This dirty word is driving economic change in Japan

Workers born outside Japan are playing an increasingly important role in the world's third-largest economy. Just don't call it immigration.

The country is often said to pride itself on homogeneity and an aversion to outsiders. But as Japan's population declines and ages, employers are becoming aware of their constraints. The number of employees from overseas has more than doubled since 2012 to about 1.5 million, says Bank of America Merrill Lynch.

In recent conversations with local business owners, few expressed qualms about adding more of the foreign-born workers to their payrolls. With the jobless rate at a microscopic 2.2% – and two jobs for every applicant in the Tokyo area – pragmatism is starting to kick in. And while robots and automation are a part of the answer, as I wrote recently, that doesn't solve everything. Labor must be imported.

Unfortunately, new laws that took effect in April to open the country to workers from abroad don't go far enough. Prime Minister Shinzo Abe's proposal to bring in 345,150 foreigners over five years –  watered down to appease conservative legislators – falls short of the 1.5 million needed to fill Japan's labor shortage.

For Shinobu Hirano, manager of the Ishida-Taihei ironworks in Yubari, getting foreign workers is a matter of survival. His workforce of 35, including several people from Vietnam, makes grated tops for drainage systems. At least one of Hirano's Vietnamese employees is leaving soon, but thanks to Abe's reforms, he's pencilled in to get a handful of new ones. If headcount falls below 30, Hirano can't meet its production goals.

Yubari, a rural town in northern Japan that I wrote about last week, has lost about 90% of its population since the 1960s. Hirano said he is reconciled to outsiders, regardless of what you call it. "If there are no people, we can't manufacture."

Under Abe's new program, workers with some skills in industries like agriculture, construction, lodging, nursing and shipbuilding can stay in Japan for five years. Those with expert knowledge can extend their stay and bring their families. That could be a boon to employers like Hirano. 

The legacy of Japan's last big immigration overhaul three decades ago is fraught. With the country's economy booming at the time, descendants of Japanese who left the country, mostly in the 19th century for Latin America, were eager to return. The government started opening its arms to a quarter of a million of so-called Nikkeijin with few conditions.

The practical challenges were significant, however: Few spoke Japanese, many worked without health insurance and truancy was high among schoolchildren, according to a Kobe University paper by Junichi Goto. By 2008, in the throes of the global financial crisis, the government was subsidizing the Nikkeijin to leave.

The travails of the diaspora came up in conversations as a cautionary tale of what can go wrong. There are two big caveats, however. The first is that the policy was developed in a boom; Japan's famous bubble economy began deflating soon afterward. Even more importantly, Japan's headcount hadn't yet begun to shrink. If the country is willing to undertake significant changes to immigration in good times, imagine what can be done when the need is truly pressing.

There are some encouraging signs already. Language tests for foreign workers are being geared more toward the needs of businesses. Exams are administered both in Japan and overseas and are aimed at practical life in Japan, rather than the distinctly academic bent of previous versions. This is to be applauded; there is less scope to use testing as a prop to keep people out.

The trickiest part about Japan's labour-force transformation may be what you call it. The air quickly went out of discussions when I used the "I" word. It's worth mentioning that by the middle of the next decade – when Japan's post-war baby boomers hit 75 – the pressure on the native-born labour force will be so great that immigration alone can't bear the burden. Getting more locals into the job scene and gains in productivity will be just as important, BAML's Izumi Devalier and Takayasu Kudo wrote in May.

Even at 2% of the population, Japan is becoming a nation of immigrants, as Keizo Yamawaki, professor at the School of Global Japan Studies at Meiji University, puts it. The Japanese may be coming around to that idea – even if they don't shout it.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.