Japan's Labor Shortage Bankruptcies Hit Record High: "Quitting" Now More Devastating Than "Hiring Difficulties"
2025 Sees First-Ever 400+ Labor Shortage Bankruptcies
Japan's labor shortage crisis has reached unprecedented levels, fundamentally threatening business survival across the nation. According to research by Teikoku Databank, labor shortage-related bankruptcies in 2025 reached 427 cases—a 25% increase from the previous year's 342 cases and the first time annual figures have exceeded 400. This marks the third consecutive year of record-breaking numbers, signaling a structural turning point in Japan's labor market.
What's particularly striking is the shift in what's causing these failures. While "inability to hire" has traditionally been the primary driver, recent data shows that "employees quitting" has become an increasingly deadly factor. Between January and July 2025, "employee turnover-type" bankruptcies—where staff resignations directly or indirectly caused business failure—reached 74 cases, representing a roughly 60% increase from the same period the previous year.
The "2024 Problem" Devastates Construction and Logistics
Breaking down the figures by industry reveals construction leading with 113 cases—the first time it has exceeded 100—followed by logistics with 52 cases. Both sectors set new records, reflecting the severe impact of the "2024 Problem"—new overtime labor regulations that took effect in April 2024.
In construction, the departure of licensed professionals such as construction supervisors and designers has made it impossible for many companies to continue operations. One home builder collapsed after key executives resigned following a change in leadership, severely undermining both sales capabilities and construction capacity.
The logistics industry faces a chronic driver shortage compounded by an inability to pass rising labor costs onto shipping rates. Teikoku Databank's research shows that trucking companies' price pass-through rate sits at just 28.6%—over 10 percentage points below the all-industry average of 39.4%.
"Wage Increase Difficulty-Type" Bankruptcies Crushing Small Businesses
Perhaps the most alarming finding is that approximately 77% of all labor shortage bankruptcies—329 cases—occurred at small businesses with fewer than 10 employees. For these companies, losing even a single worker can deliver a fatal blow to operations.
The underlying cause is the widening wage gap between large corporations and small businesses. In the 2025 spring wage negotiations (shunto), major private companies achieved an average wage increase of 5.52%—a historic level exceeding 5% for the second consecutive year. However, small businesses with limited profitability struggle to match these increases.
One real estate brokerage company serves as a cautionary tale: after reducing salaries due to poor performance, employees quit in succession, ultimately making business continuation impossible. Such "wage increase difficulty-type" bankruptcies are becoming increasingly visible manifestations of the risk companies face when they cannot offer competitive compensation.
Active Job Market Pressures Small Businesses
Japan's labor market is experiencing an increasingly active job-switching culture, with workers seeking better conditions. According to Ministry of Health, Labour and Welfare data, while the overall number of employed persons continues to rise, companies' sense of labor shortage remains elevated. As of October 2025, 51.6% of companies reported feeling a shortage of regular employees—marking the fourth consecutive year this figure has exceeded half.
This apparent contradiction reflects workers' transition to being "choosers" in the labor market. Talent concentrates in large companies that can offer attractive packages, while small businesses unable to compete on compensation struggle to secure personnel. Companies in regional areas lament that "young talent goes to major corporations, and we get no applicants even when we post job openings."
Service Industries Also See Surge in "Resignation-Driven" Bankruptcies
Labor shortage bankruptcies have intensified across service industries including IT, eldercare, and staffing agencies. The elderly welfare sector saw 21 cases, while staffing agencies experienced 13—both significantly exceeding previous year figures.
The IT industry has been particularly hard hit by engineer poaching and talent outflow. One software development company operating on a small scale saw engineers depart and outsourcing costs rise, eroding profitability until bankruptcy became inevitable. Similar patterns are emerging in labor-intensive sectors including video production, beauty services, and security services.
Are There Solutions in Sight?
Several developments offer potential relief for the labor shortage problem. First is the raising of the so-called "income ceiling." Tax reform measures will raise the spouse special deduction threshold from ¥1.03 million to ¥1.6 million in fiscal 2025, and to ¥1.78 million in fiscal 2026. This may ease the tendency of part-time workers to limit their hours to stay under the threshold, potentially increasing labor supply.
Digital investment for productivity improvement is another important option. However, current data shows that small and medium enterprises lag more than 10 percentage points behind large corporations in capital investment for DX and IT initiatives. For small businesses that must rely on human resources, bridging this gap is no simple task.
Teikoku Databank emphasizes that becoming a company "chosen by workers" is essential from a talent acquisition perspective. Beyond wage increases, enhancing training programs and employee benefits to increase the advantages of working for a company will be crucial for improving corporate attractiveness.
Time to Confront Structural Challenges
In an aging Japan with declining birth rates, labor shortages are not a temporary phenomenon but a long-term structural challenge. Companies must face this reality and work toward building sustainable business models.
Wage increase momentum is expected to continue into 2026 and beyond. There are concerns that "wage increase difficulty-type" labor shortage bankruptcies will remain at high levels, particularly among small and medium-sized businesses unable to keep pace. Japan's labor market stands at a major turning point.
