Talk of “wait-listed seniors” and “wait-listed children” has become commonplace in Japan these days as the nation grapples with a severe shortage of nursing homes for the elderly and daycare facilities for infants and children.

According to figures from the Ministry of Health, Labor, and Welfare, approximately 420,000 senior citizens are currently receiving long-term nursing care in some 6,000 “special nursing homes” around the country. Approximately the same number of seniors are on waiting lists for placement (receiving in-home services in the interim), with the wait time averaging two to three years. Meanwhile, the number of elderly citizens with dementia is expected to rise from 2 million to 3 million over the next decade, further expanding the demand for nursing care.

On the face of it, the shortage of day-care facilities for children may seem less severe. As of April 2011 there were 26,000 infants and children awaiting enrollment in licensed daycare facilities, as compared with 2.12 million enrolled, according to a MHLW survey. But these figures understate the problem, particularly in Japan’s big cities. Japan’s daycare system would need to accommodate an estimated 1 million additional children to meet the needs of all the Japanese women whose childcare responsibilities prevent them from seeking employment.

Clearly, rectifying this situation is vital not only to the young and elderly requiring those services but to our working-age population as well. Apart from providing equal opportunities for women, policies that enable mothers of young children to work outside the home could be crucial in the years ahead if Japan is to maintain an adequate labor force amid a dwindling and aging population.

Low Productivity, Meager Returns

Where eldercare is concerned, the industry has at least been expanding steadily since Japan’s Long-Term Care Insurance System was launched in 2000; although profits are modest compared with most other industries, private enterprise has moved in to take advantage of new opportunities, and private nursing facilities for the elderly have proliferated.

In childcare, however, government regulations restrict the form that private operations can take, limiting the potential for profit and making daycare centers an unattractive business investment.

Of Japan’s licensed childcare facilities, the majority are operated by “social welfare corporations”—private entities that receive public support and are subject to strict government regulation. The Welfare and Medical Service Agency, which provides low-interest financing for such facilities, surveyed 2,634 loan recipients in 2009 and discovered that about 20% were operating in the red. It also found that labor productivity—value added (operating income less business expenses and depreciation) divided by the number of employees—was just ¥3.86 million on average. This compares unfavorably with the averages for eldercare facilities, including low-cost “care houses” (¥4.38 million), special nursing homes (¥4.58 million), and “health service” (rehabilitation) facilities (¥4.91 million). Meanwhile, all of the foregoing compare poorly with the overall average for private businesses, which is slightly in excess of ¥6 million.

One reason for low productivity in the daycare industry is that it has failed to adopt management practices that have improved cost-efficiency elsewhere. This relates to the fact that most social welfare corporations operate only one facility. This forces them to hire a comparatively higher number of employees than those that can assign workers to shifts at several facilities, and prevents them from designing systems to deal more flexibly with fluctuations in demand according to time of day. And because they purchase their supplies (toys, instructional materials, etc.) in relatively smaller lots, they end up paying more per unit. Such factors keep daycare costs high and prevent major increases in productivity among social welfare corporations.

Meanwhile, of the approximately 23,000 licensed childcare facilities in Japan, only 157 are operated by joint-stock corporations. Many companies that have considered entering the business note they were discouraged by government regulations. Social welfare corporations alone cannot be expected to meet the needs for childcare services. Unless we actively tap the resources of private business, the shortage in daycare facilities is bound to persist, and women with young children will continue to find it difficult to enter into the workforce.

Pioneering Cross-Generational Care

Although long-term care for the elderly and daycare for children are both under the jurisdiction of the Ministry of Health, Labor, and Welfare, they are handled by different departments and governed by separate policies. In the private sector, however, an effort is underway to partially integrate nursing care with childcare operations. Joe Sadamatsu is head of a Tokyo firm called Global Bridge that is one of the pioneers in this effort, and he is optimistic about the prospects. “There’s high demand among working couples, and business is on a stable footing,” says Sadamatsu.

Expected return on investment is one of the key factors businesspeople consider when deciding whether or not to venture into a new area. In the case of elder- and childcare, the potential for profit is limited by regulations requiring a minimum number of employees for each person receiving services. Sadamatsu’s answer is to save on investment in facilities by operating eldercare and childcare programs under the same roof, with shared entranceways, business offices, kitchens, reception rooms, and so forth. By his reckoning, this arrangement can reduce investment costs by one-third.

In recent years both nursing homes and childcare centers in Japan have been hard pressed to secure adequate personnel. Sadamatsu’s model offers an advantage here as well. Having daycare on the premises of a nursing-care facility enables businesses to extend their recruiting efforts to those who are themselves raising children, while women need not quit to bear or raise children. Meanwhile, the interest and publicity this innovative approach is generating gives it a leg up in recruitment. From a social standpoint as well, such joint facilities provide valuable opportunities for interaction between small children and the elderly in an era when three-generation households are increasingly rare.

Regulatory Obstacles

Unfortunately, this sort of venture faces major regulatory hurdles under Japan’s current system. The biggest is the fact that the government subsidies available to qualified, privately operated daycare centers are limited to one establishment per operating entity. Under this system, a business that operates multiple nursing homes is unlikely to consider opening a childcare facility adjacent to each home. Eliminating this one-establishment-per-operator rule would go a long way toward improving profitability and facilitating staffing.

Given the current situation, the most realistic option is to combine day services for the elderly either with small-scale nationally licensed daycare services or with centers operating under local certification systems (such as in Tokyo). From the standpoint of encouraging interaction between children and the elderly, the ideal nursing-care model is a day facility for seniors who are not bedridden. Sadamatsu has already launched such a business in partnership with a daycare service provider in the city of Chiba, and so far the results have been very promising: the nursing facility is operating at 98% capacity, while enrollment in the childcare facility is 95%.

Since coming to power in 2009, the Democratic Party of Japan has pushed hard for increases in public funding for children’s welfare, most notably through a controversial child allowance. Leaving aside the issue of whether cash payments are the most effective approach, a policy dependent solely on bigger government outlays runs into serious funding hurdles in today’s fiscal environment. What we need now are new models for the efficient delivery of social services, and the combining of elder- and childcare is one such model.

Social welfare has acquired a reputation as a black hole for public funds, but it can also be seen as a market with vast business potential. The public and private sectors should work together to encourage the development of this market, starting with those segments that are conducive to private initiatives. One crucial prerequisite for such development is the wholesale relaxation of the regulations governing the entry of private business into the care industry. I believe that such reform will lead to more judicious and efficient uses of tax revenues for social welfare and pave the way for the “integrated reform of the social security and tax systems” that the government and the DPJ have pledged to pursue.

Social Security Goals under the Government Reform Plan

Translated with permission from “Shakai hosho: Sangoka no joken,” Keizai Kyoshitsu column, Nihon Keizai Shimbun, October 28.