender diversity at work, schools and homes. Common myths about womenomics such as those that suggest that higher female labor participation will further depress Japan’s birthrate (when empirical evidence proves the opposite is true) need to be overturned. Gender-based stereotypes need to be challenged, and men need to be encouraged to be more active in the home. It is also critical to engage male leaders through initiatives such as “male champions of change” and similar actions.

Since Japan is leading the G7 and other developed countries in terms of the pace of its aging and shrinking population, it has a unique opportunity to become a positive template for other nations facing similar challenges. Japan’s single-most valuable resource is its people, but with its demographic clock rapidly ticking, more aggressive steps must be taken to promote gender diversity so that everyone has the chance to maximize their full potential. Diversity is no longer an option, but an economic imperative and the benefits of greater diversity will be enjoyed by all.

Download the PDF of this G7 Ise-Shima Summit Special

Kathy Matsui is vice chair and chief Japan strategist at Goldman Sachs Japan.

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