Economic Impact of Japan’s Aging Population

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Japan holds one of the world’s strongest economies. However, despite its present strength, the future of Japan’s economic health appears uncertain. Japan faces an unprecedented degree of population aging as more than 20 percent of its population is over 65 years old. By 2025 it is projected that for every one elderly person there will be only two individuals of working age. It is estimated that by 2030, one in every three people will be over 65 years old.

Key Factors Leading to Japan’s Rapidly Aging Population

Two primary factors have led to Japan’s disproportionately aged population. One component is the increase in the proportion of elderly individuals. The second component is the slow population growth rate due to the declining fertility rate of its population.

Due to scientific and medical technological improvements in the past fifty years, life expectancy in Japan has raised from 72 years to 84 years, one of the highest in the world. While seemingly positive, this large rise in life expectancy has led to a large increase in the number of senior citizens.  

Japan’s decline in fertility has largely been attributed to Japan’s changing lifestyles. In the postwar era, Japan’s fertility rate experienced a sharp decline as it fell from a fertility rate of 3.5 births per woman in 1950 to just 2 births per woman in 1960. A decrease in the wage gap between men and women after World War II encouraged more women to enter the workforce, which led to women giving birth to fewer children as a result of the difficulty in reconciling work and child-rearing. Additionally, due to Japan’s generous social security system, fewer individuals feel the need to have children to support them through their old age because of the financial security they receive from the government. Another key factor that has led to decreased fertility is the decline of marriage as more people are getting married later in their lives, and a greater number of individuals are choosing to forgo marriage altogether.

Another factor leading to the skewed age demographic is the suicide epidemic that is plaguing Japan. Suicide is the leading cause of death for people aged 15-39 in Japan. The suicide epidemic has a long history in Japan that has roots in the country’s history of samurai and, in more recent years, the image of honorable suicide propagated by “kamikaze” pilots in World War II. In modern-day Japan, high levels of suicide are most likely directly correlated with the country’s stigma towards mental health and inadequate mental health support.

Economic Implications of Japan’s Aging Population

One of the primary issues that arise from Japan’s aging population is Japan’s ratio of retiring workers to new hires. As people age, they enter retirement and leave the workforce. This becomes problematic for the economy as a whole when there are not enough young people to fill the necessary jobs left by the retirees. Japan’s largest industries such as its automotive industry and electronics industry currently don’t have the manpower to continue at their current rate of production. This decreased rate of production as a result of its smaller workforce poses a large threat to Japan’s current position as an economic and technological leader. According to the IMF’s world macroeconomic model (MULTIMOD), the direct impact of Japan’s skewed demographics is projected to have a real GDP fall of about 20 percent in the next century and decrease annual GDP growth one percentage point over the next three decades.

Potential Solutions

Many solutions have been considered to help mitigate the issue of Japan’s aging population. Perhaps the simplest solution is the addition of more women into the workplace. The addition of more women in the workplace has many economic benefits for Japan. Although 64 percent of women are employed, most women only work part-time due to societal pressures to take care of their children and spouses. The most intuitive benefit is the increase in people in the workforce; however, Japan can see other benefits that come from more women entering positions of leadership, which will not only strengthen women’s rights but also bring Japan closer to egalitarian business and employment practices practiced by many other global superpowers. Prime Minister Abe has already adopted a new path called “womenomics” that pressures and incentivizes companies to hire more women and bring them to positions of leadership. A large hurdle that “womenomics” must overcome to achieve its goal of using women to raise the GDP of the company is the shortage of affordable daycare. Most private daycares are expensive enough to incentivize women to stay at home and take care of their children, and most government-run daycares are hard to get into because of limited capacity. One reason for the shortage in government-run daycare centers is because of the difficulty to hire those that work in the daycares because many believe that the pay received by daycare workers is not enough to compensate for the stress in caring for children. An easy way to tackle this problem is to compensate daycare workers appropriately.

Another easily implementable solution is decreasing barriers to immigration. This would provide Japan with a larger working population and more taxable income, which solves key aspects of the economic issues presented by Japan’s aging population. However, Japan’s government has been extremely reluctant to implement such a solution. Currently, only 2% of Japan’s residents are foreign, and many in that 2% are Japanese-born Koreans. This homogeneity is by no coincidence. Japan actively reduces the integration of foreigners in hopes of creating a strong sense of national unity.

The government has also come up with the idea of creating an “age-free society” in which people over 65 are not considered senior citizens. This incentivizes individuals to stay in the workforce for longer periods, which increases productivity despite the declining labor force supply. This idea can only be feasible and sustainable if there is large structural and labor reform that will allow elderly people to play active roles in the labor force for longer periods of time.

Japan faces a pertinent and persistent problem that is only projected to worsen. However, with direct action, the issues this problem creates can surely be mitigated. Japan’s response is not only critical for Japan’s population but the global arena as well. Japan will certainly prove to be an informative case study for countries projected to face an aging population in the future.

More posts by Chaitanya Vankireddy.
Economic Impact of Japan’s Aging Population
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