REEXAMINING

JAPAN IN

GLOBAL

CONTEXT

On January 13, 2014, Reexamining Japan in Global Context's fifth seminar took place at The E.H. Norman Library, Embassy of Canada in Tokyo. The theme of the event was "The Aging Society."

The first presentation of the forum was given by Professor David K. Foot (University of Toronto) under the title "Population Ageing: Unwinding the Demographic Dividend." Professor Foot is widely considered one of the world's foremost demographers, and he is the author of the best-selling book Boom Bust & Echo: How to Profit from the Coming Demographic Shift. Originally from the United Kingdom, raised in Australia, and living in Canada, Professor Foot noted that the British spelling of "ageing" in his title was a nod to his heritage

While people always age, populations as a whole do not always do so. Population aging is entirely a function of life expectancy, fertility rate, and migration. In developed countries in recent decades, we have begun to notice and pay attention to population aging. Now we are beginning to see populations age in the developing world as well. The classic pyramid-shaped national "population pyramid" is rapidly becoming rare. In some countries, population pyramids are even beginning to look somewhat inverted. With fewer people in the work force relative to the population as a whole, not surprisingly the main economic impact of population aging is to slow the rate of economic growth, and in some cases even to reverse it. Lower or negative economic growth, however, does not imply a reduction in quality of life. Even with a shrinking population and negative growth, per capita GDP can rise as long as the population declines more quickly than total GDP.

Canada nicely illustrates the dominant trend in the developed world. As in any country, Canada's population pyramid tells us much about the country's history. When Canadian soldiers and sailors returned from World War II, Canada experienced a predictable "baby boom." A sharp decrease in fertility occurred beginning in the 1960s with the introduction of birth control, resulting in a baby "bust," but as the Boomers' children began themselves to have children, we saw a baby boom "echo." This pattern of boom, bust, and echo is quite common in OECD countries. Generally, governments in Canada (and elsewhere) have not paid attention to it, and accordingly evinced surprise and concern when (for example) in the 1970s school enrolments suddenly decreased. This was almost entirely a function of predictable demographic patterns. The example nicely illustrates that policy crises in such things as education, health, or social welfare are often governed by structural and historical forces beyond policymakers' control. Accordingly, governments need to be more aware of demographic trends when formulating policy. Fortunately, these are quite predictable. Demographic shifts tend to have a strong momentum.

In the case of Japan, it is evident that the population is aging much more dramatically than in Canada. Japan's drop in fertility predated Canada's by almost twenty years. Since people incur approximately half of their lifetime medical costs in the last years of their life, Japan's rapidly aging population can be expected to strain health care resources precisely at a time when proportionately fewer Japanese are in the labor force to support them and when the number of young health care workers is in decline.

Not all countries face this challenge. The United States’ population pyramid, for example, has a relatively stable base, owing to the relatively high fertility rate among Blacks and Hispanics. Other examples with high fertility rates include Mexico and Turkey. In these countries, we can anticipate an economic "demographic dividend," as more and more people earn and spend money. On the other hand, Western Europe—with the exception of France—faces similar demographic challenges as Japan. To some extent Europe's declining fertility rate has been driven by rising levels of education among women which results in the postponement of childbirth. France and, to some extent, Scandinavia, have managed to avoid this by implementing policies that address the needs and interests of working women with babies.

Although a population pyramid with a narrow base can signal economic difficulties, equally dangerous is one with an overly large base, as we see in Pakistan, Afghanistan, and Egypt. Very high fertility rates make it difficult to find jobs and provide job security for young people, resulting in high levels of unemployment and frustration. The ideal population pyramid is more or less cylindrical in shape. For this, a fertility rate between 1.8 and 2.3 children per woman is ideal.

Many observers look at China and India and conclude that their rapid economic growth and large populations suggest that they are rising powers that will challenge the United States economically within a few decades. In fact, their population pyramids suggest different trajectories. India has a very young population, but the base of its pyramid is stabilizing. China's is shrinking rapidly. This will inevitably result in the Chinese economy slowing down. South Korea, Taiwan, and Hong Kong are all experiencing the same trend and are facing similar challenges.

What we need to accept is that in most parts of the developed world, output in absolute terms will decrease, and maintaining "economies of scale" sectors will not be sustainable. However, this macroeconomic challenge does not mean the deterioration of our economic well-being. What we need is a mindset shift; even if we accept that ultimately populations and national economies will shrink, our quality of life can continue to improve especially if productivity increases.

The second presentation, by Professor Noriko Tsuya at Keio University, was titled, "The Impacts of Population Aging and Decline in Japan: Demographic Prospects and Policy Implications." Professor Tsuya argued that, if she were asked to convey her message in one sentence, it would be that Japan must get ready now for continuous aging and further population decline. As is well known, Japan's is the most aged society in the world with the proportion of elderly (those age 65 and above) in the total population being 23% in 2010, and the proportion has been increasing steadily since the early 1970s. Because of the population momentum, this trend of rapid and extreme aging will surely continue for years to come even if Japan’s currently very low fertility rate rises above the replacement level in the near future. All social-institutional and policy changes that address population aging and decline need to take these grim demographic underpinnings into consideration. Unfortunately, Japan has no short-term magic solution to these challenges.

Population decline takes place when women who are born in a time of low fertility have babies at a rate significantly below the replacement level, which is just over 2 children per woman. Japan's population pyramid began to show a narrowing base in the mid-1970s as the total fertility rate (TFR) dropped below the replacement level. However, given the postwar fertility trend, this population aging was predictable and expected. Japan had an unusually short postwar baby boom compared to other developed countries—a period of only three years from 1947 to 1949. Technological advances in fertility control, increasing economic uncertainty, and delayed marriage and increasing non-marriage have all driven Japan's fertility down and have kept it very low.

As we saw in the first presentation, population aging is not unique to Japan. So why are Japan's demographic challenges more serious than most other developed countries'? Put simply, Japan's aging is much more rapid compared with its Western counterparts. Yet, social institutions are by nature resilient to change and therefore cannot accommodate rapid demographic changes well. Furthermore, when rapid population aging and shrinking occur together, it is extremely difficult to manage, as social institutions that are slow to change have to deal with multi-dimensional socioeconomic and demographic changes. Meanwhile, an enormous pressure is placed on the social security schemes including the public pension, the long-term care insurance, and the national health insurance, because the number of contributors decreases and the number of recipients rises.

There have been a number of policy initiatives by the Japanese government to respond to these demographic and social-institutional challenges. In the 1990s, the government implemented the Golden Plan (1990-94) and the New Golden Plan (1995-1999) to encourage families to take care of the elderly at home, and then launched the long-term care insurance scheme in 2000. Despite these active policy efforts, however, it is inevitable that Japan will face even more difficult policy challenges in the future. The current situations are not going to change overnight, as the demographic forces behind them have been overwhelming—well beyond the capacity of any short-term policy solutions. Some researchers have proposed to increase the number of in-migrants from other Asian countries to counter rapid population aging and decline by increasing the supply of young able-bodied workers. However, the numbers of in-migrants required to maintain Japan's current population size and age-structure are unrealistically large. It would therefore be prudent for Japan to accept the inevitable future in which the benefits for the elderly are reduced and the burdens shouldered by the younger generations are alleviated by constructing a high-investment, low-return social security system.