Future Shock: Japan Faces Demographic Nightmare

By Palash R. Ghosh, International Business Times

July 21, 2010 

Japan

Elderly woman exercises with wooden dumbbells during a health promotion event to mark "Respect for the Aged Day" in Tokyo

As of 2008, the national birthrate was 1.37 children per woman, according to the Japanese health ministry. If this trend continues, Japan's population will drop from 127 million currently to 95 million by 2050.

Simply put, Japan has too many non-working elderly people and too few people of working age to support them. As this discrepancy widens in the coming years, the costs of taking care of the aged will become an ever-greater burden on the already-weary Japanese of prime working age.

“We have never seen a country of the size and importance of Japan face these kinds of demographic issues before,” said Dr. Stephen Bronars, Ph.D., a Washington D.C,-based senior economist with Welch Consulting, a labor & employment consultancy. 

Japan's overall public debt is more than twice its entire $5-trillion economic output, which far exceeds any other industrialized country. An effort to curb the nation's huge public debt by Prime Minister Naoto Kan's new government by raising sales taxes was soundly rejected by the populace.

Not only does Japan suffer from a very low fertility rate, but the problem is compounded by a very high life expectancy and a traditional discouragement of immigration.

Japan's average life expectancy is the highest in the world – as of 2008, it was 86.1 years for women and 79.3 years for men.

European nations like Germany, Italy and Spain (and even the U.S.) are experiencing similar aging demographic woes, but these countries allow relatively high numbers of immigrants to sustain and replenish their labor forces. By contrast, it is estimated that less than 2 percent of Japan's population is currently foreign-born.

“It's not just that the overall population of Japan will decline, the crucial issue is that the size of the labor force relative to the overall population will decline,” Bronars said.

According to government figures, in 2008, the combination of the elderly and young population divided by the working-age population amounted to 55.2%. Also, the proportion of elderly in the total population has remained above that of the younger age group since 1997.

It is also believed that Japan's workforce will be cut by 18% by 2030.

Bronars noted that many developing countries also are seeing higher life expectancies, but their fertility rates have not declined as much, so that the labor force grows as a fraction of the overall population.

Japan's economy has stagnated with deflation for about the past two decades, but Bronars does not think the country's aging population was the principal culprit behind this phenomenon.

“Japan enjoyed huge per-capita GDP growth up until the early 1990s, when growth started to flatten,” he said. “But prior to that there was also a massive run-up in asset prices, resulting in a bubble. That had nothing to do with an aging population.”

But in the future, the aging workforce and population will be an all-encompassing issue.

Indeed, how the large number of elderly people impacts the economy is a long-term forward-looking theme – perhaps over the next 50 years or so.

“An increase in the elderly population will likely result in higher spending on health care, social programs and retirement programs, increasing the deficit,” he noted.

Although Japan has a very high debt-to-GDP, Bronars indicated that they also have substantial public pension fund reserves and other assets, which somewhat offsets their public debt.

Also, the aging demography will have a dramatic effect on Japan's time-honored tradition of saving.

“Historically, Japan has had a relatively high savings rate which helped maintain higher government spending,” Bronars noted. ”But with fewer people working and more in retirement, there is likely to be dis-saving – that is, the drawing down of assets accumulated over the years.”

For many decades, Japan's public debt was financed by massive savings that resides in its banking system or in Japanese sovereign bonds.

But now Japan's savings rate has dropped to about 3 percent from more than 10 percent a decade ago.

As such, Japanese bond markets will have to open up to foreign investors, who up till now have participated very little in the nation's debt markets.

Bronars predicts that the Japanese government may print more money in order to monetize that debt and pay back investors holding Yen-denominated debt. That would, of course, drive down the value of the yen relative to other major currencies over many years.

“For years Japan has run trade surpluses,” Bronars said. “Much of the money they generated from exports went back into investments into overseas markets, but historically there has been much less foreign investment in their own country. That is going to have to change now. They're going to have to open up what has traditionally been a fairly closed economy and society.”

It will likely be very difficult for Japan to avert this disaster, but they could take some measures to mitigate it.

It is estimated that by 2055, 40% of the Japanese population will be age 65 or above (versus 20 percent in 2006) and most of them will not be working.

Bronars suggests that they increase immigration to European-levels; encourage more Japanese women to enter the workforce; and raise the mandatory retirement age. But even that might not be enough to quell a most intractable problem.

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