Introduction:
During the 50s and 60s, Japan had a population pyramid that actually looked like a pyramid with a wide base of children under working age and narrower at higher age structures. The population of Japan had been increasing because of decreases in infant mortality rates and death rates, and an increase in life expectancy. These are practically due to advancements in medication and healthcare. When the Crude Death Rates (CDR) are low and a mixture of high life expectancy and Crude Birth Rates (CBR) are seen in a country, a great increase in the population is expected, which was seen in Japan's case as well. However, as infant mortality rates decreased in Japan, the fertility rates of women decreased as well because more and more children started surviving. Also, increase in celibacy and the role of women in the labor market also affected this decline in the TFR. The TFR during the early years of the twentieth century was just short of 5, and it lowered to 1.36 in 2000. (Horlacher, 100) As a result of this decline in the TFR and CDR, the population pyramid has been losing its original shape, and the older generations are increasing in number.
The Japanese population has been aging rapidly since 1950 until now, and
this trend will intensify during the next 50 years. The ratio of old aged
people will increase from 10 to 20 percent in less than 25 years, causing
the retired population to be only half as much of the working population
and pushing up the number of dependents (including children) to 85 dependents
for every 100 of working age. The median age was 22 in 1950, 41 in 2000,
and by 2050 it is projected to be 53. Such projections have been causing
various types of fear in Japan such as the loss of economic activity, difficulties
in providing pension and healthcare, loss of customers, labor shortages,
and the lack of old-age support. (Horlacher, 97) How has the aging population
of Japan affected its economy, and how will it continue affecting it? Are
there any policy recommendations that could cope with this severe demographic
transition? This paper focuses on the causes of this demographic transition,
the effects on the economy as a whole, and possible policies that could
be incorporated to minimize negative impact due to the aging population
effect.
Causes:
As stated in the introduction, Japan's population is aging at a fast rate.
The young-age sector will decrease from 15% (of entire population) to 11%
in 2050, the working-age population will drop from 70% to 55%, and the old-age
sector is the only sector that will increase from 17% to 36%. Although the
ongoing decline in the young-age sector has given a downward force to the
number of dependents, the fast growth of the elderly population has significantly
overcome this downward trend and is causing the number of dependents to
increase rapidly, causing a heavy burden on the shrinking working age population.
(Horlacher, 99) It is stated above that a decrease in the CDR and infant
mortality rates cause the population to increase, which is then followed
by a decrease in the TFR and CBR. As a result, the TFR remains low and the
population keeps getting older and older. This is only one explanation to
the aging population phenomenon in Japan. The current TFR of 1.36 is far
below the replacement level, which is about 2.0. This low rate is caused
by delaying marriage and increased lifetime celibacy. "50% of the Japanese
women who are in their prime childbearing ages, 25-29, are not married"
and "the proportion of women who are not likely to marry at all increased
from 5 to 15 per cent" since 1975. (Horlacher 101)
The decreasing demand for marriage is occurring because of improved opportunities
for higher education and employment. Japanese women have received higher
education and higher salaries in recent years compared to the past when
the common practice was to have women take care of the household and men
go out to work. The wages of women under age 30 have risen from 70% of men's
wages in 1970 to 90% in 2000; therefore, they have been favoring working
over taking care of children. The demand for children has also drastically
decreased because of the improvements in public and private pension payments
in Japan. This reduces the value of children as a source of support when
the parents retire from work. Hence, it is not necessary to have 4 or 5
children in a house hold anymore because they will only increase the burden
(both financial and physical) on the woman, not allowing them to work as
much, and their old-age support is already taken care of by the government.
(Horlacher, 103)
The aging population has caused the number of dependents to increase, forcing
more and more women to give up full-time jobs and stay home while taking
care of the elderly. While the population of the elderly who need full-time
care has been increasing, the number of middle-aged women who usually take
care of the old people is decreasing. "By 2025, almost half of non-working
middle-aged women will be providing elder care." (Horlacher, 103) This
is said to be another reason why fertility rates are declining in Japan.
Effects on the Economy:
Japan's GDP increased the most between 1945 and 1975 at nearly 10% per year,
and those years were also when Japan's population grew fastest. The GDP
tripled in three decades between 1965 and 1995. However, these growth rates
began to decrease little by little and it has been negative for most of
the 90s. GDP will continue to decrease over the next 25 years but GDP per
capita is projected to increase slowly. This is hypothesized to be correlated
to the aging of Japan's population. (Horlacher, 104)
Similarly, projections also predict that saving rates will also decline
as consequently to the aging Japanese population. Currently, Japan's saving
rate is the highest among the developed countries, but it is decreasing
slowly. The factors that are likely cause a downward movement on the saving
rate are the aging of the population, the decline in economic growth rates,
and an increase in the retirement age. On the other hand, the factors that
will increase the saving rate are the decline in the labor force participation
rates of the elderly, and increases in life expectancy at retirement. When
the two sets of factors are weighed, it is likely that the factors that
cause a downward trend dominate. (Horlacher, 104)
Modigliani and Brumberg predicts in the life cycle hypothesis that retirees
will consume by dissaving, which is financed by the savings of the labor
force. However, if population of the labor force is decreasing, the worker's
savings will not catch up to the dissavings of the elderly. Hence, there
is a downward pressure in Japan's saving rates. Yashiro (1997) mentions
that Japan's saving rates have been exceptionally high because of the labor
participation of Japanese males over 65, and that the life expectancy has
risen, encouraging people to save more for a longer retired period. Yashiro's
study proves the life cycle hypothesis by showing that the elderly people
in Japan are indeed dissaving. Since aging is accelerating and the labor
force is lessening, predictions show that the saving rates will decline
in the future. Horioka (1989) predicted likewise that the saving rate in
the first half of the twentieth century would fall to about -20% of personal
income. In contrast, Ando (1995) "projected that in the early stages
of population aging, the higher saving of middle-aged couples would more
than offset the decline in saving by the oldest group of individuals and
families." (Horlacher, 107) So saving rates will not fall immediately,
but the boost in the number of people above 70 will cause a decline in the
saving rate to about 10% of income.
