The paper also reiterated that if the labor shortage leads to higher wages, household incomes will rise, which in turn will boost consumer spending.

The “Annual Report on the Japanese Economy and Public Finance” for fiscal 2017 was submitted to a cabinet meeting on Friday by Economic and Fiscal Policy Minister Nobuteru Ishihara.

The report pointed out that Japan’s current labor shortage is worse than that during the country’s bubble economy in the late 1980s. While that is a constraint on economic growth, it can also offer a chance for Japan to increase productivity and beat deflation, the white paper says, urging companies to reform work styles and push for technological innovations.

The paper apparently suggests that a fourth industrial revolution, which incorporates such things as artificial intelligence and work style reforms, could increase productivity and help rid Japan of deflation.

The report says Japan’s current economic recovery cycle might already be the third-longest since World War II.

The labor shortage is due to growing demand for workers thanks to economic recovery, as well as the shrinking working-age population, the paper says.

Although more women and elderly people are joining the workforce, their working hours tend to be shorter, so that the overall labor supply is not growing, the paper points out.

To expand the favorable cycle of economic expansion and beat deflation, Japan needs both higher consumption helped by higher wages and at least some inflation, the paper says, adding that it is imperative that the public share this view.

The problem with the current economy, the report argues, is that a tighter supply-demand balance in the labor market is not helping to push up wages as much as before. One reason cited in the report is that compared to the bubble economy, Japan is investing less today so that labor productivity is not improving and wages are tending to stagnate. Another factor that is keeping wages from rising is risk aversion, both by workers and by companies. For instance, people have a strong preference for staying in the same job for many years, the paper says.

Japan lags behind other major economies in adopting new information technologies and automation. The labor-intensive nature is stronger among nonmanufacturers than manufacturers.