A family prays for the victims of the atomic bombing by the U.S., in the Peace Memorial Park in Hiroshima
A family prays for the victims of the atomic bombing by the U.S., in the Peace Memorial Park in Hiroshima Reuters

Japan, once the world’s most vibrant economy and a powerful political force on the global stage, has seen its fortunes dramatically reverse in the past two decades. Not only has the economy remained stagnant since the early 1990s, but like many Western European countries, Japan's population is aging while its birth rate is falling.

The government’s Health and Welfare ministry just reported that Japan’s population may shrink by one-third over the next fifty years (from the current 128-million to 87-million) By that time, about 40 percent of the people will be of retirement age. Moreover, Japanese life expectancy will continue to climb (up 84.2 years for men in 2060, and 90.0 years for women).

Due to a number of unique factors – including the nation's historical isolation, among others – Japan's demographic crisis is more acute than in many western countries.

Most observers agree, however, that unless steps are immediately taken, Japan faces a demographic disaster from which its economy many never recover.

The numbers are daunting.

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. A few days ago, Prime Minister Yoshihiko Noda promised to push through tax and social security reforms to tackle the mountainous debt. Among other measures, Noda wants to boost the 5 percent sales tax in two steps -- to 8 percent in 2014 and 10 percent by 2015.

“As things stand right now, the burden will be too heavy for future generations,” Noda told lawmakers.

“There’s no time to put this off any longer.”
Noda further warned: As global financial markets directly affect our economy, damage is irreversible once a nation’s credibility is lost. We’ve already seen examples in Europe.”

However, there is only so much government legislation can do to thwart peoples’ behavior or change the course of inexorable demographic trends.

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 percent. 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 – over the next 50 years or so at least.

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

“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.

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.