Japan's future prosperity will depend on improving its lagging productivity, says a report by McKinsey Global Institute that urges companies to boost their competitiveness by better use of their workers.

Japan's population of about 127 million began declining in 2011 and is rapidly aging, a trend seen in many industrialized countries. The country's gains in productivity — or the value added for each hour of labor — have lagged behind other wealthy countries in almost all industries, even advanced manufacturing.

That has hurt wage growth and also keeps returns on investment comparatively low, even for the largest Japanese companies, says the report, released Tuesday.

Japan's labor productivity lags 32 percent behind Germany's and 29 percent behind that in the U.S. — a gap that will widen to 37 percent over the next decade and ensure continued stagnation, the report said. Only in real estate did Japan show higher productivity than the U.S.

"Many of the barriers and bottlenecks that have constrained growth are not imposed by regulation; they stem from traditional ways of doing business," the report said. "Japan can reach 50 percent to 70 percent of its productivity goal by adopting practices that are already in use around the world, while most of the remaining improvement can be captured by deploying new technologies."

The report suggests better use of women and older workers; improved access to financing for entrepreneurs, and a more aggressive approach to tackling global markets by making company management more global in nature.

At stake is the country's economic future: Without improvements, Japan's per capita GDP will likely fall to $32,000, down from $46,736 in 2012. With major gains, it would at least hold steady, at about $48,000, the report says.

Prime Minister Shinzo Abe has made improving Japan's competitiveness a priority of his "Abenomics" growth strategy, which has so far mainly focused on lavish monetary stimulus and public works' spending. Abe's government has also drawn up a sweeping set up proposed reforms meant to spur growth, the third of his three economic policy "arrows" but has made little headway in what will be a years' long battle against vested interests in many industries.

"There is a fourth arrow, in a sense, which is what will companies actually do?" said Georges Desvaux, managing partner of McKinsey&Company's Japan office.

Japan's automakers, such as Toyota Motor Corp. and Nissan Motor Co., have done better than some other industries, especially consumer electronics manufacturers, in tapping into faster growing emerging markets. Japan can do a better job, Desvaux said, of capitalizing on its expertise in robotics and 3-D printing to significantly boost profitability.

In other areas, such as retailing, there is ample room for improvement, and an urgent need for quicker action given the strong growth in online commerce, the report said. In financial services, productivity has been declining at an average rate of 2 percent a year, it said.

"What Japanese have not been able to do is actually move from components to software and services," Desvaux said. "Japanese companies tend to be very good around manufacturing and development but not the rest," such as sourcing, procurement, supply chain management and pricing, he said.

Squeezed by competition from China, South Korea, Germany and other major exporting nations, Japanese manufacturers have sought to squeeze labor costs, mainly by shifting factories overseas and by slashing payrolls. But relying on temporary or contract workers who lack social benefits or long-term career prospects can hurt productivity, the report notes.

"That is a real issue because it's a lack of investment," Desvaux said.

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