When Yutaka Takahashi strolls around his neighborhood in Japan's capital, he sometimes wonders where all the children have gone.

"When we were young, it seemed as if there were kids all over. Now it seems as if there are only elderly people like me," said the 67-year-old retired oil company manager -- neither of whose 30-something offspring have children of their own.

Already, one in five Japanese are aged 65 or over and by mid-century a falling birth rate and rising longevity mean that figure will nearly double, while the population will drop by 30 percent to 90 million.

Faced with a shrinking labor force, companies in the world's fastest-aging society are looking to older people as well as younger women, immigrants and even robots to fill the gaps.

Yet none of those sources, economists warn, will suffice to avert a nightmare scenario of ballooning social welfare costs, faltering competitiveness and declining living standards without one more vital ingredient -- a rise in productivity per capita.

"The productivity issue is the absolutely most important issue," said Robert Feldman, chief economist for Morgan Stanley in Tokyo. "Filling the gap in the work force would help, but the number is far bigger than that can cope with.

"Even the cats would have to work."

Other countries face similar challenges. Already the majority of the world's older people live in developing countries, and by 2050 almost 80 percent of those aged 60 and over will reside in such places, according to a recent United Nations report.

Japanese policy-makers are well aware the world is watching.

"If Japan successfully provides an answer, that becomes an answer for many other countries, because Japan is a pioneer in dealing with this aging population," said lawmaker Kuniko Inoguchi, former minister for gender and population policies.


Like other aging societies, Japan is suffering from a pincer effect of falling birth rates and longer lifespans due to healthy diets and improved medical care.

Japanese girls born last year can expect to live to an average age of 85.8 years, making them the longest lived in the world. Their male compatriots fare slightly less well, with a life expectancy of 79, second to Icelandic men at 79.4 years.

At the same time, Japan's fertility rate has dropped to 1.32, up slightly from its record low but well below the 2.07 needed for a stable population.

Japanese policy-makers grappling with the baby shortage have sought ways since the early 1990s to make it easier for women to juggle jobs and families -- so far with a marked lack of success.

What Japan needs, Inoguchi says, is a three-fold approach that combines better access to daycare, increased family allowances for struggling young couples and steps to cut back the long working hours that discourage men from helping out at home.

"The more women work in society, the higher the birth rate," she said in an interview. "You might think it is the other way around, but that is the correct hypothesis."


Many experts, however, doubt that fertility rates can rise enough to stem a decline in the work force.

"Even bringing the fertility rate to 1.7 would be an enormous gain, but the new workers wouldn't come on line until 22 years from now, and even at that, the number would be fairly small," said University of Michigan professor John Creighton Campbell.

Japan's latest government forecasts suggest there will be 1.3 workers per older person by mid-century, down from 3.3 in 2005.

Immigration is one often-mentioned solution, but even with a gradual opening to skilled foreign workers, few expect foreign workers to compensate for much of the labor shortage.

"Fifty years from now, there will be 30 million fewer people," said Hitoshi Suzuki, a senior researcher at Daiwa Institute of Research. "It's impossible to let in that many foreigners. We are not going to become a country like America."

Japan may be less unusual in this regard than is suggested by its frequently expressed fears that foreigners are hard to absorb in a society that perceives itself as culturally homogeneous.

"No country is expected to allow the massive immigration needed to offset aging," the United Nations report said.

That means corporate Japan must step up its search for overseas markets and production centers while tapping two groups -- women and older people -- to try to fill labor gaps at home.

Women are among the most under-utilized segment of Japan's labor force -- many still quit or switch to part-time jobs after marriage and childbirth -- so there is scope for change if social and corporate attitudes change.


Older Japanese, many of whom are already inclined to keep working, are likely to do so in even greater numbers as laws change to require companies to let them stay on and the age for receiving full pension benefits is gradually raised from 60 to 65 -- and possibly higher down the road.

Even so, Japan and other aging countries will need to boost productivity to maintain living standards, economists agree.

"It is vital to boost productivity per capita," said Hideki Matsumura, a senior economist at the Japan Research Institute. "Concretely, this is very difficult. There is no simple solution.

"One way is to improve education. Another is to increase capital investment, to rely not just on people but on the capability of machines, including computerization and robots."

Reforming collusive business practices that undercut productivity and improving corporate governance would also help boost productivity levels that are now about 70 percent of those in the United States, economists say.

Japan's government has set a productivity growth target of 2.4 percent by 2011/12, up from an average of 1.6 percent in the 10 fiscal years to 2005/06.

Economists say the goal is achievable, if the government keeps pursuing policies to encourage innovation and efficiency.

Still, even optimists expect Japan's clout to decline as its population shrinks and ages.

"Japan's economic scale and status will decrease, but Japanese companies are already shifting to where the growth is, so they will grow, leaving their headquarters and R&D in Japan but selling and producing overseas," Matsumura said.

"Japan will become like a control center."