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Japan Digging Out of Chronic Deflation One IT Worker at a Time

In Japan, it’s common for an employee to work for the same company for their entire career. Indeed, lifetime employment has been a central feature of the nation’s economy since World War II, and with such limited job mobility, nominal wages haven’t grown for three decades.

But one Japanese company in the Information Technology (IT) sector has taken an unusual approach to reinvigorating the labor market. SHIFT, which provides software-testing services, is poaching and re-training workers from other industries, turning them into IT pros. As Prime Minister Fumio Kishida advocates for the reskilling of workers and for companies to increase wages, SHIFT’s system is an example of how companies could help put a dent in Japan’s entrenched model of lifetime employment, helping the country dig out of a decades-long deflationary environment.

Among its labor-market challenges, Japan faces a major shortage of IT engineers. Of the 75 million people in the country’s working population, only about one million are IT professionals. That’s a lower proportion than in other developed countries such as the US and Germany. But SHIFT estimates that 10% of Japan’s non-IT workers aspire to join the space.

Software testing is also one of the most labor-intensive processes in software development, as it entails the time-consuming work of manually looking for bugs within code and making sure an application works as intended. For firms that struggle to find experienced programmers to begin with, having those expensive programmers do testing doesn’t make sense. Some of SHIFT’s biggest customers are consulting firms that would rather have their own high-paid employees focus on their main business of consulting while outsourcing something like software testing to save money. For example, the average salary at Nomura Research Institute (NRI), an IT-consulting firm, is double the average at SHIFT:

Source: Company filings

Even though it’s lower than at other IT-related firms, compensation is a big part of the draw of making a career change to work at SHIFT. Candidates seeking to become software testers start by taking a recruitment exam, known as CAT, that filters applicants for certain skills and traits—comprehension, attention to detail, and judgment, for example—rather than computer-programming knowledge or IT experience. As of December, nearly 103,000 people have taken the CAT exam and about 16% have passed, according to SHIFT.

For the people SHIFT hires, it provides training and certification programs as well as performance-based compensation as incentives for continued learning and advancement. That sort of pay structure means that many of SHIFT’s personnel costs are variable, but the compensation scheme—and the fact that these workers were likely earning lower wages in their previous jobs—helps SHIFT attract and retain talent, which is important for the company to sustain growth. According to SHIFT’s filings, the average monthly unit price for its engineers is 818,000 yen (US$5,600). Engineer compensation accounts for about 60% of those sales, which implies an annual salary of about 6 million yen (US$41,000), higher than the average pay in Japan of 4.6 million yen (US$31,000).

By encouraging worker mobility and development of new skills, SHIFT is driving up Japan’s stagnant worker pay.

Analyzing Industry Structure through Porter’s Five Forces Model

As bottom-up investors, we aim to invest in high-quality growth businesses at reasonable prices to provide superior risk-adjusted returns over the long term. To determine what constitutes a high-quality growth business, we research a company’s management, financial strength, growth prospects, and we closely examine the industry in which it operates to determine the company’s competitive advantage.

It’s as important to examine a company’s industry as it is to examine the fundamentals of a company. An analysis of industry structure can inform how well-positioned a company is relative to competitors, as well as the profit potential for the company.

Our analysis is guided by Harvard University professor Michael Porter’s Five Forces, which were first introduced in a 1979 issue of Harvard Business Review and later detailed in his 1980 book, Competitive Strategy: Techniques for Analyzing Industries and Competitors.

In this six-part video series, we examine each Porter Force and discuss how we use them to analyze industries. Watch the series introduction below and click through to see how we leverage Michael Porter’s Five Forces framework for industry analysis.

Japan’s Past Hints at China’s Future

China faces a demographic shift similar to Japan three decades ago. Portfolio manager Jingyi Li explains how that comparison can help guide investors looking at China today.

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NVIDIA and the Cautionary Tale of Cisco Systems

NVIDIA, the giant semiconductor company founded by Taiwanese American Jensen Huang, seems invincible these days. Annual revenue has more than doubled since 2020. Its stock price has more than doubled this year and is up more than 700% over the past five years. It is one of the rare trillion-dollar market-cap companies.