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Oct 1, 2015 | 19:31 GMT

3 mins read

Japan's Future Demographic Challenge

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Japan's Future Demographic Challenge

Since 2005, Japan has seen its 65-and-over population grow by more than 33 percent, faster than any past or future forecast rate. Over the next decade, this rate of aging will slow substantially, as will the decline in Japan's working-age population. From 2020 to 2030, Japan's working-age population (ages 20-64) will fall by around 4.8 million to 5.6 million. This drop will be well below the decline of 7.7 million-8.3 million people from 2010 to 2020, but it will be substantial nonetheless. To maintain a constant GDP, Japan will need to ensure average annual productivity growth of at least 2 percent. Doing so will require securing labor reforms. It will also depend on the Japanese government's ability to stimulate higher value-added services (such as financial services) and computer technologies industries at home.

Fixing employment problems will be critical for supporting Japan's growing elderly population. Compared with the years between 2010 and 2020, when the country's over-65 population grew by 7.5 million, the rate of population aging will slow considerably in the 2020s. Still, the absolute burden of caring for Japan's elderly population will only grow. By 2030, people over 65 will account for 32 percent of Japan's population, as opposed to 56 percent of the population at working age.

Tokyo will make tangible progress throughout the 2020s in cementing reforms and encouraging the kinds of industries needed to improve the overall productivity of Japan's economy. But the Chinese and European economies will remain weak through the early 2020s, and Japan's internal changes are unlikely to generate enough taxable income to reverse Tokyo’s reliance on deficit spending. Japan probably will not default on its debt, given the high rate of domestic ownership, but the amount of debt will grow, as will debt servicing costs.

The rates of workforce decline and population aging will both remain moderate in the 2030s before picking up precipitously in the 2040s. Efforts to boost fertility rates in the late 2010s and 2020s may help counteract the effects of working-age and population decline after 2040, but by and large, their effects on Japan's workforce will not be felt in the 2030s. If fertility does improve, Japan's workforce (by 2040, only 52 percent of the population) could find itself even more financially strained than in the previous decade. By 2060, Japan's workforce will have declined by 50 percent since 2015, while the country's total population could fall by as much as 25 percent. With this in mind, the years after 2040 are likely to be increasingly dominated by internal economic and social management-related issues.

 

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