Japan faces labor shortages and demographic crisis as elderly population hits record high

Japan commemorated its "Respect for the Aged Day" earlier this week, with the national holiday underscoring a somewhat problematic fact — the country has a record amount of elderly citizens to celebrate. 

Government data released ahead of the event showed that Japan's population of people aged 65 and over has risen to an all-time high of 36.25 million.

While the country's overall population has been declining, the segment of those aged 65 and above has grown to 29.3% of the population, the highest share of any country, according to the Statistics Bureau of the Ministry of Internal Affairs and Communications. 

According to Robert Feldman, chief economist at Morgan Stanley MUFG Securities, the data fuels further concerns about demographic shifts and a labor crunch in the country.

A survey from Teikoku Databank last month showed that 51% of companies across sectors in Japan feel there is a shortage of full-time employees.

"The labor shortage is just as bad as ever," said Feldman, noting that it's especially felt in labor-intensive industries such as food service.

Meanwhile, 2023 saw the number of Japan's workers aged 65 and over rise for a 20th consecutive year to reach a record 9.14 million, Statistics Bureau data showed. 

Feldman warned that as these elderly workers begin to retire from the workforce, there won't be the same number of young workers stepping up to replace them.

Based on recent trends, Japan's proportion of elderly people is expected to continue to rise, hitting 34.8% in 2040, according to the National Institute of Population and Social Security Research.

Meanwhile, a recent research note from Morgan Stanley's Feldman estimated that based on past demographic trends, the total labor force could drop from about 69.3 million in 2023 to about 49.1 million in 2050.

The Japanese government has recognized the economic and societal harms that could result from these trends and has taken steps to counter them.

Several measures have been aimed at reversing the country's declining birth rates, with Prime Minister Fumio Kishida's office rolling out policies such as providing more funds for child-rearing and support for more child-care facilities in the country.

Local governments have even taken steps to support public dating apps that are aimed at getting Japanese people to mingle, marry and have children. 

Boosting birth rates, however, will do little to solve labor shortages in the short term. So, Japan has been steadily opening up to more migration over recent years, hitting a record 2 million foreign workers in 2024 and eyeing up to 800,000 more over the next five years, according to local media reports. 

Replacing expected demographic losses in the country over the next couple of decades will require the country to add foreign-born workers at a much faster rate, in the tens of millions, according to Feldman.

"I don't think that's going to happen, which means that a large portion of that drop in the domestic labor force has to be made up by better productivity of those young people who will remain," Feldman said.

Creating this productivity growth amongst workers will require more capital to invest into workers' productivity and the implementation of new technologies such as AI and automation, he added.

Earlier this year, Carlos Casanova, senior economist for Asia at UBP, told CNBC's "Squawk Box Asia," that AI technology has often been cited as the solution to Japan's demographic crisis but had so far done little to mitigate it.

"We have a society that is increasingly consumer oriented, so you do want to have a big workforce that is making money and that is spending money in order to sustain economic momentum," Casanova said. 

"AI can be part of the solution, but there are other things that they have to do," he added, suggesting in addition to immigration, the country works on social and structural changes such as increasing the female workforce participation rate.