Japan’s Population Set to Shrink, Unknown Economic Implications

One of the basic assumptions of modern economics is that population growth will persist. While couples will have fewer children as their societies become richer, this will be offset by improved healthcare that ensures more children reach adulthood. As a result, economies must expand faster than population to ensure greater wealth per capita. Statistics released by the Japanese government yesterday call all of that into question. By the end of this century, the Japanese populations may fall to 45 million – as many as lived in the Meiji reign in 1910.

The number of men in Japan has started this decline already. In the 12 months ended last October 31, the number of Japanese men fell by 9,000 to 62.295 million. That may not seem significant, but it is the first ever such decline since record-keeping began in 1920 – although, such statistics were not gathered during the Second World War. While the number of women rose, thanks in large part to the significant longevity of Japanese women (the CIA estimates a woman in Japan has a life expectancy of 84.51 years), the increase in total population was merely 67,000. In practical terms, population growth in Japan has stopped.

Moreover, the population is much older than before. The under-14s are just 13.5% of the population now, which means there will be fewer people in the main child-bearing years in a decade or so. And the labor force, those between 15 and 64, contracted by 170,000 in the last year. Since Japan has very little immigration, the future is pretty clear. Fewer Japanese overall, and fewer young people in general.

The immediate effect of this will be a pension crisis, far more serious than anything about which Mr. Bush is railing. Jeff Kingston, Director of Asian studies at Tokyo’s Temple University, says that current retirees are likely to take out ¥60 million (US$1=¥106) from the pension system more than they paid into it. The average 20-year-old will get ¥40 million less. This is not politically tolerable, but it isn’t the whole story.

A smaller labor force means fewer consumers, which in turn means less demand for goods and services. Japan has suffered the effects of deflation for over a decade, and its recent economic growth has tapered off to nothing. A shrinking population will mean a permanent threat of deflation, and no central bank in the world has very much experience in fighting it. Alan Greenspan and his fellow practitioners of the fiscal arts are worried about rising, not falling, prices. The last time the world had to deal with this kind of problem was in the 1930s – when populations were growing rapidly. Demography isn’t destiny, but it certainly sets limits to the actions policymakers can take.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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