How Japan’s SMEs can secure talent and build economic resilience

Labour shortages are a pressing global issue, having reached “historically high levels over the past decade” according to the OECD. As it points out, this can “hinder productivity growth, exacerbate supply chain bottlenecks, and ultimately contribute to inflationary pressures”.

For businesses, securing and retaining talent is essential to stability and business continuity. This is particularly true for smaller businesses, which tend to be especially vulnerable to economic shocks. Small- and medium-sized enterprises (SMEs) represent around 90% of companies and are responsible for roughly 70% of jobs and GDP worldwide.

In Japan, over 3.36 million SMEs account for 99.7% of all businesses and around 70% of total employment. Japan's SMEs also face significantly higher early-career turnover rates than larger corporations, according to data Japan’s Ministry of Health, Labour and Welfare (MHLW).

Between 2003 and 2021, around 25% of employees at Japanese companies with over 1,000 workers left within the first three years. The rate was about 33% for companies with 100 to 499 employees and 40% for those with 30 to 99 employees.

By 2023, one-year turnover rates were 11% for firms with 100 to 499 employees and 15.3% for those with 30 to 99 employees – significantly higher than the 7.3% seen in large enterprises with over 1,000 employees.

High turnover raises recruitment and training costs, of course, but it also lowers productivity and heightens risks to business continuity. In 2024, a record high of 350 business bankruptcies in Japan were attributed to labour shortages, underscoring the urgent need to reinforce both talent acquisition and retention strategies.

Public-private collaboration on initiatives to support recruitment, training and development are crucial to helping Japan's SMEs face the country's labour shortage issue. Programmes already underway are using digital tools and government subsidies to do this.

Primary drivers of turnover among Japan's SMEs can include dissatisfaction with wages, work conditions and career development opportunities. Digital tools can help to address these challenges by streamlining human resource management and expanding access to upskilling opportunities.

Such digital solutions can be both cost-effective and accessible. They can improve employee engagement, make career paths more visible and support ongoing learning and development. For example, HR management system KaoNavi goes beyond consolidating employee data to support HR with talent development. By streamlining HR operations and identifying skills gaps, KaoNavi facilitates clearer career planning and greater transparency in evaluations, enhancing employee retention.

Reskilling support services designed for small teams are also available in Japan. Education company Benesse, for example, provides access to the corporate version of the online learning platform Udemy to small businesses. Users can choose from around 14,000 courses that cover practical business skills, including presentation techniques and digital tool usage. Similarly, Persol Innovation, a subsidiary of Japanese human resource management company Persol Holdings, offers a small-team plan for its reskilling support service Reskilling Camp, which bundles popular training topics into accessible packages.

These programmes help SMEs to upskill their workforces and advance digital transformation. Also, importantly for smaller companies, many of these tools are both affordable and eligible for subsidies from local governments.

The Japanese government and local authorities are ramping up their support for SME recruitment and retention schemes through financial assistance. The government recently announced an ambitious five-year, JPY 60 trillion ($417m) investment plan aimed at facilitating wage growth and productivity improvements among SMEs. The initiative includes expanding support networks through chambers of commerce and financial institutions, as well as promoting capital investment in labour-saving technologies.

Prime Minister Shigeru Ishiba emphasized this commitment during the announcement: "Wage increases are the key to our growth strategy. We will mobilize all policy resources to support management reforms at small and medium-sized enterprises and small businesses, which account for 70% of employment in Japan, and to create an environment for wage increases."

MHLW is also advancing workforce development through the Human Resource Development Support Grant, which subsidizes part of the cost incurred by employers who provide specialized job-related training to their employees.

At the local level, various initiatives help Japan's SMEs adopt machinery and IT tools that boost productivity and lead to wage increases. Notable examples include Chiba Prefecture’s SMEs Growth Promotion Subsidy and Saitama Prefecture’s SMEs Labor Shortage Response Support Program.

Japan’s integration of digital tools with robust government support aims to help SMEs secure and retain talent, even when resources are limited. In an era of growing global uncertainty, such efforts are vital for building long-term economic resilience.