The fate of Japan — and everyone else

If you want a peek at the future, try looking at Japan. It’s a sobering exercise. Here’s how economist Timothy Taylor, managing editor of the Journal of Economic Perspectives, describes the country’s outlook:

“[Japan] is facing a situation of a declining population and workforce, and the share of the population that is elderly is on the rise. [This is] driving up government spending on pensions and health care, and together with attempts to stimulate its economy through government spending (much of it on infrastructure), Japan has run up an enormous government debt.”

To put it bluntly (as I have argued before): Japan is slowly going out of business; its population is shrinking and it resists immigration. This cannot continue indefinitely.

What is significant about Japan’s situation is that it’s shared, to a greater or lesser extent, by most of the world’s advanced countries. Birth rates are depressed; economies are expanding slowly, if at all; and debt burdens are high and often growing.

You may recall, or not, that in the late 1980s, Japan was widely expected to overtake the United States as the world’s leading economy. Japanese firms also increasingly dominated old-line manufacturing industries (steel, autos) as well as new high-technologies (electronics).

What a difference a few decades make! Japan’s economy, though huge, remains the world’s third largest, behind the United States and China. But it is no longer the envy of the world. Many practices admired in the 1980s are less so today.

The biggest problem is the nation’s aging. A new report on Japan from the Organization for Economic Cooperation and Development (OECD) — quoted by Taylor and posted on his useful blog, the Conversable Economist — reports this astounding fact: Half of Japanese children born in 2007 are expected to live to 107.

Meanwhile, Japanese births have slumped. The total fertility rate — the number of children women are expected to have during their lifetimes — was only 1.4 in 2016, compared with an OECD average of 1.7. (A fertility rate of about 2.1 is needed for a population to replace itself.) Deaths have exceeded births since 2007, and the population is “expected to decline by 8.2 million in the 2030s, the equivalent of losing Tokyo.”

Naturally, there are spillovers. Based on present trends, the labor force will drop 25% by 2050, while the relationship between working-age Japanese (20-64) and the 65-and-over population shifts sharply. There are now two working-age Japanese for everyone 65 and over; by 2050, that ratio is projected to fall to 1.3 working-age Japanese for each elderly person.

What this describes is an economic doomsday machine. The increasing number of older Japanese has already put enormous pressures on the government’s budget. Since 1991, public social spending — mainly for retirement pensions, health care and long-term care — has doubled as a share of gross domestic product, from 11% of GDP to 22% of GDP in 2018.

The mounting deficit spending has in turn ballooned Japan’s government debt to 226% of GDP — “the highest ever recorded in the OECD area” and roughly twice the U.S. level. But efforts to reduce the deficits by cutting spending or raising taxes risk squeezing the incomes of younger workers and discouraging them from having more children.

Of course, Japan’s imbalanced population could be rectified through more immigration. But this has never been popular in a country with such a strong sense of its own identity. True, the number of foreign workers doubled from 700,000 in 2013 to 1.46 million in 2018. Still, that was only 2% of Japan’s labor force. The share of foreign residents was only 1.9% of Japan’s population in 2017, while the OECD average was 13%.

The ultimate cures for Japan’s ills are obvious: women should have more children; people should work longer; economic growth should be accelerated. Despite some small improvements, all have been impossible to achieve.

Whether Japan can find its way out of this box is uncertain. There are good reasons (politically) to do nothing and weak reasons (substantively) to do something.

Many advanced countries, including the United States, face similar — though less severe — problems. “The rest of the world will be watching,” says the OECD. It may not like what it sees.