In Japan, the primary cause of labor shortage bankruptcies is shifting from "hiring difficulties" to "employee turnover," making the business environment increasingly harsh for small and medium enterprises. What is the situation like in your country regarding labor shortages and workforce retention? What measures are being taken? Please share your thoughts and experiences in the comments!
References
- https://www.tdb.co.jp/report/economic/20260108-laborshortage-br2025/
- https://www.tdb.co.jp/report/economic/20250806-taisyoku25y/
- https://www.tdb.co.jp/report/economic/20251006-laborshortage-br25fyh/
- https://www.tdb.co.jp/report/economic/20250704-laborshortage-br25h/
- https://www.tsr-net.co.jp/data/detail/1201650_1527.html
Reactions in Japan
Three people are leaving our company next month. We can't match the wage increases at big companies, but our clients won't let us raise prices either. We're completely stuck.
It's absolutely true that turnover is more serious than hiring difficulties. Even when we manage to hire, people don't stay six months. I wish more people understood the reality that small businesses don't have the resources for better compensation.
Construction bankruptcies at a record high? No surprise there—the trifecta of no days off, low wages, and dangerous work. Glad I switched careers.
The logistics industry can't survive without raising shipping rates. Shippers won't accept cost increases, so we have to suppress labor costs → people quit → bankruptcy. It's a vicious cycle.
It's ironic that big company wage increases are cornering small businesses. But from workers' perspective, moving to better conditions is the obvious choice.
So labor shortage bankruptcies are increasing in eldercare too. Of course they are—it's heavy work where you're responsible for lives, but the pay is low. Enough with exploitation dressed up as 'meaningful work.'
427 labor shortage bankruptcies. This is just the tip of the iceberg—include closures and the number is much higher. The culling of Japan's small businesses has begun.
Bankruptcies from engineer poaching is real. Several people at my company left for bigger firms. The workload increases for those who stay, then they quit too—it's a chain reaction.
Small businesses in rural areas are really struggling. Young people leave for cities, and many companies have no choice but to rely on foreign workers. Regional economies can't sustain this.
Honestly, I chose a big company over a small one because of salary. I have student loans to pay back, and choosing a company with better conditions for my livelihood is unavoidable.
They say 'become a company workers choose,' but wage increases and benefits require funds. Without changing the subcontracting structure that prevents price pass-through, there are limits to what small businesses can do alone.
It's nice that the income ceiling is going up, but it's meaningless if hourly wages don't increase. Some people want to work within dependent limits. It's not that simple.
They talk about improving productivity through DX, but IT talent costs have also soared beyond small businesses' reach. We end up relying on manpower, but we don't have the people. It's checkmate.
Over 5% wage increases in spring negotiations is welcome, but that's at big companies. If the gap with small businesses widens, employment polarization will accelerate. We need to lift the whole floor.
When I moved from a small company to a big one, my salary increased 1.5 times. I liked my previous company, but I had to support my family. And now, that company has gone bankrupt.
More people are quitting companies to become freelancers. If non-employment work styles spread, the very definition of 'labor shortage' might change.
We had the 'Great Resignation' phenomenon in America too. After COVID, workers' values changed and people left jobs with poor conditions. Japan seems to be following the same path.
In the UK, labor shortages have been severe since Brexit with fewer EU workers. Logistics and care sectors are in the same situation as Japan. This might be a common challenge for developed nations.
In Germany, succession and talent acquisition for SMEs (Mittelstand) is also an issue. But perhaps not as severe as Japan. The difference in immigration policies might be significant.
In France, worker protections are strong and firing is difficult, so hiring is cautious. It's the opposite problem from Japan, but in the end, small businesses suffer in both countries.
Korea is in a similar situation to Japan. Young people prefer large conglomerates (chaebol), and SMEs struggle to secure talent. We share the aging population issue too. It's a common East Asian challenge.
Labor shortages in manufacturing are serious in China too, but internal migration can cover some of it. Japan is an island nation with few immigrants, so the situation is probably tougher.
Spain actually has high youth unemployment. Japan's situation could be considered enviable in a way, but both countries share structural problems.
Australia supplements labor with immigration, but some industries still face shortages. If Japan accepted more foreign workers, wouldn't that solve it? Though there may be cultural barriers.
India has abundant young labor, and many people work overseas. If Japan relaxes visa policies, talent supply from India could be possible. It could be a win-win.
Many Poles went to work in Germany and the UK. As a result, we now have labor shortages domestically too. Labor movement is unavoidable in globalization.
Canada is proactive about immigration, but shortages of skilled workers continue. Ultimately, countries with declining populations all face the same issues.
Technical trainees from Vietnam to Japan are increasing, but we often hear about treatment issues. If Japanese companies valued foreign workers more, it could help solve labor shortages.
Mexico has many young people so labor shortages are less common, but brain drain to America is a problem. In terms of talent outflow, it's similar to Japan's small business situation.
Sweden is known for high welfare, but securing the workforce to support it is also a challenge. While not as extreme as Japan's declining birthrate, we might follow the same path in the future.
New Zealand is a small country where securing talent is also difficult. I thought remote work would reduce disadvantages for rural areas and small nations, but it's not that simple in reality.