The global AI investment surge has ignited enormous demand for semiconductors and electronic components, pushing up Japanese export prices. Yet export volumes have remained virtually flat, creating a striking disconnect that stands in sharp contrast to South Korea's robust performance, where both volumes and prices have climbed together. As the AI-driven boom reshapes global industry, Japan's manufacturing sector appears to be missing out on what could be a once-in-a-generation opportunity.
According to a research report released on August 19 by Kentaro Koyama, chief economist at Deutsche Securities, this paradox is not simply a matter of insufficient capital investment. Rather, it stems from a deeper structural bottleneck in the labor market — rigid employment practices and short-sighted corporate decision-making are jointly blocking the reallocation of labor resources toward high-growth industries. The report highlights that these structural issues are undermining Japan's ability to seize the opportunities presented by the AI era.
The report argues that this predicament directly hampers the effectiveness of the government's growth strategy. The administration has set a target to channel large-scale domestic investment into 17 strategic sectors, including manufacturing, but without addressing the structural problems in the labor market, these investments are unlikely to translate into genuine capacity expansion.
Divergence in Price-Volume Dynamics: Japan Versus South Korea
Accelerating AI-related investment has spurred rapid growth in global data center construction, driving sharp increases in demand for semiconductors and memory chips. Japan, South Korea, and Taiwan are all key global supply hubs, yet each has reaped vastly different rewards from this boom.
Trade data since 2025 shows that electronic product exports from South Korea and Taiwan have grown substantially in volume, while Japan's export volumes have remained essentially unchanged. Meanwhile, export prices across all three regions have trended upward, confirming that genuine market demand exists. In the electronic components category, Japan's export price increases have even outpaced those of Taiwan. Even in integrated circuits, where Japan holds a relative competitive advantage, export values have risen significantly while export volumes have stalled.
The divergence is equally pronounced at the production level. Since 2024, South Korea and Taiwan have rapidly expanded their electronic component production, whereas Japan's output remains below its 2021 peak. The report points out that the rise in Japan's export prices actually proves its products are indispensable in global supply chains and retain pricing power — this is not a case of weak demand or outdated products. Instead, Japanese exporters are deliberately shifting focus toward higher-value-added products, pursuing a "low volume, high margin" strategy and consciously avoiding the "high volume, thin profit" path.
Capacity Expansion Hurdles: Capital Investment Shortfall Is Only the Surface
On the supply side, Japan's electronic components industry has long struggled with capacity accumulation. Data shows that the industry's capacity index has been stagnant since the 2008 global financial crisis, and has even declined in recent years. In contrast, South Korea has consistently expanded its capacity investment.
The report suggests that Japanese companies' cautious approach to expansion is deeply tied to painful historical lessons. In the 2000s, Japanese semiconductor firms made massive investments, only to be hit by market downturns and price collapses that resulted in substantial losses — a memory that remains firmly etched in management's collective consciousness. Combined with uncertainty about the sustainability of future demand, this has suppressed corporate willingness to expand and reinforced the inertia of sticking to the "low volume, high profit" approach.
However, insufficient capital investment is not the whole story. Even with existing facilities, companies have failed to fully utilize their potential — while capacity utilization in the electronic components industry has recovered somewhat since 2025, it still remains below historical peaks, revealing another more critical constraint.
The Real Bottleneck: Labor Shortages
Data from the Bank of Japan's Tankan survey exposes this deeper contradiction: in the electrical machinery industry, the index for excess equipment capacity has remained persistently positive, while the employment conditions index has fallen deeply into negative territory, indicating severe labor shortages. This gap has become a chronic problem since labor shortages intensified around 2015, and the data overwhelmingly points to "labor" rather than "equipment" as the primary bottleneck.
The structural root of the problem lies in the extremely low elasticity of substitution between labor and capital in the electronics industry. According to the Bank of Japan's January 2025 Outlook Report, the electrical machinery industry ranks among the lowest in manufacturing for capital-labor substitution elasticity, making capacity utilization highly vulnerable to labor shortages. Additionally, work style reforms implemented since 2019 have reduced working hours, but productivity gains have not kept pace, further constraining total output levels.
Labor shortages extend beyond individual companies. Staffing constraints throughout the supply chain, along with an acute shortage of construction workers responsible for building factories, further hamper corporate production through procurement delays and equipment installation setbacks. The Development Bank of Japan's Fiscal 2026 Capital Investment Plan Survey shows that for non-manufacturing companies, "easing supply-side constraints such as labor shortages" ranks as the top factor for expanding domestic investment; among manufacturers, this factor ranks third in importance — behind only "improved growth expectations" and "technological and talent advantages" — and even ahead of expectations for government support. This structural dilemma is that labor shortages not only fail to incentivize companies to increase labor-saving investments but actually directly suppress their overall investment intentions.
A Chronic Ailment: Resource Misallocation in Japanese Firms
The report examines this phenomenon from a broader perspective, arguing that Japanese companies' tendency to be "inactive or unable to act" in the face of opportunity is nothing new. During the significant yen depreciation since 2013, Japanese exporters similarly gave up opportunities to lower export prices denominated in foreign currencies and expand market share, instead maintaining local currency prices to prioritize profit improvement — resulting in the puzzling situation where "the yen weakens but export volumes don't grow."
Both scenarios share a common thread: Japanese companies lack the instinct to pursue scale expansion opportunities, and the fundamental issue lies in the structural inefficiency of labor resource allocation. From a macroeconomic perspective, even as the total labor force continues to shrink, if labor could be shifted from low-productivity sectors to high-productivity industries like AI-related fields, overall economic output could still improve. The current AI boom presents an ideal opportunity to drive this industrial transformation.
However, in reality, such cross-industry dynamic labor mobility is extremely limited, constrained by two structural factors: the rigidity of the labor market premised on lifetime employment, which hinders labor movement across industries; and a corporate decision-making culture oriented toward short-term results, which makes management hesitant to take on the risks of significantly raising wages to attract talent when demand prospects are uncertain. Together, these factors cause the mechanism for reallocating labor resources toward growth industries to malfunction.
Deep-Rooted Causes: The Triple Dilemma of Demographics, Industrial Structure, and Talent Supply
Horizontal comparison with South Korea further reveals the systemic origins of Japan's manufacturing labor predicament.
In terms of manufacturing employment scale, Japan's manufacturing workforce peaked in 1992 and has since declined by approximately 35%, leveling off in recent years. South Korea has remained broadly stable since the 1997 Asian financial crisis. On the trend of deindustrialization, Japan and South Korea have followed similar paths, with manufacturing employment shares both continuing to decline — reflecting the common patterns of demand shifting from goods to services as national incomes rise, and manufacturing automation displacing labor.
In terms of demographics, Japan's working-age population (ages 15-64) peaked in 1995, while South Korea did not reach its peak until 2017, and its current working-age population ratio is still comparable to Japan's historical peak level — this partly explains why South Korea's manufacturing employment decline has been relatively milder.
The gap in high-skilled talent supply is equally significant. OECD data shows that South Korea's proportion of STEM (Science, Technology, Engineering, and Mathematics) graduates in higher education ranks second among OECD member economies, while Japan falls below the OECD average. The report concludes that Japan's manufacturing labor predicament is a deep-seated problem arising from the intertwined effects of demographic trends, deindustrialization, and the education system.
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