TOKYO -- Japan's recovering economy may be in danger of hitting a wall, with a shortage of manpower limiting companies' ability to meet demand.

A construction company in Kurashiki, Okayama Prefecture, in western Japan, recently posted an announcement of bankruptcy procedures on a bulletin board that had been soliciting full-time workers. "We could have avoided this if we had been able to secure enough employees," lamented a company official responsible for sorting out debts totaling nearly 200 million yen ($1.93 million).

Thanks in part to the public works spending of Prime Minister Shinzo Abe's government, conditions for construction companies have improved. The competition for workers, however, has intensified. The Kurashiki company's inability to hire enough help meant it was unable to take orders, the official explained. That choked the business.

The worker crunch and higher construction costs are having ripple effects. York-Benimaru, which runs a chain of around 200 supermarkets in eastern Japan, had planned to open 15 stores in fiscal 2014, through next March. But it has been forced to cut the number to eight. As a result, the company has pushed back the target date for a medium-term business plan by two years, from fiscal 2017. The plan aims for 500 billion yen in sales.

When York-Benimaru does open stores, it too finds it difficult to recruit and retain workers. At a new outlet that opened in the northeastern Tohoku region in February, 20 part-timers declined job offers. "We are laboring to secure manpower on a day-to-day basis," said a York-Benimaru executive officer.

Seeing the ceiling

Japan's unemployment rate stands at 3.6%. With the supply of labor tightening, Bank of Japan Gov. Haruhiko Kuroda has said the problem of oversupply -- a contributor to the nation's prolonged deflation -- is about to be resolved. The governor noted the gap between supply capacity and actual demand is "almost zero."

That sounds positive, but a close look at the data reveals cause for concern. Japan's labor force is around 2.5 million off the peak of 68.1 million in 1997. During the current recovery phase, there are 820,000 more job offers than there were four years ago, but the number of job seekers has fallen by 610,000.

When Japan's economy is energized even moderately, labor scarcity quickly becomes an issue. Put another way, the country's growth ceiling was long clouded by deflation -- and now the limit is coming into view.

Some in the corporate world are feeling the need to become more worker-friendly. In this year's annual spring wage negotiations, former Hitachi Chairman Takashi Kawamura said the "fruits of growth" should be shared between management and labor. Fast Retailing decided to convert a significant number of nonregular workers into full-fledged staff members at its Uniqlo casual wear chain. Tadashi Yanai, the group's chairman and president, explained the move by saying that "workers are not parts" of a machine.

Yet recruitment looks likely to only become more challenging. Japan's working population is projected to decrease by nearly 12 million by 2060, even with efforts to promote employment of women and seniors.

For the period from 2012 to 2017, Japan's potential growth rate -- call it the economy's cruising speed -- is around 0.8%. The Organization for Economic Cooperation and Development estimates the shrinking labor force is currently restraining the rate by 0.4 of a percentage point. After 2018, the OECD says the impact will amount to 0.5 of a point, and after 2031 it will be 0.7 of a point.

"We have to be prepared for profits to fall for a while," said the president of DCam, a shipping company. For the first time in eight years, DCam this year accepted employees' demand for a pay-scale increase. The company, which manages four tankers, is buffeted by a harsh business environment. But Naito said management gave in because "if we lose workers, we'll be unable to operate the ships."

Companies are finding themselves in a tight spot as Japan exits from deflation but lacks the requisite human resources. This is a structural issue -- not something that can be explained away as part of the business cycle. For the economy to really hum, the labor problem will have to be addressed.

(Nikkei)