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. For the full year 2025, "employee turnover-type" bankruptcies, where staff resignations directly or indirectly caused business failure, reached 124 cases, up roughly 40% (37.8%) from 90 the previous year. It was the first time the annual figure topped 100 and the highest since records began in 2013.

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.

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!

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