Japan IT Labour Market in Focus

Renowned for its pioneering innovation and technological advancements, Japan’s Information Technology (IT) sector continues to play a pivotal role in driving the growth of the world’s fourth-largest economy.

Despite the recent headwinds and acute shortage of skilled talent stemming from the country’s declining population, the domestic IT services market is growing at a steady pace. Maintaining a CAGR of 5.60%, the revenue from Japan’s IT services market is projected to grow from JP¥ 13.28 trillion in 2024 to JP¥ 16.64 trillion in 2029.

While transformation remains at the forefront of boardroom agendas, several organisations in Japan are still in the early to middle stages of their digitalisation and modernisation journeys. Preserving their rich cultural heritage while embracing technology-enabled change is easier said than done. The ability to harmonise people, processes, and products and find the right balance between pragmatism and innovation will ultimately differentiate the digital leaders and the laggards.

Amidst the rise of new-age technologies and changing market dynamics, Japan's IT sector is at an inflection point. As organisations look to transform and thrive under the new normal, the ability to quickly adapt, bridge skills gaps, and be future-ready will be mission-critical.

Looking ahead, here are some of the key trends that are impacting Japan's IT labour market.

1. Digitalising Systems and Operational Processes Remain Significant Priorities as Organisations Bolster Automation and Shift to Cloud

In order to mitigate risks and boost competitiveness and future-readiness, most organisations in Japan are stepping on the gas when it comes to digital transformation. Revamping clunky legacy systems, modernising IT infrastructure, and migrating platforms from on-premises to cloud-enabled environments have become mission-critical as organisations struggle to keep pace with change. While the technology, financial services, and automotive sectors have been front-runners in system modernisation and cutting-edge innovation, others are ramping up efforts to digitalise processes, streamline workflows, and automate their labour-intensive operational activities. This is key to saving time, boosting productivity, and optimising costs across the board – enabling organisations to do more with less and capitalise on the underlying opportunities.

However, decades of adopting traditional practices, using mainframe systems, and resistance to change pose challenges to digital transformation efforts. The onus is on senior executives and middle management to lead by example, empower their workforce, navigate through the uncertainties, and transform their business models – particularly as the 2025 digital cliff looms large.

2. Acute Skills Gaps and Fierce Competition for Top-Notch Talent are Prompting Organisations to Recalibrate their Hiring Strategies

One of the major hindrances to digital transformation is the shortage of high-calibre IT talent with bilingual capabilities (fluency in both Japanese and English). Acute skills gaps and technical deficiencies within their workforce are holding organisations back from harnessing the full potential of new-age tools and technologies. In addition to the challenge of hiring top IT talent amidst limited supply and a highly competitive labour market, organisations are experiencing high turnover rates and losing new talent within six months of onboarding.

Grappling with a shortage of top-notch local and international talent within high-demand IT skillsets, organisations across the board are recalibrating their hiring strategies. Training, upskilling, and talent development programmes have gained prominence as organisations look to elevate the skills and competencies of their existing workforce. For example, Microsoft has laid out plans to train over 3 million full-time and part-time workers, as part of their multi-billion-dollar investment to enhance their hyperscale cloud computing and AI capabilities in Japan.

On a macro-level, the Japanese government is rolling out initiatives to bring in skilled foreign talent to plug the existing gaps and introduce global best practices within the local workforce. Examples include the flagship digital nomad scheme, which allows visitors from 49 countries and territories to stay in Japan for up to six months and work while touring the country.

With Japan playing catch up with the West when it comes to digital transformation, most organisations are in a cut-throat competition for top talent across AI, cloud computing, cybersecurity, data analytics, and other in-demand skillsets to drive their flagship initiatives. Articulating a strong EVP and finding out-of-the-box solutions are key to addressing talent attraction and retention challenges.

3. The Demand for Work-From-Home Flexibility is Higher than Ever

Since the onset of the COVID-19 pandemic, work-from-home (WFH) or remote work has emerged as a growing trend within the Japanese workforce. Majority of Japanese employees today prefer a hybrid (at least 2-3 days WFH) or fully remote work arrangement. With several employees having to take care of their young children or ageing parents, organisations in Japan have been prompted to recalibrate their traditional on-site work policies and provide more WFH flexibility. This has gained further momentum following a legislative mandate from the Japanese Parliament that requires employers to provide flexible work arrangements to employees with young children and extend their leave policies (including child care and nursing care leaves). As the country finds solutions to its alarmingly declining birthrate, providing WFH flexibility and boosting work-life balance across the Japanese workforce have become all the more important.

4. Increased Public Sector Investment is Expected to Boost the Competitiveness of Japan's Semiconductor and AI Sectors

The Japanese government has recently announced plans to invest more than JP¥ 10 trillion (approximately US$ 65 billion) through fiscal 2030 to bolster the country’s semiconductor and AI sectors. This investment is dedicated to support AI chip suppliers including the chip foundry venture Rapidus, which was established in 2022 with the backing of the Japanese government and eight major Japanese businesses – Denso, Kioxia, MUFG Bank, NEC, NTT, SoftBank, Sony, and Toyota. In partnership with IBM and Imec, Rapidus is targeting to kickstart the mass production of 2-nm chips in its Hokkaido plant by April 2025. With an influx of domestic and foreign investment, all eyes are on the employment prospects and ongoing developments within the chip manufacturing and AI sector – and whether it successfully catapults Japan as the global leader in semiconductors over the coming decade.

5. Flexible Onshore-Offshore Resourcing Models are Gaining Prominence as Organisations Look to Optimise Costs

Lacking sufficient bandwidth internally to drive their digital transformation and technology adoption efforts, Japanese organisations are increasingly leveraging staff augmentation and IT service providers to outsource their project delivery. However, skills gaps, budget constraints, and cost optimisation requirements are prompting several organisations to explore offshore resourcing models to complement their onshore workforce in Japan. Preferred offshore destinations include the likes of India and the Philippines, as organisations look to lower resourcing costs without compromising on quality.

In addition to working with IT service providers with proven onshore-offshore capabilities, a number of Japanese enterprises are setting up R&D centres and innovation labs overseas. For example, Olympus Corporation recently announced plans to establish a new R&D Offshore Development Centre in India. This trend is likely to continue as Japanese organisations form strategic alliances across the globe and ramp up their research and innovation efforts.