As stated in the paragraph above, the labor force is shrinking in Japan.
Formerly, Japan's economic growth was powered by young educated workers
that worked for lower wages. However, the current focus on human capital
makes a university or college degree more attractive, and the labor force
participation rate (LFPR) is decreasing rapidly. The LFPR of men are much
higher than that of women, but it has been declining at a fast rate. On
a different note, Yashiro (1997) suggests that an increased LFPR of older
workers may result from the pension benefit cutting and the increase in
the age of eligibility for public pensions to 65. Many firms in Japan have
now set a mandatory retirement age at 60, and this is imposing difficulties
for the elderly who are retired at age 60 but cannot receive pension benefits
until age 65. (Horlacher 109)
Various public pension policies have been implemented in the past to satisfy
the demands of the older generation without compromising the objectives
of the nation. Tendencies show that the government is leaning toward collecting
abundant revenue, but reducing benefits to be able to cope with the rapidly
aging population. The pension system currently has a large stock of assets
because of the extra revenue the government has accumulated in the past,
but Yashiro (1997) and others warn that the rapidly aging population would
require much more than what is stored; hence, a deficit is expected by year
2050 if modifications are not made to the pension policy. One strategy to
counterbalance the pressure of further expenditure is to reallocate pension
benefits to the elderly from wages to consumer prices. In other words, they
will be able to buy products at a cheaper price. Another strategy is to
raise the benefit eligibility age from 65 to 67 years. However, pension
payments construct 60% of the income for elderly, so a severe cut in their
income can cause a lowering of living standards for the older age group.
(Horlacher, 112)
Likewise, reforms in the health system must be made as well to combat the
aging population. In 1975, health care cost for the elderly accounted for
14% of the entire population. This increased to 31% in 1995, and by 2025,
it could rise up to about 50%. The "Golden Plan" was employed
in Japan to reduce the demand for medication by improving care services
for the elderly (Horlacher, 114)
One way to offset the effects of population aging, decline in population,
and also enable continuous economic growth is to increase the efficiency
of the economic system. "In the face of an increasing scarcity of labor,
firms would seek to employ their workers more efficiently." (Horlacher,
111) However, studies show that the decrease in the labor force growth has
only led to a decline in the growth of productivity measures. The productivity
had been growing at a rate of 2.4% per year from 1983 to 1990, but the rate
dropped to 0.2% growth per year in the following decade.
Policy Recommendation:
Japan's government has accumulated a deficit amounting to 9% of GDP and
the net debt is about equal to GDP. (Muhleisen) With such high measures
debt, it would be extremely difficult for Japan to finance the needs of
an aging population while appeasing the issues that are raised in the section
above. Obviously, not one single policy fiscal or monetary policy can stabilize
the economy while satisfying the elderly. What Japan currently needs is
policy mix that attacks the problem from different angles and with sensitivity
to not allow one aspect to predominate over the others.
One mix suggested by Muhleisen and Faruqee (2001) is to stabilize the debt
situation in the country by cutting public investment, broadening the direct
income tax base, and increasing the consumption tax rate. All of these are
rather feasible because public investment in Japan is one of the highest
in developed countries, a broader tax base allows deductions in income tax,
and the consumption tax rate at 5% is relatively low by international standards.
This endeavor to stabilize debt will surely lead to long-term advantages,
but it may impose short term risks that may impede the economic recovery.
Therefore, a sensitive balance to the implementation is necessary. (Muhleisen)
Cuts in social security benefits and an increase in the benefit eligibility
age are also necessary to complete the policy mix; so that the burden of
financing a large cohort of old aged people can be lighter on the country.
Another strategy that is definitely necessary is technological innovation
that is discussed in the previous section. An effort to maximize the productivity
of labor is largely significant to allow for further growth in Japan's economy
amidst of an aging population.
Horlacher, David E. and F. Landis Mac Kellar, (2003), "Population Ageing
in Japan: Policy Lessons for South-East Asia", Asia Pacific Development
Journal, vol. 10, no. 1, (June 2003), pp. 97-122
Muhleisen, Martin; Faruqee, Hamid (2001), "Japan: Population Aging and the Fiscal Challenge", Finance and Development, v38, n1 (March 2001): 10-13